Ellen hopes to retire next spring, while Roger plans to work for another five years and maybe more. Their retirement spending goal is $120,000 a year after tax.Duane Cole/The Globe and Mail
Roger is 59 years old and Ellen is 62. They both work in health care, earning salaries of about $120,000 a year each, plus variable bonuses. They have three adult children and a house with a mortgage in the Greater Toronto Area.
In their first Financial Facelift, Roger and Ellen were struggling to make double mortgage payments, save for retirement and fund their children’s education.
“Fast forward 20 years and the kids are through university and pretty much out of the house,” Roger writes in an e-mail. “We are living in a much bigger property that is really too big now, although we’ve rented out the basement apartment,” Roger writes. They’re thinking of downsizing their home at some point.
Ellen hopes to retire next spring, while Roger, who has found professional stability after years of contract work, plans to work for another five years and maybe more. Their retirement spending goal is $120,000 a year after tax.
We asked Amit Goel, a certified financial planner and portfolio manager at Hillsdale Investment Management Inc. in Toronto, to look at Roger and Ellen’s situation. Mr. Goel also holds the chartered financial analyst designation.
What the expert says
Roger and Ellen both contribute every two weeks to registered retirement savings plans (RRSPs), with employer matching and annual top-ups, Mr. Goel says. Both have significant unused RRSP contribution room.
Roger also has a small pension in Britain with a commuted value of $150,000. Ellen has a pension that will pay $13,300 a year, not indexed. Roger expects an inheritance of roughly $400,000 within the next 10 to 15 years – a conservative estimate, the planner says.
They are not contributing to tax-free savings accounts (TFSAs). Their investments are self-managed across several platforms, heavily weighted toward equities – one-third each in Canadian, U.S. and international stock index funds – with an estimated annual all-in cost of 0.75 per cent. They’ve considered robo-advisers and bank-managed portfolios, but nothing has felt like the right fit, Mr. Goel says.
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The couple’s home, valued at about $1.4-million, carries a $225,000 mortgage with weekly payments of $633. They rent out part of the house, earning $1,000 a month, plus another $75 from solar panels. “Roger asks if they should still be carrying debt in their 60s,” the planner says. “They also wonder if Ellen’s coming retirement means they’ll need to sell and move.”
Monthly expenses, excluding the mortgage, run around $8,500 – expected to rise to $10,000 after both retire to cover higher health, vehicle and travel costs.
Their goal is to spend about $120,000 a year after they have retired “without eroding their savings or taking on unnecessary risk.”
They’re also thinking ahead: If downsizing becomes necessary, when would be the right time to do it? How can they continue managing their own investments as they shift from accumulation to withdrawals? And with their mortgage coming up for renewal, what’s the smartest way to handle that debt as they move closer to retirement?
At their current pace, their mortgage will run for about two years after Roger retires, Mr. Goel says. His forecast assumes Roger retires in 2031. “By then, the balance should be below $100,000 and manageable with the ongoing rental income,” he notes. Alternatively, they could use Roger’s future British pension payout to clear the debt.
“The good news is that they don’t need to downsize when Ellen retires,” the planner says. A 5-per-cent withdrawal rate from Ellen’s RRSP, combined with Roger’s income, would cover living costs. When Roger retires, they can revisit the idea.
If they do sell and buy a smaller home, the proceeds – roughly $280,000 after paying off the mortgage – could be invested. Though they’d forgo rental income of about $14,000 a year, the trade-off is nearly offset by the 5-per-cent potential return on those proceeds. “In other words, downsizing is optional, not essential.”
After Ellen retires next year, she should start withdrawing from her RRSP, the planner says. At 65, she will start receiving an annual pension of $13,300 to support the cash-flow needs. During Ellen’s lower-income years (ages 63 to 70), she could draw slightly more from her RRSP at favourable tax rates and shift some funds into a TFSA for future tax-free growth. This will also help reduce the eventual tax burden on their estate.
For stability, Ellen’s RRSP should gradually move away from a 100-per-cent equity allocation. She can split her portfolio into three distinct buckets, each with different goals, to balance risk and provide more stability in their retirement years, Mr. Goel says. Roger can adopt a similar structure when he retires.
Short term (20 to 30 per cent): Four to five years of withdrawals held in cash, GICs and other safe assets for liquidity.
Medium term (30 to 40 per cent): Dividend-paying or low-volatility investments to outpace inflation.
Long term (30 to 40 per cent): Growth-focused equities, particularly within the TFSA, to build future wealth.
Roger and Ellen can both afford to defer Canada Pension Plan and Old Age Security benefits to age 70, locking in lifetime bonuses of 42 and 36 per cent, respectively, the planner says. By their early 70s, with higher CPP and OAS payments flowing in, they’ll rely less on withdrawals from their registered retirement income funds (RRIFs). Early RRSP drawdowns will also lower the annual minimum RRIF withdrawals later, keeping taxes manageable.
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The couple have several key milestones ahead. “Although they’ve done a commendable job managing their own finances, this may be a good time to connect with a qualified professional who offers integrated investment management and financial planning,” Mr. Goel says. “A trusted adviser could help them navigate tax strategy, cash flow and portfolio decisions.”
With moderate cash-flow needs, the couple is well positioned to meet their retirement goals, the planner says. This is supported by a combination of timely RRSP withdrawals, deferred government pension income and a well-balanced asset allocation strategy. The plan assumes a 5.5-per-cent annual return after fees and 2.5-per-cent inflation.
To account for market fluctuations, the plan was stress-tested using a Monte Carlo simulation of 500 scenarios. The results show more than an 80-per-cent chance of success, rising to nearly 90 per cent if they choose to downsize when Roger retires and invest the net proceeds, or if Roger decides to work another year, Mr. Goel says.
In all scenarios, Ellen can retire next year with confidence, knowing their lifestyle goals are well within reach, he says. “They can decide whether to stay in their current home or downsize, based on what feels right for them.”
The couple hasn’t accounted for potential health care or retirement home costs later in life. They could draw on home equity – by downsizing or using a reverse mortgage – to cover these expenses, the planner says.
Client situation
The people: Roger, 59, Ellen, 62, and their three children.
The problem: Can Ellen retire next year and still maintain their standard of living? Will they have to sell their house?
The plan: Ellen retires and begins drawing early on her RRSP. They both defer government benefits to age 70. They divide their savings and investments into three distinct parts with three different goals.
The payoff: The comfort of knowing they can stay put as long as they want and can fall back on their house value if they need to.
Monthly after-tax income: $12,460.
Assets: Her RRSP $700,000; his RRSP $410,000; residence $1,400,000. Total: $2.5-million.
Estimated present value of his pension: $150,000. This is what someone with no pension would have to save to generate the same income.
Estimated PV of her pension: $200,000.
Monthly outlays: Mortgage $2,720; property tax $545; home insurance $105; electricity $255; heating $195; pool expense $75; maintenance $465; garden $25; transportation; $780; groceries $1,500; clothing, including children’s $335; loan $400; gifts $150; charity $600; vacation, travel $665; dining, drinks, entertainment $360; personal care $20; gym $100; sports, hobbies $305; subscriptions $170; other personal discretionary $865; health care $165; communications $400. Total: $11,200.
Liabilities: Mortgage $225,000 at 4.5 per cent; interest-free personal loan $32,000. Total: $257,000.
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Some details may be changed to protect the privacy of the persons profiled.