Financial Post Article: This retired man has been living on cash savings – but that’s a mistake.

The Financial Post asked me to review the finances of a retired man making the mistake of living off his cash savings.

See how learning to have a higher risk tolerance makes his retirement more comfortable.

CLICK THE LINK BELOW TO READ THE ARTICLE BY MARY TERESA BITTI:

This retired man has been living on cash savings – but that’s a mistake

Details:

Our retired man is 60 and divorced with two adult children. 

He worked for Bell Media for 32 years, was laid off during Covid and took a buyout package in February 2020. 

He now has different “pots of money” and he is trying to figure out how to draw down in a way that will ensure he doesn’t run out of money. 

The money:

Defined contribution pension plan: $834,320. 

What he wants to know: “I can leave this pension with my former company which I will, due to the low fees. I then have an option to convert this to the Bell income retirement option, which allows me to draw down on that “bucket” of savings. I think this would be a good strategy for this pension but would like any advice that could be offered.”

RRSP: $172,000

TFSA: $74,000

Sun Life non-registered account: $92,000

Bell stocks: $127,000 (he receives $1,775 in dividends each quarter; the is currently $3,800 in his dividend account)

Crypto investments: $7,000

TFSA is invested in a Balanced Growth fund. 

The non registered is in a Conservative Portfolio. Mostly bonds.

Savings: $217,000 (this is in savings/chequing accounts — he wants to know if he should move it to a high-interest savings account, or what you would recommend. This is also where he’s taking money from to pay for his expenses. He hasn’t touched his pension or the other listed investments.) 

Expenses: He sold his home and moved to a rental when he retired and pays $1,675 a month in rent plus heat and hydro are another $200 a month. His total expenses each month are between $2,700 and $3,200 but he hasn’t started to travel yet. He has no debts.

Goals: He’ll start traveling summer with a two-week trip to Paris. In the winter, he may go to Florida and rent for a few months. He also has a friend with a place in Ecuador that he could rent cheaply. Overall, he anticipates a couple of trips a year. He also wants to leave money for his children if he can. He’s also open to meeting someone. His parents both lived into their 80s. He’s looking for a path to make sure he doesn’t run out of money.

At 65 he was going to take his CPP and OAS. Is this a good idea, should he hold off until I’m 70? He believes he would be at the maximum for CPP because he’s been paying into it since he was 18.

His questions: Do I have too much cash? Should that be put in other places, should it be in high interest savings account? How should I be drawing down funds to make sure it will last? Am I spending too much? Too little?

Interview

Investments:

Bell pension                 $834,320

RRSP                              $172,000

TFSA                                  $74,000

Sun Life non-registered    $92,000

Bell stocks                    $127,000

Crypto                               $7,000

Savings                         $217,000

Total                                $1,523,320

Withdrawal Rate               Cash Income

4%                               $61,000

3.5%                                $53,000

3%                                       $46,000

2.5%                                    $38,000

Income required:      $3,200/month        $38,000/year

Add: Travel                                     $10,000

Lifestyle – After Tax Income           $48,000/year net

Cash Income before tax             $59,000/year before tax.

Goal: $60,000/year before tax, rising by inflation.

Questions:

1/ At 65 he was going to take his CPP and OAS. Is this a good idea, should he hold off until 70?

Most important factors are how you invest & tax. As a mix of investments, but essentially moderate investor, it is slightly better to delay. However, he will be pushed into the 30% tax bracket with higher CPP & can take it now at 20% tax bracket.

Recommend: Start CPP at 60 and OAS at 65.

Taking them early has estate benefits. He can’t leave CPP & OAS for his kids, but taking it early can leave more investments for his estate.

2/ Do I have too much cash? Should that be put in other places, should it be in a high interest savings account?

Yes, you have too much cash. You need a decent rate of return on your investments to have a comfortable retirement. 70-80% of retirement income is growth AFTER retirement. Detailed study of the last 150 years: Hold cash to  use when investments are down. Holding cash has never provided a more reliable 30-year retirement in the last 150 years, and always left a smaller estate. Most effective to NOT hold cash. Just withdraw from investments as needed. The only reason to hold cash is for significant unusual purchases within a year or so.

3/ How should I be drawing down funds to make sure it will last? Total investments: $1,523,320

Decide on risk tolerance. Bell pension is 60/40. Bell stocks are 100% equity. Non-registered is mostly bonds. Lots of cash.

Bell pension: If he wants low fees, get ETFs. If he wants top management, find the best. Be careful choosing the cheapest active fund manager.

Recommend: Decide on risk tolerance and desired rate of return. Use it for all investments.

Reliable withdrawal study:

Rule (better than 4% Rule): 2.5% + .2% for every 10% in equities.

Higher equities is the most reliable for a 30-year retirement, and provides a more comfortable retirement.

Investment Short-term Risk    Reliable Withdrawal         Retirement Income with $18,000 CPP & OAS                 

Bond investor                           2.5%          $38,000             $56,000

Conservative investor              3.0%           $46,000             $64,000

Moderate investor                   3.5%           $53,000             $71,000

Equity investor                         4.0%          $61,000             $79,000

Goal: $60,000/year before tax, rising by inflation.

Existing Investments                 Tax-Efficient Investing

Probably moderate risk: $53,000         Taxable $56,000 Taxable    $38,000

CPP                                 $10,034                      $10,034 $10,034

OAS                                $8,251                        $8,251                        $8,251

Total                             $71,601                     $74,364                       $56,000

Recommend:

Tax-efficient investing:

Invest bonds & cash more tax-efficiently focused on long-term capital gains.

Sell Bell stocks to invest focused on long-term capital gains. Dividends are $7,000, but add $10,000 to taxable income (including 38% gross-up). Taxed at 6%, vs. capital gains at 10%, but mostly years in the future.

Withdraw $3-5,000/year more from non-registered & less from RRIF & pension to keep taxable income below $53,359.

RRIF withdrawal rate at age 60: 3.33%. Keep part of pension & RRSP in an RRSP or LIRA, not RRIF & LIF, so withdrawal can be below 3.5%.

Am I spending too much? Too little?

Depends on the investment method. Probably can spend more.

More equities = more comfortable retirement.

With moderate risk & tax-efficient investing, reliable income can be $71,000. Need $60,000.

Retirement income of $60,000/year includes $10,000/year of travel.

Can spend about $9,000/year more ($19,000/year travel) with effective investments.

With equity investments, reliable income can be $79,000.

Can spend about $15,000/year more ($25,000/year travel) with effective investments.

Ed