National Post Article: Couple has a compelling reason for wanting to break with the retirement mould

The National Post asked me to review the finances of a couple who want to retire in their 50s.

They’d like to spend three to four months a year in a warmer climate.

They have a $1.6 million investment portfolio that generates about $52,000 a year in dividends, they have a combined annual income of about $200,000 a year before tax, they are debt free and they own a home valued at $550,000 with no plans to downsize.

In the article you’ll learn:

• How much they will need in their investment portfolio before taxes to retire comfortably.
• How do they deal with how scary it is to start withdrawing from their investments?
• What percentage they should allocate to equities in their investment portfolio to have the most reliable retirement income.
• The financial planner’s advice on dividend investing.
• Where to allocate their RRSP contributions to make income splitting in retirement easier and save tax.
• At what age they should both start their Canada Pension Plan (CPP) and Old Age Security (OAS).
• How can they access their home equity to live more comfortably?
• Should they keep a cash cushion to access in down markets?
• Is it really necessary to plan for a 30-year retirement for them?

Note the blog post has more in-depth answers.

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

Couple has a compelling reason for wanting to break with the retirement mould

Financial Snapshot:

Employment income:  100000 (F) 98000 (H)

Investment income (dividends):  combined 52000 (currently being reinvested in RRSPs and TFSA)

Pension (current or anticipated): ~300,000 (H) will be likely put in a LIRA when she stops her employment  ideally Dec 31 2026

Assets

Primary residence approximate value: 550000

Investment holdings

Cash: 50000

TFSAs:  180000 (F)    80000(H)

RRSPs:  730000 (F)    150000 (H)

GICs: ~ 175000 (inside our RRSPs)

LIRA:   94000 (F)    15000 (H)

RESPs: 70000 mutual funds only three accounts with mutual funds. 

How can I get that money out? Get rid of those LIRAs are segregated mutual funds, not the RESP. How do we get out of LIRAs. What should we ask a fee for service person?

Mutual Funds: (inside both LIRAs)

Stocks: (inside both our RRSPs and TFSA)

Canadian stocks with strong global footprint (see list below Monthly expenses)

Life insurance:

Type (i.e., term, whole) value: 150000 (F)   400000(H)

Monthly expenses

$7,800

These are the stocks the couple is invested in:

TD, BIP, ENB, BCE, RY, CNR, BN, FTS, AQN, 3M, BNS

Financial Plan

To maintain their current lifestyle after they retire, they would need $113,000/year income before tax. They would need to have about $2.25 million, but are projected to have about $1.83 million, so they are 18% behind their goal. This is not enough that they would necessarily have to work longer, but it is better to be 10-20% ahead of your goal to allow for some things to go wrong.

Their portfolio is 80-90% equities, so a long-term return of about 7%/year should be reasonable, and perhaps 6%/year after they retire to allow for investing a bit more conservatively as they age and the math of withdrawing vs contributing regularly.

To be on track, they could maintain their current allocation for life and invest at least $2,250/month for the next 3 years. Their cash flow shows that they should have about $3,800/month, so they should be able to do this. 

Their RRSP contributions now should all go in Heather’s name – either in her RRSP or in a spousal RRSP in her name with Frank as the contributor. This can make income-splitting after they retire easier to save them some tax.

Note that reinvesting their dividends does not add to their investments. The dividends are money coming out of their investments that they reinvest, but it is not an additional investment.

Please refer to my YouTube video and blog post on this “Dividend Investing Is a Brain Fart” (https://edrempel.com/dividend-investing-is-a-brain-fart/) 

If they would maintain their current allocation of 80-90% equities or higher through their entire retirement, then they are 5% behind their goal. The issue is that at least one of them is likely to be alive 35-40 years from now, so growth of their investments after their retirement produces the bulk of their retirement cash flow. They would need to maintain a relatively high equity allocation to earn 6-7%/year or more to retire with their current lifestyle.

Q & A:

Traditional financial planning models are designed to build portfolios that will fund a 30-plus year retirement after age 65. But what do you do if your goals don’t align with that model? “Heather is extremely healthy today, but she is also a childhood cancer survivor and has had a few health scares. Given all that she’s been through we don’t want to wait until 65 to retire,”

Heather’s health history is a good reason for them to want to retire earlier. However, they should still plan for a 30-year retirement. They do not really know that her life will be shorter and their retirement plan should last as long as either of them is alive. At their current ages, there is a 50% chance one of them could live past age 94.

