National Post Article: Couple shy of retirement goals with $2.1 million portfolio

The National Post asked me to review the finances of Tom and Amanda, a semi-retired couple in their early 60s, who are debt-free, own a $1.9 million home in Southwestern Ontario, and plan to spend $115,000–$120,000 annually in retirement.

Tom and Amanda enjoy part-time consulting work, which brings in $24,000 annually before tax, but the bulk of their income comes from a self-directed, equity-focused investment portfolio worth just under $2.1 million. 

Their love of travel drives their biggest expense, and they want to maintain this lifestyle while leaving at least $500,000 to their children, all while ensuring they are never a financial burden on them.

In the article, you’ll learn:

• Do Tom and Amanda have enough to fund their desired lifestyle to age 95+?
• What is the most effective tax-efficient drawdown strategy for their investments?
• Why is this drawdown strategy better for them, and how does it align with their retirement goals?
• When should they start taking CPP and OAS to maximize their income?
• Should they downsize their home, and if so, when and how much equity should they free up?
• How their investment mix—index ETFs, growth stocks, Canadian bank stocks, and dividend-generating equities—can support their long-term goals.

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

Couple shy of retirement goals with $2.1 million portfolios

Tom and Amanda, both 60, self-employed and semi-retired, plan to spend $115,000 to $120,000 a year after-tax in 2024 dollars to age 95+.

Are they on track to generating enough income to meet their lifestyle goals?

Their current annual spending is nearly $109,000, and their biggest expense is travel, something they love and plan to do as long as possible. 

Both Tom and Amanda left full-time employment behind in 2022 and now work as a small business consultant and health and wellness consultant respectively, earning about $1,000 a month each after expenses and before tax.

At this point, they plan to continue working part-time until December 2027. The bulk of their annual income comes from their self-directed, equity-focused investment portfolio valued at just shy of $2.1 Million.

Their portfolio generates approximately $80,000 in dividends via a mix of dividend-generating equities and High Interest Savings Account ETFS. They withdraw $70,000 of dividends from their RRSP and Non-Registered accounts, and reinvest the $10,000 of dividends generated within their TFSA.

Their portfolio includes: $264,000 in Tax Free Savings Accounts, $1,206,000 in Registered Retired Savings Plans, $110,000 in Guaranteed Investment Certificates; $63,000 in a Locked In Retirement Account; and $411,000 in Non-Registered accounts and a residual balance of $34,000 in RESPs that they will likely collapse in the near future. 

“The majority of our equities are in Index ETFs,  solid growth stocks, Canadian bank stocks and other dividend-generating equities,” said Tom. “We are not panic buyers or sellers. We are very much about buying for the long term and adjusting as appropriate.”

Tom and Amanda are debt-free and own a home in Southwestern Ontario valued at $1.9 million. “Ideally we’d love to stay here for as long as possible, but if it makes sense to downsize to help ensure we have enough cash flow long-term, we’re willing to do so. Should we look to downsize to free up some equity? If so, when and how much equity do we need to free up?”

The couple has two adult children who are established and financially independent. Tom and Amanda would like to leave them $500k+ in 2024 dollars but their overarching concern is ensuring their estate is cash positive. “It is critical to us that we do not become a financial burden on our children,” said Tom.

Neither Tom nor Amanda has contributed materially to the Canada Pension Plan since 2022. After speaking with Service Canada, Tom’s projected CPP benefits will be $1,174 per month if he starts at age 65, $1,469 per month if he defers to age 68, or $1,667 per month if he defers to age 70.

Amanda expects to receive $604 per month if she starts at age 65; $756 per month if she defers to age 68; and $858 per month if she defers to age 70.

KEY QUESTIONS

RETIREMENT FUNDING:

Do we have enough to meet our lifestyle goals (~$110k-$115k spending in 2024$) to age 95+? If not, how far off are we?

CPP+OAS:

When should we take CPP and Old Age Security (OAS)?

DRAWDOWN STRATEGY:

What is the recommended drawdown strategy for their registered and non-registered investments?

ROI/INFLATION/ETC:

What figures do you recommend using for Investment ROI target, inflation, home value increase, other?

What return on investment target should they be working towards that will help meet the cost of inflation and ensure they are on track for the long-term retirement lifestyle they want?

DOWNSIZING:

Should we look to downsize to free up some equity? If so, when and how much equity do we need to free up?

OTHER:

What else should we be accounting for in our plan?

Any other suggestions/guidance?

Financial Plan

• To retire with $120,000/year after tax ($150,000/year before tax) in 3 years at age 63, Tom & Amanda would need a total portfolio of $3.15 million. They are 32% behind their goal, being on track to have $2.15 million. That is $1 million behind their goal in 3 years.
• It is advisable to be 10-20% ahead of their goal, instead of 32% behind.
• Tom & Amanda are on track for retirement based on $100,000/year before tax, not $150,000/year. This is $85,000/year after tax, instead of $120,000/year after tax. Ideally, they should look at their desired lifestyle and plan to reduce it by about $35,000/year after tax. That is likely too much for them, since it would likely completely eliminate their travel, which they really enjoy.
• If they downsize their home by 25% to invest $500,000 in 10 years and implement the tax-efficient drawdown strategy and tax-efficient investments, they could retire on $120,000/year before tax, or $100,000/year after tax. That is $20,000/year less than their desired lifestyle, but might be achievable for them.
• They are working only part-time earning $1,000/month each, which means they are withdrawing close to $110,000/year to pay for their lifestyle and taxes now.
• They are invested 85% in equities and 15% in cash and GICs. A reasonable, somewhat conservative, long-term return expectation on these investments is about 7.2%/year before they retire and 6.2%/year after they retire.
• If they invested 100% in equities, instead of 85%, the higher expected long-term return means they would be only 26% behind their goal.
• With effective tax planning, they can reduce this to 22% behind their goal.
• They should plan to start CPP & OAS at age 65.

