National Post Article: Can Gerard and Penelope afford to leave the corporate grind before reaching 60?

The National Post asked me to review the retirement plans of Gerard and Penelope, a couple in their late 50s eager to leave the corporate grind behind.

They hope to retire within the next two to four years with $90,000 per year before tax to support their lifestyle, which includes $4,700 in monthly expenses and $18,000 annually for travel.

With $2.1 million in assets, they’ve built a strong financial foundation, but they’re wondering if they really need to wait that long.

In this article, I’ll answer their key retirement questions:

• Is retiring in four years—or even sooner—possible?
• When can they tap into their LIRA, and what happens to their RPP and DCPP if they retire early?
• When should they start QPP and OAS?
• Should Gerard start drawing from the Quebec Pension Plan at 60, or defer it to 65 for higher benefits?
• How will their rental income affect their taxes in retirement?
• Does it make sense to sell their duplex and downsize to a condo once their children move out?
• Which investments should they draw down first to keep taxes low?
• What’s the smartest way to structure their finances for the retirement they truly want?

Here’s how they can maximize their wealth and design a retirement that gives them more freedom, flexibility, and financial security than they thought possible.

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

Can Gerard and Penelope afford to leave the corporate grind before reaching 60?

FINANCIAL PLAN

Questions:

Is retiring in four years – or, even better in two to three years – possible? 

Good news for Gerard & Penelope! With their goal of retiring with $90,000/year before tax, they can retire now! They don’t have to wait 4 years. They need about $1.35 million for this retirement and they have $2.1 million, so they are 58% ahead of their goal.

They may be setting their goal too low. Their combined income and rent today is $336,000/year. Can they really be comfortable with only $90,000/year? That would cover their expenses of $4,700/month plus $18,000/year for travel in after tax cash flow, so it appears that they have put some thought into it.

They can afford to retire on $110,000/year now or $130,000/year in 4 years, including their QPP and rent. The effect of this on their lifestyle is that they want $18,000/year for travel, but they can afford $33,000/year if they retire now or $48,000/year if they retire in 4 years.

They have many options in how they choose to live. A Financial Plan is really a life plan. It would help them think through exactly what lifestyle they want in their life and what to do with their extra money.

“When can I tap into the LIRA? And what happens to the RPP and DCPP if we retire early?” He also wonders if he should start drawing from the Quebec Pension Plan at 60, versus waiting until age 65 when he can receive full benefits. 

They can tap into their LIRA starting at age 55, so Gerard could start now and Penelope next year.

It is best for them to start both QPP and OAS at age 65. Deferring QPP from age 60 to 65 gives them an implied return of 10.4%/year on investments they would have to withdraw to provide the same income. This is likely more than their investments would make in that period. Deferring to age 70 gives them an implied return of 6.8%/year, which is likely less than their investment returns.

Which investments would we draw down first?

The lowest tax bracket in Quebec is 26.5% on incomes up to $53,000. This means they can have taxable income of $106,000 between them all at the lowest tax bracket. They only want $90,000/year, which is $45,000/year each if they split it properly.

For some people, it is better to try to defer tax as long as possible, even if they will be in a higher tax bracket decades from now. In their case, they will likely be pushed into the 36% bracket that starts at only $57,000 each relatively quickly, especially if they decide to retire with the higher income that they are on track for. Therefore, their best strategy is to withdraw what they need entirely from taxable investments as long as they can stay in the lowest tax bracket.

75% of their investments are RRSPs & pension, so it is probably best to try to hold onto their TFSAs and cash & GICs to draw on when their lifestyle would push them into the next tax bracket or for lump sum expenses like a large trip or a car.

Gerard is concerned about the tax implications of the rental income once they retire. “The extra income is nice, but if it puts us in a higher tax bracket, is it worth it?” The couple are also open to downsizing once their children leave home over the next few years. “A condo in our area costs about $400,000 in today’s dollars. Does it make sense to sell the house when the children leave?”

The tax on the rental income is not an issue as long as they are comfortable with only $90,000/year income before tax, including the rent and their QPP. It should all still be at the lowest tax bracket.

However, they are missing out on a large opportunity to live more comfortably. If they sell their home for $950,000 and buy a condo for $400,000, after closing costs they should clear $500,000. With only a conservative 4% withdrawal on $500,000 (based on the 4% Rule), they could get $20,000/year of income, instead of only $10,000 in net rent they get now. The $20,000 invested in growth mutual funds, like they are doing, should trigger hardly any capital gains by selling only 4% of it every year. Selling a bit of an equity (stock market) investment every month is known as “self-made dividends”. With this method, they would pay a lot less tax on $20,000/year cash flow from their $500,000 investments than they do on their $10,000/year net rent. Their investments in equities are likely to grow significantly faster in value than their home, as well.

Ed