National Post article: Is a $740,000 all-equity portfolio enough for Jasmine and Terry to retire early?

One of the questions I hear most often is, “Do I have enough to retire?”

The answer is almost never as simple as looking at the size of your portfolio. 

The real question is whether your investments, savings strategy, tax planning, and retirement income plan all work together to support the lifestyle you want.

In this case, Jasmine and Terry have built a $740,000 all-equity portfolio and hope to retire within the next eight years. 

They also have a disabled child, which adds another layer of planning around taxes, government benefits, investing, insurance, and estate planning.

In my latest article for the National Post I answer the following questions:

• Is a $740,000 all-equity portfolio enough?
• Is it smart to plan for lower spending during “slow go years”?
• Is it smart to keep a “cash bucket”?
• Should they contribute to RRSP or TFSA or another account?
• Should they keep contributing to their TFSAs after they retire?
• Should they open an RDSP for their disabled child?
• How much life insurance do they need?

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

Is a $740,000 all-equity portfolio enough for Jasmine and Terry to retire early?

Jasmine*, 47, and Terry, 53, want to retire early – within the next eight years or sooner, if possible. They have two children. Their youngest has a disability with a shortened life expectancy and they want to spend as much time together as a family as they can.

Ideally, they’d like to retire at the same time, but Jasmine is prepared to work a few more years than Terry if that means they can achieve their target monthly income of $7,500 after tax for the first 10 to 15 years of retirement. They expect their cash flow needs to decrease to $6,500 a month when they shift from their “go go years” to their “slow go years”. Their current monthly expenses are about $4,000.

Jasmine earns $90,000 a year before tax and Terry earns $65,000. They also receive the Canada Child Benefit ($10,020 annually), and the Child Disability Tax Credit ($7,660 annually). They have not invested in a registered disability savings plan because of the uncertainty of their child’s life expectancy, but they wonder if this is a missed opportunity. 

The couple have built an all-equity portfolio worth $740,000. This includes $375,000 in Tax Free Savings Accounts, $282,000 in Registered Retirement Savings Plans, and $83,000 in Locked-In Retirement Accounts. They also have about $12,000 in a Registered Education Savings Plan invested in a dividend growth mutual fund for their oldest child and $20,000 in cash for emergencies.  

Terry and Jasmine plan to apply for the Quebec Pension Plan and Old Age Security at age 65. “Is this the right thing to do? Does it make more sense for one or both of us to start QPP at 60? Or should we defer either benefit until age 70?” asked Terry. “When we’re in our 70s, we’re hoping our government pensions will cover our cash flow needs. Is this feasible?” 

Jasmine and Terry own a home valued at $650,000. They have no mortgage and no plans to sell, at least for the next 10 years or so. They each have $100,000 term life insurance policies. 

When both Jasmine and Terry are retired, they plan to create what they are calling a “three-year cash bucket”. This would be invested in guaranteed investment certificates or other “safe” investments to cover a three-year cycle of cash flow needs, with the rest of their portfolio fully invested in an equity index fund. 

The idea is that they would draw from the “cash-bucket” when markets are down, which would allow them to stay invested and avoid losses. “Is this a good strategy,” asked Terry. “Is investing so heavily in equities too risky?”

He would also like to know if he and Jasmine should continue to maximize annual contributions to their RRSPs until they retire. Jasmine contributes $30,000 a year; and Terry contributes $20,000 a year. “We’re not high earners. Are we over-invested in RRSPs? Would it make more sense to open a spousal RRSP? Or a non-registered account instead?”

The couple plan to continue to maximize TFSA contributions each year throughout their lives. They don’t want to withdraw any money from the TFSAs, viewing them as an inheritance for their children. Is this possible? How old will they be when their RRSPs are depleted? 

Most importantly, are they on the right track to retire early, and if so, how early? 

INCOME 

Employment income: Combined income before taxes $155,000

Investment income (dividends): $0

Pension: Anticipate to start QPP / OAS when we both turn 65.

CCB / Child disability tax credit = $835 monthly + $1915 quarterly.

ASSETS

Primary residence approximate value: $650,000 

Rental property approximate value: $0

Investment holdings

Cash: $20k 

TFSAs:

Jasmine: $171,000

Terry: $204,000

RRSPs:

Jasmine: $132,000 + $30,000 to be contributed within the next couple of months.

Terry: $100,000 +  $20,000 to be contributed within the next couple of months.

GICs: $0

LIRA: $44,000 (self directed) 

     $39,000 (work contribution)

RESPs: $11,789

Mutual Funds: $0

Stocks: $0

Rental property: $0

Life insurance:

TERM = $100,000 each

Total monthly expenses: $4,037 

Mortgage or rent payments: $0

Utilities: $560

Groceries: $1100

Transportation costs: $410

Childcare: $30

Insurance premiums: $210

Home repairs: $100

Credit card payments: $0

Property tax: $327

Loans: $0

Dining out/travel/entertainment: $1000 

Other: $300

FINANCIAL PLAN

Are they on the right track to retire early, and if so, how early? 

Their retirement goal is to retire in 8 years or less on $110,000/year before tax ($90,000/year after tax) and reduce that to $94,000/year before tax ($78,000/year after tax) 15 years into retirement. They are 53 and 47 now and hope to retire at ages 61 and 55. 

To achieve this and retire in 8 years, they would need $2.15 million. With their existing investments plus adding $50,000/year to their RRSPs and $14,000/year to their TFSAs, they are on track to have $2.05 million. They are 4% short of their goal, which is close enough that they are on track, but without a margin of safety.

They should plan to work 8 more years. To have a 10-15% margin of safety, Jasmine could work 3 additional years.

