Colin,* 55, and Marcella, 54, are ready to retire. The Halifax-based couple have one child in university and are effectively empty nesters. They are prepared to downsize if necessary to pursue their love of travel and other hobbies – hopefully in the next one to two years.
Colin and Marcella have saved aggressively to be in a position to start their post-work lives but they want confirmation their investment portfolio will comfortably sustain them throughout retirement. They have a target combined after-tax retirement income of between $140,000 and $150,000.
“We think we have done all the right things, but uncertainty in the markets causes us concern. We do not have defined benefit pensions and will be relying on our investments,
Canada Pension Plan
(CPP) and
Old Age Security (OAS)
benefits,” said Colin.
Colin’s current annual pretax income is about $235,000 and Marcella’s is $123,000.
They own a home valued at $1.1million with a $70,000 mortgage that they plan to pay off in March 2027 when it matures. They also inherited a share in a property that is up for sale and their stake is valued at $125,000. Part of the proceeds of the sale will be used to pay off a $40,000
home equity line of credit
(HELOC) taken out to cover the capital gains on the inheritance.
The couple’s current annual cash flow, which includes money earmarked for savings, is about $230,000. They expect this to drop to about $115,000 when they retire and after they pay off the mortgage and HELOC and stop contributing to their registered savings plans and employee stock purchase plans.
Colin and Marcella have built an investment portfolio worth about $2.75 million. This includes nearly $2 million in
registered retirement savings plans
(RRSPs) and about $290,000 in locked-in retirement accounts (LIRAs) that are all 60 per cent invested in equities and 40 per cent in fixed income. They have about $140,000 in
tax-free savings accounts
(TFSAs) invested in guaranteed investment certificate (GIC) funds. Both Colin and Marcella own shares in their respective companies. The book value of Colin’s stock is $305,000 and Marcella’s stock is valued at $53,000. They have a
registered education savings plan
(RESP) worth about $80,000.
Colin and Marcella each have $100,000 whole life insurance policies and $500,000 term life policies. They also each have term life policies through their employers valued at $350,000 and $120,000. They have had the whole life policies for decades and no longer pay premiums but wonder if they should maintain their individual 10-year term life policies, which have another four years to maturity. Colin would also like to know when he and Marcella should apply for CPP and OAS to avoid any clawback.
Most importantly, can they realize the early retirement they are hoping for? “Do we need to downsize our home? Adjust our portfolio? Are we able to leave the work world behind in 2026 or 2027? If not, then when?”
What the expert says
“Colin and Marcella have done an excellent job saving. Based on a simple overview of their investment accounts, retiring in 18 months when their mortgage is paid off is a reasonable and attainable financial goal,” said Graeme Egan, a financial planner and portfolio manager who heads CastleBay Wealth Management Inc. in Vancouver.
“Assuming a five per cent pre-tax return for their registered accounts over the next year and a half, their net worth should grow to approximately $3,050,000, not including any additional savings between now and March 2027,” said Egan.
“Earning a pretax five per cent return on the $3,050,000 would generate $152,500 per year pretax without drawing down capital. Assuming most of this income is withdrawn from their RRSPs ($76,250 each annually), this would result in an effective tax rate of 25 per cent, netting them $114,375 per year or $9,500 per month, very close to their desired after-tax goal of $115,000,” Egan said.
The $150,000 does not include CPP or OAS benefits, which, given that it appears they do not need the additional income, Egan suggested they delay until age 65. “This will replace some income they would otherwise take out of their portfolio or provide them with extra income to travel more in one year. They might be subject to some OAS clawback at that time, but planning around the clawback should not be a priority for them in this case.”
For a detailed strategy for the most tax efficient drawdown of their capital during retirement, along with when to start CPP and OAS, Egan suggested they ask their current adviser or a fee-only financial planner to prepare projections for them.
When it comes to their portfolio, Egan suggested they maintain their current 60/40 asset mix until they retire, at which point they could consider lessening the equity exposure to 50 per cent. He also recommended that Colin and Marcella review the current components of their various accounts to ensure their portfolio is properly structured. “For example, their respective TFSA accounts should be 100 per cent equity, given the tax benefits of TFSAs. Fixed income should be held in their RRSP accounts.”
Egan also recommended they continue to maximize their respective annual contributions to their RRSPs and TFSAs as well as maximizing their company stock savings, especially if they are getting some form of company matching on the plans.
“At retirement, they will need a strategy to sell their respective company stock to diversify away, given the large exposure, and de-risk their holdings in one company,” Egan said.
In terms of investments, if Colin and Marcella aren’t already using them, Egan recommended they consider
exchange-traded funds
(ETFs), which typically have low management expense ratios and a wide range of options, including all-in-one asset allocation such as equity/fixed-income ETFs. “Using ETFs will save after-tax fees annually versus retail mutual funds.”
Given the size of their estate and their self-sustaining whole life policies, Egan said he does not see a need for Colin and Marcella to keep their term life insurance policies and recommended they let them lapse at maturity.
*Names have been changed to protect privacy.
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