Couple plan to retire at 50

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At 44 and 46, respectively, and with two young children, Tom* and Melanie are looking to put an aggressive retirement strategy in place after recently learning about the medical histories in both their families.

They are both healthy, but now have concerns about their own longevity. Tom, who works in engineering, is also worried about a potential ownership change at his company that could impact his employment.

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“With all that in mind, an early retirement is a new priority. We want to know what our options are,” he said. “Is it possible for me to retire at 50? Or maybe shift to part-time work and a partial retirement at this point in our lives? Our children are seven and 11 and expenses are high.”

Their total monthly expenses are approximately $12,300, including $3,084 in mortgage and property tax payments on their $1.45-million home in British Columbia.

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Tom earns $204,000 a year before tax and Melanie, who changed careers and shifted to part-time work about six years ago to better accommodate their children’s schedules, earns $25,000 a year before tax. She plans to continue to work part time for several more years.

“I contribute to a registered retirement savings plan for myself as well as a spousal RRSP for Melanie, but is there more we can do?” he asked about their tax efficiency.

About 18 months ago, Melanie received a $600,000 inheritance. They invested $500,000 in a non-registered account and have earmarked the rest to put towards family vacations and “fun” money. She will receive another $150,000 as part of that initial inheritance at the end of this year.

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The couple’s approximately $2.5-million portfolio generates about $45,000 a year in interest income, largely from guaranteed investment certificates (GICS) and dividends. This money is used for contributions to their registered retirement savings plans (RRSPs) of about $1 million, tax-free savings accounts (TFSAs) of $257,000 and registered education savings plans (RESPs) of $79,000.

The couple also has non-registered accounts invested in GICs ($750,000), high-interest exchange-traded funds ($356,000) and mutual funds ($20,600). Tom has a locked-in retirement account worth $86,000, a $400,000 term life insurance policy through his employer as well as a $750,0000 personal term life policy, and Melanie has a $500,000 term life insurance policy.

The couple’s five-year mortgage ($510,000 at 1.79 per cent) is up for renewal in June 2026.

“When it matures, given rates will likely be higher, would it be wise to use the investments to pay it off completely or pay a portion off?” Tom asked. “Or is the better option to get a new mortgage and continue to let the investments grow? We’ll likely stay in this home while the kids are in school and living with us.”

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Tom and Melanie would like to travel when they retire. This will likely be a few weeks each year while the kids are still young and they’d like to winter somewhere around the world for a few months each year.

“While I’d love to live into my 80s or 90s, my family health history doesn’t reflect that,” Tom said. “I’m not worried about running out of money. In my mind, retiring early is much more important. Is this possible? And how early?”

What the expert says

Graeme Egan, a financial planner and portfolio manager who heads CastleBay Wealth Management Inc. in Vancouver, believes Tom’s best option is to continue to work for the next six years and then retire at 50.

“If Tom retires at age 50, their combined portfolio, including the forthcoming $150,000 inheritance but without adding any savings, would grow to approximately $3.55 million based on an average five per cent annual return after tax,” he said.

Assuming they use $400,000 to pay down the remainder of their mortgage at that time, Tom and Melanie will have $3.1 million, which would generate approximately $155,000 per year. At a 15 per cent combined tax rate, this would net them approximately $131,750 per year, or $10,979 per month, more than enough to meet their mortgage-free expenses plus some travel.

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Egan recommends Tom and Melanie work with a financial planner to run through the different implications of retiring at 50 and 55.

If Tom retires at 50 and pays off the mortgage in six years, the family’s need for life insurance will be greatly reduced. Egan suggests reassessing their personal policies at the end of their terms to determine if they need any coverage at all.

Egan also said it’s important to make sure their investment asset mix reflects their retirement date, cash-flow needs and risk profile. He suggests an asset mix of 60 per cent equities and 40 per cent fixed income as a starting point and recommends investing the non-registered account in dividend-paying investments to benefit from a preferential tax rate.

“GICs are helpful when rates are high, but they do not keep up with inflation and the interest is fully taxable,” he said.

He also recommends replacing their small mutual fund holdings with index-based ETFs as long as there is no deferred sales charge when selling the mutual funds and the tax implications are not prohibitive.

“ETFs are low-cost, liquid, diversified and a good choice for investors who don’t want to research and pick stocks,” he said.

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For income-splitting purposes, it makes sense for Tom to continue to contribute to a spousal RRSP for Melanie and to his company RRSP since he benefits from a 100 per cent matching program while employed there.

Typically, Egan said it makes sense to hold more aggressive investments in the TFSAs given the tax and compounding benefits.

“If they can present an argument that the non-registered money is 50/50 — assuming they are not doing this already — then they can split the annual income equally from the non-registered account, which sets them up well for beneficial income splitting at Tom’s retirement,” he said.

Any surplus savings between now and Tom’s retirement could be added to their RRSPs and TFSAs, and then their non-registered investments.

“Retirement projections will help answer the most tax effective way to save and draw down their registered and non-registered assets,” he said.

* Names have been changed to protect privacy.

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