Their goal of spending $7,500/month when they retire is $3,500/month more than they spend now. That’s $40,000/year for additional expenses like travel, which is very generous.

They expect their cash flow needs to decrease to $6,500 a month when they shift from their “go go years” to their “slow go years”.

Our experience from working with thousands of clients is that “slow-go years” is usually about not having saved enough – as it is for Jasmine and Terry. Retirees with money and health tend to spend as much on travel in their 80s as in their 60s, and may do more luxury travel.

It is usually better not to plan that you must reduce your spending at a certain age, whether you want to or not at that time.

Terry and Jasmine plan to apply for the Quebec Pension Plan and Old Age Security at age 65. “Is this the right thing to do? 

Does it make more sense for one or both of us to start QPP at 60? Or should we defer either benefit until age 70?” asked Terry. “When we’re in our 70s, we’re hoping our government pensions will cover our cash flow needs. Is this feasible?” 

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. Deferring to age 70 gives them an implied return of 6.8%/year. Since their investments are all equity investments, they should provide more than 6.8%, but may or may not beat 10.4%. It is probably best for both of them to start QPP and OAS at age 65.

When both Jasmine and Terry are retired, they plan to create what they are calling a “three-year cash bucket”. This would be invested in guaranteed investment certificates or other “safe” investments to cover a three-year cycle of cash flow needs, with the rest of their portfolio fully invested in an equity index fund. 

The idea is that they would draw from the “cash-bucket” when markets are down, which would allow them to stay invested and avoid losses. “Is this a good strategy,” asked Terry. “Is investing so heavily in equities too risky?”

I studied holding various amounts of cash for a 30-year retirement during the last 150. I found that holding cash has never helped any time in the last 150 years. There has never been a case where someone ran out of money during retirement with 100% equities that would not have also run out with a cash holding of any size. Cash holdings over 30 years have always had lower returns than stocks, which has been a more significant factor than using the cash through market declines.

The benefits of holding cash are 100% psychological. If they psychologically help you stay invested when your investments go down, then there might be a benefit. For investors that buy and hold through market ups and downs, holding no cash is an easy way with a 100% success rate in history to have more money during your life.

They could have a credit line available for any large, unexpected expense or just sell some investments at that time. Having a GIC is a bad choice for them for liquidity, since it is locked in for at least a year. They could not access if their investments are down.

Since they have been all equity investors, they must have been able to hold on through market declines. If so, then staying 100% equities gives them a more reliable 30-year retirement income rising by inflation than having fixed income. I studied the “4% Rule” over the last 150 years, which is a general rule of thumb for how much you can safely withdraw from your investments. My study showed that having 70-100% equities provided a reliable cash flow for a 30-year retirement rising by inflation 96-97% of the time in history without managing it. If you manage the withdrawal rate, then it has been 100% reliable. Adding fixed income made the retirement less reliable.

Should they continue to maximize their annual contributions to their RRSPs until they retire?

Jasmine contributes $30,000 a year; and Terry contributes $20,000 a year. “We’re not high earners. Are we over-invested in RRSPs? Would it make more sense to open a spousal RRSP? Or a non-registered account instead?”

Jasmine should contribute at least $35,000 and Terry $10,000 to their RRSPs each year, or just enough to reduce their taxable income to $54,000 each year. They will retire in the lowest 26% tax bracket in Quebec which is on taxable income up to $54,000/year. Both their incomes today are in the 36% marginal tax bracket. They get a 36% tax refund on their contributions today, but will only have to pay 26% tax when they withdraw years from now.

This totals $45,000/year, but contributing a total of $50,000/year like they have been doing is still worthwhile for them. The extra $5,000 could go to whoever has room. They also get more Canada Child Benefit of 5.7% of their RRSP contributions, which makes them worthwhile.

They can save tax during retirement if their taxable incomes are about the same. To achieve this, it is best to try to have RRSPs about the same size. Jasmine probably has a larger RRSP than Terry now. If so, then Jasmine should contribute her RRSP contributions to a spousal RRSP in Terry’s name until their RRSPs are about the same size.

The couple plan to continue to maximize TFSA contributions each year throughout their lives. They don’t want to withdraw any money from the TFSAs, viewing them as an inheritance for their children. Is this possible? How old will they be when their RRSPs are depleted? 

This is a good idea. They have the cash flow now while they are working and it would be worthwhile right through their retirement as well, if they can. They can save tax if they use their TFSAs any time they have larger expenses that would put their taxable income above the lowest tax bracket (which is $54,000 today).

They have not invested in a registered disability savings plan because of the uncertainty of their child’s life expectancy, but they wonder if this is a missed opportunity. 

Many families that would benefit significantly from using RDSPs are not using them. This includes Jasmine and Terry, as long as their disabled child lives at least 10 years. For now, they could contribute $1,000/year and get a grant of $1,000/year. The year the child turns 17, they should start filing a tax return even if there is no income. The year the child turns 19, the grants start being based on the child’s income, which means they can contribute $1,500/year and get $3,500/year in grants and $1,000/year in a bond. That is $4,500/year free money by contributing only $1,500/year. Once the child passes away, they will lose the grants and bonds in the last 10 years, but all the contributions and grants and the growth in the RDSP would be part of the estate and could go to the family.

They each have $100,000 term life insurance policies. 

To replace the income lost if something happens to one of them before they retire, they need about $400,000 life insurance on Terry and $600,000 on Jasmine. Their $100,000 policies would leave the survivor short, so they would have to work longer. To protect their incomes, they could get a $500,000 joint-first-to die 10-year term policy. They can probably cancel any life insurance once they retire, since they would have enough for the survivor to maintain their lifestyle just from their investments.

Ed