Q & A

Q/ Do we have enough to meet our lifestyle goals (~$110k-$115k spending in 2024$) to age 95+? If not, how far off are we?

A/ No. They are 32% behind their goal. It is generally advisable to be 10-20% ahead of your financial independence goal. Ideally, they should plan to retire on $100,00/year before tax, not $150000/year, which is about $25,000/year lower lifestyle after tax.

Q/ The couple has two adult children who are established and financially independent. Tom and Amanda would like to leave them $500k+ in 2024 dollars but their overarching concern is ensuring their estate is cash positive. “It is critical to us that we do not become a financial burden on our children,” said Tom.

A/ The way a retirement plan works, to maintain a constant lifestyle after inflation, investments tend to grow until your mid-80s and then fall off to run out about age 95-100. This means they are likely to have $500K in investments for each of them until then. They are not using their home equity for retirement income, other than downsizing somewhat in 10-15 years. This means they should always have enough home equity to provide $500K in today’s dollars for an inheritance for their 2 children just from their home equity. They are right to focus on providing for themselves and not being a burden on their children, instead of focusing on trying to leave a significant estate. This is true because they are 32% behind their goal now.

Q/ They’d like to know when they should start taking CPP and Old Age Security.

A/ Ideally, they should start both at age 65 for both of them. Deferring CPP from age 60 to 65 gives them an implied return of 10.4%/year. 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 a bit lower than their investment returns.

Q/ What is the recommended drawdown strategy for their registered and non-registered investments?

A/ There are 2 overriding tax strategies for a retirement income:

1.       Try to withdraw at a low tax bracket & avoid higher tax brackets.

2.       Try to defer tax as long as possible.

For Tom & Amanda, strategy #2 deferring tax as long as possible appears the best. This is because they have significant non-registered investments that could provide for them for quite a few years, and because they are still 12 years from having to withdraw from their RRIFs.

They are paying about $25,000/year income tax now and can reduce this by $15-20,000/year by deferring RRSP/RRIF withdrawals until age 72 and investing tax-efficiently with their non-registered investments. This means they should hold all fixed income in their RRSPs.

Their drawdown strategy should be to drawdown only from their non-registered investments until age 71 while continuing to contribute to their TFSAs. Once their non-registered investments run out, then drawdown on their TFSAs. They should leave their RRSPs and not convert to RRIFs until age 71, and then only withdraw the minimum starting at age 72.

This may leave them with a large tax bill on their estate with mainly RRIFs left. However, paying less tax for many years and allowing their investments to compound many years of growth should be significantly more.

Q/ What return on investment target should they be working towards that will help meet the cost of inflation and ensure they are on track for the long-term retirement lifestyle they want?

A/ They are invested 85% in equities and 15% in cash and GICs. A reasonable, somewhat conservative, long-term return expectation on these investments is about 7.2%/year before they retire and 6.2%/year after they retire.

If they invested for more growth with 100% equities, they could plan on long-term returns closer to 8%/year before retirement and 7% after retirement.

It is not advisable to plan on higher returns than about 8%/year. The stock market returns long-term have normally been higher than this, but long-term 25-year stock market returns have been 8%/year and sometimes lower. It not advisable to have a retirement lifestyle dependent on higher long-term returns, since it would be difficult for them to adjust years after they retire.

Q/ What figures do you recommend using for Investment ROI target, inflation, home value increase, other?

A/ Their portfolio long-term expected returns should be about 7.2/year before retiring and 6.2% after.

Inflation of 3%/year is a reasonable assumption. The average since 1950 has been about 4.2%/year, but the Bank of Canada is mandated to keep inflation between 1-3%/year. 3% is the high end of this band. However, actual 30-year inflation has nearly always been above the mid-point of 2%/year inflation.

Real estate appreciation depends a lot on where they live. In Toronto, the average for the last 40 years has been 6.3%/year, but most of the rest of Canada has been lower. Studies of real estate in many cities show an advisable appreciation rate is about 4%/year based on history or 3%/year based on inflation. Most real estate appreciation is inflation.

Q/ We are considering downsizing in the next 10-15 years. If we do, we’d ideally spend 75-80% of net proceeds on our new home, and invest the other 20-25% of proceeds going into our Non-Reg accounts. Should we look to downsize to free up some equity? If so, when and how much equity do we need to free up?

A/ If they clear $500,000 from downsizing in 10-15 years, that would put them about 25% behind their goal instead of 32%. Helpful, but not a cure.

They need about $1 million more in 3 years. If they could downsize their home worth $1.9 million to a new home worth half that value when they stop working, they could be on track for the lifestyle they want.

A large part of their capital is in their home and providing no retirement cash flow for them. This is one of the main reasons they are behind on their financial independence plan.

Q/ What else should we be accounting for in our plan? Any other suggestions/guidance?

A/ Accessing their home equity in some way to help their retirement cash flow can make a huge difference for them. They could consider either selling to rent, downsizing to a home worth half the value, borrowing against their home equity to invest, or borrowing against their home equity to spend. Those are the 4 ways to access home equity to provide retirement cash flow.

Ed