Childhood rags to riches makes husband fearful of being broke

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Having grown up in a household where money came and went, living in mansions and then hiding the silverware and moving to motels, Andrew* is doing everything in his power to ensure his own family never experiences financial instability.

As a result, he is always working. He is a serial entrepreneur and has a full-time job, never fully believing “there is enough.” His wife, Karen*, would like to see Andrew work less, rest easier when it comes to money and not feel as though “we could lose it all at any moment.”

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“I’d like for him to retire at 55 but we need confirmation that this is possible,” said Karen, who plans to continue working to age 60, or later if necessary. “While Andrew’s enormously fearful of being broke, he’s not afraid to spend money on the things that matter to us – travel, experiences, our oceanfront cabin and education. We live well, despite being surprisingly cash poor.”

Andrew, 52, and Karen, 50, have three children (two in high school and one at university) and live in Vancouver. Andrew earns $165,000 before tax from his “day” job. His latest tech startup should be profitable in about a year but is not currently bringing in extra income. If he does retire from his day job at 55, he will continue to work full-time on the business.

Karen is a government employee and earns $201,000 a year before taxes. “We both have the ‘golden handcuffs’ of defined benefit pensions indexed to inflation,” she said. Andrew will receive $4,500 a month if he retires at age 55 and $6,800 a month if he retires at age 60.

“When is the right time to let go of my day job and pension and focus solely on my entrepreneurial venture?” asked Andrew.

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Karen will receive $9,000 a month at age 60 if she chooses the joint life option which would continue to pay Andrew in the event of her death or $10,000 if she opts for the single life option. She’d like to know what the expert recommends.

The couple own a $3.2 million home in Vancouver with a $690,000 mortgage at 2.8 per cent that’s up for renewal in July 2025. They have no plans to downsize at least until their youngest child completes undergraduate studies in seven years. They also own a $1.1 million cabin. Their investment portfolio includes $143,000 in Tax Free Savings Accounts, $462,000 in Registered Retirement Savings Plans, $814,000 in joint non-registered accounts split across two different brokerages. “Their returns are about the same – on average about 7 per cent. Should we consolidate? Is it worth paying fees to two different brokerages?” asked Andrew.

They have $108,000 in Registered Education Savings Plans but are concerned about whether they will have enough for all three of their children. They maximize contributions each year to the RESPs but aren’t able to maximize TFSA contributions. The family’s total monthly expenses are just over $25,000.

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The couple spend about $500 a year for a $700,000 private whole life insurance policy. Andrew also has employer funded death benefits of two times his salary upon death. Karen’s employer will pay out $500,000 upon her death.

When retired, they’d like to spend winters somewhere warm and summers at their cabin.

“What do we need to do in order to bolster our chances of an early retirement? Are we living beyond our means? Do we need to tighten our belts? Should we tap into investments to be able to pay off expenses, maximize our TFSAs or should we stay the course? When should we apply for CPP and OAS,” asked Karen.

What the expert says

With a net worth of just over $5 million and great pensions, Andrew can comfortably retire at 55, especially with Karen working to 60, said Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management. “The challenge here is not financial, it’s psychological. A comprehensive retirement plan can help them gain clarity about their spending, confidence about the future and help Andrew move beyond the profound impact his past has had on his present feelings about money and work.”

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Einarson recommends the couple ask each of their two brokerage firms to create two retirement plans (one for age 55, and one for age 60, with reasonable, conservative variables around long-term returns, inflation and longevity) for them to compare and then consolidate their investments with the brokerage that provides the most comprehensive plan.

“The planning should begin with a picture of their desired retirement lifestyle/retirement income need and a precise understanding of their current monthly budget. What will change in terms of spending? Will they travel more? When will they downsize and realistically how much money can they invest at that time?” said Einarson. “If they don’t have the children as dependents and are mortgage-free, then they will have significantly less expenses and more to invest for retirement income.”

Einarson suggests Andrew and Karen could likely live comfortably on about $10,000 after tax each month – an amount they can get from their pensions alone. A retirement plan will allow them to see the big picture, including all retirement income and asset values each year into the future as well as how the timing of retirement can affect these.

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“Andrew should not plan on his entrepreneur activities being profitable in retirement,” said Einarson.

Deciding on when to take CPP and OAS comes down to their priorities: do they want to get the most out of CPP over the long term or take it early to use less of their own assets sooner? “They might want to defer the CPP at least to 65 to get the full amount and indexing on that larger portion.”

Einarson said they should be maxing out their TFSAs even if that means tapping into their $814,000 non-registered funds. “This may be another reason to consolidate with one investment firm: to have an advisor who sees your whole picture and can give advice accordingly.”

Bottom line: “It is possible for Andrew to comfortably retire at 55, especially with Karen working to 60. The key question that will be answered in the plan is how best to structure tax efficient income for an early retirement.”

* Names have been changed to protect privacy.

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