Jennifer Gauthier/The Globe and Mail
Quentin is 50 years old and his wife Ida is 56. They have a house in Vancouver and two children, one in university and the other starting this fall.
Quentin earns $240,000 a year plus bonus in the technology sector. Ida earns $127,000 in sales. Quentin has a group registered retirement savings plan to which he contributes 5 per cent of his earnings, matched by his employer. Ida has a defined contribution pension plan to which she and her employer each contribute 9 per cent.
“Our main objectives are for Ida and I to be in a position to slow down professionally in a few years,” Quentin writes in an e-mail. In that scenario, he says they would keep working part-time, earning $15,000 a year each until they each turn 65.
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They’ve earmarked their tax-free savings accounts for travel and possibly buying a vacation property in future. “We’d like to entice the kids to continue to travel with us as much as possible,” Quentin writes.
In a decade or so, Quentin and Ida plan to distribute their non-registered savings to their children for down payments on their first homes – “if they show enough maturity and demonstrate that they can work hard and make the right life choices.”
Drawing solely from their registered savings, they wonder if they can meet their retirement spending goal of $120,000 a year, after tax and rising with inflation, for the remainder of their lives.
We asked Chris Tringham, a portfolio manager and financial planner at Park Place Securities in Kingston, Ont., to look at Quentin and Ida’s situation. Mr. Tringham holds chartered financial analyst and certified financial planner designations.
What the expert says
Quentin and Ida would like to know if they can retire in five years, Mr. Tringham says.
Their total investment assets across RRSPs, Ida’s defined contribution pension, TFSAs and non-registered accounts are more than $3.2-million and their home equity is close to $2.5-million. “This would certainly sustain spending of $120,000 per year after tax for the remainder of their life expectancy,” the planner says.
“They are looking to spend more generously on travel while they are relatively young so that their children are more likely to join them,” he says. “This may include luxury hotels, exciting destinations and upgraded flights.”
When they retire from their full-time jobs, Quentin and Ida will be 55 and 60, respectively. They are planning to defer Canada Pension Plan and Old Age Security benefits until they are 70.
“This gives them a window of 15 years to withdraw their income needs from the RRSPs before their government pensions begin,” the planner says. The defined contribution pension can remain invested in a locked-in retirement account until it is converted to a life income fund when she turns 72.
Reducing their registered accounts by making withdrawals when they are in lower tax brackets will ensure that their future registered retirement income fund, or RRIF, withdrawal minimums do not put their income above the OAS clawback threshold.
Quentin and Ida have invested successfully over the years, averaging a rate of return of nearly 10 per cent, Mr. Tringham says. “Their combined TFSA values of $570,000 demonstrate that a few individual stocks have had exceptional returns compared to their lifetime contribution limit of $218,000,” he says.
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The couple self-manages their accounts using exchange-traded funds and individual stocks, and would like to reduce risk as they move closer to retirement, the planner notes. “When they begin making registered account withdrawals, it would be prudent to rebalance their accounts so that the portfolio moves toward a more conservative asset mix.”
Lifestyle expenses of $120,000 a year will not have entirely depleted their registered savings, excluding their TFSAs, before they die, Mr. Tringham says. “There is likely to be more than $1-million remaining, which would generate an income tax liability in excess of $500,000.”
They could withdraw more from their registered accounts (excluding their TFSAs) before the CPP and OAS benefits start, so that the future tax liability is reduced, the planner says. They may also choose to purchase a whole life insurance policy to cover the tax liability that will result when their RRIFs are wound up upon their deaths. A whole-life policy would pay the proceeds to their estate when the second spouse dies. The estate can then use the proceeds of the policy to cover the taxes owing.
In preparing his forecast, Mr. Tringham used an estimated rate of return on their investments of 6 per cent, based on a portfolio of about 60 per cent stocks or stock funds and 40 per cent fixed income. “This assumes fixed income returns of 4 per cent and stock returns of 7 per cent,” he says. Inflation is estimated at 2.1 per cent.
He assumes they will work part-time, earning $15,000 a year each until the age of 65, and that Quentin lives to be 91 and Ida lives to 93.
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The remaining mortgage balance is on track to be paid off in five years’ time. Eliminating the current monthly mortgage payment of $2,600 will mean they have additional funds to pay for travel or gifts to their children.
Quentin and Ida would like to give $500,000 to each of their two children, 18 and 20, for a down payment on a first home when they turn 29. The planner says both children should open first home savings accounts now so they can begin contributing $8,000 a year up to a lifetime limit of $40,000.
“These can be annual gifts to the children so that they can maximize their tax breaks and also become acquainted with having investment accounts,” he adds. “They should also open TFSAs and begin making the $7,000 annual contributions, which can be gifted from their parents.”
Quentin and Ida have $500,000 worth of investments set aside in a joint non-registered account, with stocks and ETFs that have a book value of $300,000.
“We have modelled out an assumption that $1,000 per month is saved in this account up to the year each child turns 29,” the planner says. His forecast shows that this is close to being enough to provide the intended gifts to their children; any additional funds needed can be temporarily drawn from their TFSAs. The TFSAs can be topped up in subsequent years with their RRIF minimum withdrawals, above and beyond what they need for lifestyle spending.
Ida and Quentin are not working with any type of financial adviser or financial planner. “They would benefit from a written investment policy statement and a full retirement cash flow plan,” Mr. Tringham says.
Client situation
(Income, expense, asset and liability numbers are provided by the applicants.)
The people: Quentin, 50, Ida, 56, and their two children, 18 and 20.
The problem: Can they retire in five years, travel extensively, help their children to buy a first home and still maintain their lifestyle?
The plan: Help their children set up first home savings accounts and TFSAs now. Keep adding to the investment account they have set up for the children’s down payments. Draw down their RRSPs in the years before they start collecting government benefits.
The payoff: Goals achieved.
Monthly after-tax income: $18,290.
Assets: Bank accounts $72,000; stock portfolio $600,000; emergency fund $60,000; his TFSA $340,000; her TFSA $230,000; his RRSP $1,200,000; his work RRSP $150,000; her RRSP $300,000; her defined contribution pension $552,000; registered education savings plan $120,000; residence $2,600,000. Total: $6.2-million.
Monthly outlays: Mortgage $2,600; property tax $665; home insurance $110; electricity $100; heating $100; maintenance $1,000; furniture, décor $100; garden $100; car insurance $335; fuel $400; maintenance, oil change $350; transit, parking $200; groceries $1,100; clothing $150; charity $100; vacation, travel $1,800; unallocated spending $1,000; dining, drinks, entertainment $1,050; personal care $350; club memberships $100; pets $450; sports, hobbies $60; subscriptions $120; health care $30; life insurance $500; phones, TV, internet $220. Total: $13,090.
Surplus of $5,200 goes to Ida’s pension contribution, their RRSPs, TFSAs and non-registered savings.
Liabilities: Mortgage $145,000.
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Some details may be changed to protect the privacy of the people profiled.