The RRSPs also include $175,000 in Guaranteed Investment Certificate ladders. “We purchased these to ensure we never pull money out to live during a down market,”

Having a “cash cushion” like this sounds good and means they can draw on it if their other investments are down, but this has never actually worked in history. I studied this over 150 years for 30-year retirements, and there was never a case where having a cash cushion helped. The reduced return of the GICs vs the rest of their portfolio over a 30-year retirement has always been a more significant factor.

The LIRAs hold segregated mutual funds and the RESP is a mutual fund. I’d like to know if there is a way to do the same for the LIRAs and RESP.” How can I get that money out? How do we get out of LIRAs. What should we ask a fee-for-service person?

LIRA’s and RESPs are allowed to have the same investments as RRSPs and TFSAs. Their accounts are probably with an advisor that is limited to their proprietary funds. They could move their LIRAs and RESP to the same place they have the rest of their investments and invest them the same. This probably makes sense for the LIRAs, since they are part of their retirement plan. The RESP will likely be used by their daughter in the next 3 years or so, so they may want to invest it more conservatively.

Heather will also receive a $300,000 employer pension that she plans to convert to a Locked In Retirement Account when she stops working. “Is this a good idea?” asked Frank. “Or should we put it in an annuity? Leave it with the company to manage? Are there other options we should consider?”

They seem to be comfortable with their investments and are likely to make a higher return long-term than the pension administrator. Heather’s pension is a defined contribution pension, which is essentially an RRSP with withdrawal restrictions. She can look at the investments in her pension now and decide whether or not they would prefer their own investments.

We need a bridge to CPP and OAS. How do we decumulate our investments and use our money the most efficiently?

It is best for them to start both CPP and OAS at age 65. Deferring CPP 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 similar to their investment returns. Given Heather’s health history, it’s likely better not to wait past age 65.

They are somewhat scared to start withdrawing significant amounts from their investments at age 60, but if they are on track for their goal, it should be fine over time. Their investments can provide their full lifestyle for the first 5 years of retirement. Then CPP and OAS can kick in and they can reduce their investment withdrawals to keep their income the same.

The couple is debt-free and own a home valued at $550,000 and have no plans to downsize. “How can we pull out some of that equity without selling or employing a reverse mortgage to help fund retirement?” He also wonders about when he and Heather should apply for Canada Pension Plan and Old Age Security benefits.

Accessing the large amount of equity many people have in their home to provide retirement cash flow is tricky. They have 4 options: sell & rent & invest the proceeds, borrow from a secured credit line to spend, borrow from a secured credit line to invest & provide income, or keep the home to either pay for a nursing home or be part of their estate. All 4 options have major pros & cons.

This is a complex topic. They can have the most comfortable retirement by either selling their home or borrowing to invest, but then they would either have to rent elsewhere or become comfortable with borrowing to invest. Borrowing to spend after their investments are gone could be safer, but a lower income.

If they want to access their home equity, they should probably consult a financial planner experienced with this issue.

One of Frank’s frustrations and concerns is the lack of information he has been able to find about how to effectively and efficiently draw down his investments when they retire. “There are a lot of books about how to accumulate wealth but not about decumulation. My understanding is the order you pull out funds and how you structure decumulation is almost as important as how much money you have. It will determine whether or not you have a successful retirement. I’d like advice on how to do this.”

The 2 biggest issues to setup an efficient & effective retirement income are knowing how to invest during retirement and how much to withdraw from which accounts.

If they live 40 years, their investments should provide them a total of $7.7 million income, but they only have $2 million now. That means 80% of their retirement income is likely to come from growth AFTER retirement. This is why continuing to invest for reasonable growth with the portfolio they are comfortable with right through retirement is very important. They will need a long-term return of 6-7%/year or higher to maintain their lifestyle.

Deciding which accounts to withdraw from requires deciding between the 2 overriding tax strategies: defer tax as long as possible or withdraw what you an at the low tax bracket. Every couple is unique, so being sure requires experience. In their case, they are projected to have almost $1.5 million in their RRSPs & LIRAs, plus their government pensions, which means it will be a challenge to stay in the lowest 26%-28% tax brackets for taxable income of $56,000 or less in Manitoba. Therefore, trying to keep their taxable incomes below $56,000/year rising by inflation is their most efficient option.

To do this, they should withdraw a bit less than their maximum from their LIRAs first, since it is the least flexible, and then from their RRIFs (converted from RRSPs), to provide the $56,000 for each of them (less what their government pensions provide). Then withdraw the rest from their TFSAs to keep their taxable income from being higher.

Effective tax planning on their withdrawals should be done each year to keep their taxable incomes in the lowest 2 tax brackets.

Ed