At 40, Leon and Lydia are “enjoying a good life — restaurant dinners, good groceries, a wine collection, travel, a personal trainer,” Lydia wrote in an email. A few years ago, they bought a century-old house in southeastern Ontario. “We have no debt other than our mortgage and can still pay the bills,” she adds.
They both enjoy professional careers in education, together earning $245,000 a year. They both contribute to defined benefit pension plans, partly indexed to inflation, as well as registered retirement savings plans and tax-free savings accounts. “We would like to know if there are additional things we should do to prepare for a successful retirement in 15 to 20 years,” Lydia writes. “Are our expenses reasonable given this scenario, or should we try to reduce some luxuries? »
In the short term, they plan to take a vacation for $15,000 and redo their backyard for $30,000. In the longer term, they plan to buy an electric car. They hope to maintain their historic home at a cost of $25,000 every five years until they turn 75. Their retirement spending goal is $130,000 per year after tax.
“Can we comfortably retire at 60 or even earlier? Lydia asks.
We asked Stephanie Douglas, partner and portfolio manager at Harris Douglas Asset Management in Toronto, to take a look at Leon and Lydia’s situation. Ms. Douglas holds the Chartered Investment Manager (CIM) and Chartered Financial Planner (CFP) designations.
What the expert says
While a lot could change given the long-term horizon, if they stay on their current trajectory, Lydia and Leon should be able to retire at 60 and meet their spending goal, Ms. Douglas says. His forecast assumes they live to be 95 and earn 5% a year on their investments.
At age 95, they would still have about $1.4 million in investable assets in addition to the equity in their home. If they want to deplete their savings, they could increase their retirement spending to $136,000 a year – even more if they decide to sell their home and downsize.
“They could stay in their current home, or a home of similar value, for as long as they want, and any equity in the property could be used for long-term care if needed,” says Ms Douglas.
If they decided to retire at age 55 instead, they would have no savings left and would have to use their home equity to maintain the desired spending goal, the planner says. “That would happen very early in retirement, at age 62.” This is due to the impact of early retirement on their retirement entitlement, especially for Lydia, as she would have a retirement penalty. Leon works for another institution and therefore has a pension plan with different terms.
Retiring before age 60 may still be achievable, but it would require either saving more, lowering your retirement spending goal, earning higher returns on your investable assets, or some combination of the three.
Lydia and Leon have an annual surplus of approximately $30,000 after taking into account all expenses, taxes and savings. “I would suggest they track their spending closely to see where those extra funds are going,” says Douglas. Their income may fluctuate due to some additional consulting work from Lydia. “They should aim to save some of that surplus for their short-term spending goals to avoid depleting their TFSA,” she says. The remaining funds could be used to pay off their mortgage if they want to retire earlier.
Lydia and Leon invest on their own using an online broker because they were unhappy with their investment advisor, to whom they paid a 1% fee. Their portfolio consists primarily of large-cap, dividend-paying companies, exchange-traded funds, and mutual funds, the planner says.
“They should keep in mind that mutual funds and ETFs also charge fees that are embedded in the funds,” says Douglas. The amount they pay will be shown as the management expense ratio, or MER. For example, one of their mutual funds has an MER of 1.06%. “They should review the fees to make sure they’re comfortable with them.”
Lydia and Leon’s 100% allocation to stocks and equity funds is not inappropriate given their long-term horizons and the fact that they both have pension plans, Ms. Douglas says.
To avoid having to sell stocks in a bear market, “I suggest they set up an account specifically for their short-term goals, no less than five years,” she says. These funds can be invested in guaranteed investment certificates to ensure the funds are there when they are needed.
“They should also regularly review their asset allocation to ensure it remains in line with their risk tolerance and goals,” she says. This will be especially important once they have retired and started to dip into their savings. “At this point I would say they have between three and five years of withdrawal requirements in a low volatility asset class to draw on.”
She also suggests that they apply for a home equity line of credit while they are both still employed, in case of unexpected cash flow needs later. “If a large amount was needed and the market was down at the time, they could wait for the market to recover before selling shares to pay off the line of credit.”
As they near retirement, the planner suggests that Lydia and Leon seek advice on “decumulating” or withdrawing their savings. They will likely have the ability to dip into their RRSPs early on before they start collecting government benefits or making minimal withdrawals from their Registered Retirement Income Funds, “all of which will push them into a higher tax bracket,” she says. “That can help spread out some of the tax implications.”
Twenty years from now, in the first full year of retirement, Lydia would have a pension income of about $125,000 a year and Leon about $100,000. This is based on their pensions increasing at 66.67 percent of the rate of inflation. Their spending needs would have increased in line with inflation; they would withdraw funds from their RRSPs to make up the shortfall. Because their pensions are only partially indexed, they should review their financial plan regularly to account for any changes, Ms Douglas says.
Finally, she suggests that the couple maximize their TFSA in order to have funds available that do not constitute taxable income.
Status of customers
The people: Lydia and Leon, both 40 years old
The problem: Can they achieve their goals without reducing the luxury they enjoy? Will they be able to retire at 60 or even earlier?
The plan: Keep working and saving while taking full advantage of the TFSA. Watch the investment costs and aim for a rate of return of at least 5%. Retiring before age 60 will involve trade-offs.
Gain : A plan that can be adjusted as their goals and needs change.
Net monthly income: $15,565
Assets: Bank accounts $36,000; his TFSA of $42,000; his TFSA of $60,000; his RRSP $290,000; his RRSP $61,000; estimated present value of his DB pension $60,310; estimated present value of his DB pension $271,300; $1.3 million house. Total: $2.1 million
Monthly distributions: Mortgage $3,445; Property tax $710; water, sewer, garbage $100; home insurance $135; electricity, heating $175; maintenance $200; garden $50; transportation $270; groceries $1,000; clothing $300; offer $100; vacation $500; restaurants, beverages, entertainment $1,600; personal care $250; sports, hobbies $150; subscriptions $100; doctors, dentists, pharmacy $310; life insurance $100; disability and critical illness $100; cell phones $145; Internet $85; cable or satellite $60; RRSP $1,215; savings account $100; retirement plans $1,870. Total: $13,070. The excess of $2,495 goes to TFSAs, the provision for major ongoing expenses on their home, and unrestricted expenses.
Passives: Mortgage $671,000
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