Diego and Monique are hoping to travel extensively while still maintaining their standard of living, paying off their mortgage and leaving an estate to charity upon their death.Jennifer Gauthier/The Globe and Mail
Diego is 71 years old and retired. This summer, his wife Monique, 68, retired from her job in financial services where she had earned $125,380 a year.
They have a condo with a mortgage in Vancouver, no children and plenty of savings.
Their goals are to travel extensively starting next year, maintain their standard of living, pay off their mortgage and leave an estate to charity upon their deaths.
They have about $4.3-million in investable assets. Neither has a defined benefit pension.
Now with $4-million, what’s the best way for Mike and Miriam to deal with their capital gains?
“Can we afford to draw an income of $130,000 a year net of taxes and adjusted for inflation?” Diego asks in an e-mail.
We asked Warren MacKenzie, an independent financial planner in Toronto, to look at Diego and Monique’s situation. Mr. MacKenzie holds the chartered professional accountant designation.
What the expert says
Diego and Monique have a higher net worth than is necessary to achieve their spending goals, Mr. MacKenzie says. “If they choose to use their surplus wealth wisely, they’ll have a great opportunity to maximize their happiness during their retirement.”
Their first question is can they spend $130,000 per year plus travel expenses. They’re planning three big trips costing $40,000 each over the next few years.
Based on reasonable assumptions of a 5-per-cent rate of return on their investments and a 2-per-cent inflation rate, their projections to age 100 show that they’re on track to leave an estate of about $3-million with today’s purchasing power, the planner says.
Their will specifies that their estate will go to four charities when they are both deceased. This means that in about 30 years’ time, these charities will benefit from fairly large donations.
“There is no good reason to delay most of their charitable contributions until they’re gone,” Mr. MacKenzie says. By making their donations each year, they will lower their income, reduce income tax, reduce the clawback of Old Age Security benefits and get to enjoy seeing the good that their money can do, he says. “They will miss this opportunity for happiness if they delay all their charitable contributions until they are both deceased.”
They could achieve their spending goal and never run out of money even if they each had $1-million less in their registered retirement savings plans, Mr. MacKenzie says. “This means they could consider $2-million of their $5.3-million net worth to be surplus capital.”
The projections are conservative because $130,000 per year is more than double their existing lifestyle expenses after the mortgage is paid off, the planner says.
If they were to donate $200,000 each year to charity for the next 10 years, they would get to enjoy seeing the good they can do and still leave an estate of about $1-million, he says. By updating their financial plan each year, based on market conditions and unexpected events, good or bad, they could increase or decrease their level of donations, he adds.
How can Seth, 53, and Maeve, 54, reach their goal of spending $120,000 a year in retirement?
In 2026, the planner’s projections show cash receipts of about $459,000. This includes about $290,000 from registered retirement income funds (RRIFs), $122,000 from non-registered accounts, and a combined $47,000 from CPP and OAS. Cash outflows for the year, adjusted for inflation, total $458,000, including mortgage payments of $53,000, basic lifestyle spending of $133,000, vacations of $41,000, donations of $200,000, and income tax of $31,000.
Diego, a do-it-yourself investor, looks after investing for both of them. Monique has very little investing experience so if anything happened to Diego, she would have to look for a professional adviser to manage their investment portfolio, Mr. MacKenzie says.
“Given Diego’s expertise, he should consider interviewing a few money management firms and select one to manage just one of their accounts,” the planner says. “By doing so, Diego would have a benchmark against which to measure his performance and Monique would know where to move the investments if Diego was no longer able to manage the funds.”
The overall asset mix of all the accounts is 86 per cent in Canadian, U.S. and international stocks or stock funds and 14 per cent in cash and fixed income or bond funds. Most of the stocks are in exchange-traded funds.
“Given that markets are near their all-time highs, and that Diego and Monique can achieve their goals with a moderate risk portfolio, there is no reason for them to be in an asset mix with higher risk than is necessary to achieve their goals,” Mr. MacKenzie says.
To minimize income tax, all of their cash and fixed-income investments are held in their RRSPs and RRIFs; dividend and capital gains-producing investments are held in their non-registered accounts and tax-free savings accounts (TFSAs). “They should continue to maximize their TFSA contributions,” the planner says.
Diego and Monique should ensure they have equal taxable incomes. Because Monique has the larger RRSP, she should immediately turn her RRSP into a RRIF so that RRIF income can be split for income tax purposes, he says.
If they were to start by withdrawing only the minimum amounts from their RRIFs, then in their later years their RRIF withdrawals would put them into a high-income-tax bracket, the planner says. “In the early years of retirement, they should therefore draw more than the minimum from their RRIFs so they will take full advantage of the lower income tax brackets.”
If health care ever becomes a problem, Diego and Monique could sell the condo, which would give them tax-free funds to pay for health care costs, Mr. MacKenzie says. His projections assume that when Diego is 90, they will sell their condo and move into a luxury retirement home costing $80,000 each, or $160,000 a year in today’s dollars.
About 40 per cent of the mortgage outstanding on the condo was used for investment purposes so a portion of the interest cost is tax deductible, the planner says. But now that they have more than enough wealth to achieve all their goals, it would make sense to simplify their lives – and reduce interest costs and stock market risk – by liquidating sufficient funds to pay off the mortgage, Mr. MacKenzie says.
People often postpone or delay spending on themselves because they want assurance they will have enough for the rest of their lives, Mr. MacKenzie says. “But people need to understand that there are costs associated with this strategy,” he says.
“The costs include forgoing pleasures while they are alive, paying more income tax, and missing the opportunity to enjoy the happiness that comes from helping other people.”
Client situation
The people: Diego, 71, and Monique, 68.
The problem: Can they afford to maintain their standard of living, take a few expensive trips and still leave an estate to give to charity?
The plan: Give to charity now while they are still alive. Draw early on their RRIFs. Take steps to lower investment risk and have at least one account managed professionally.
The payoff: A smooth transition to a satisfying retirement.
Monthly net income: As needed.
Assets: Bank $30,000; non-registered stocks $812,732; his TFSA $199,220; her TFSA $307,275; his RRSP/RRIF $1,082,435; her RRSP $1,957,375; residence $1,700,000. Total: $6.1-million.
Monthly outlays: Mortgage $4,445; condo fee $975; property tax $325; home insurance $350; hydro $100; transportation $390; groceries $700; clothing $500; charity $400; travel $1,000; personal care $170; dining out $150; subscriptions $125; health care $90; phones, TV, internet $315; TFSAs $1,250. Total: $11,285.
Liabilities: Mortgage $745,000 at 3.85 per cent.
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Some details may be changed to protect the privacy of the persons profiled.
