Simon and Samantha are diligent savers with four children and would like to retire as soon as possible.Dax Melmer/The Globe and Mail
Simon is 49 years old and his wife Samantha is 45. Their combined family income is about $114,000 a year.
They have a mortgage-free house in an Ontario city and four children ranging in age from three to 23.
Simon’s goal is to retire from his job in information technology as soon as possible. Samantha would like to leave behind her part-time retail sales job in four or five years when she’s 50.
Some time ago Simon took out a line of credit, now nearly $155,000, to invest mainly in stocks. His non-registered portfolio is now valued at $648,335. They have tax-free savings accounts worth more than $500,000 combined, and RRSPs worth a total of around $850,000.
“When is the soonest I could reasonably retire?” Simon asks in an e-mail.
“Is letting my line of credit run the optimum course of action?” he asks. “That’s the impression I get so that’s what I’ve been prepared to do. It’s all been invested in my non-registered account for about 15 years now.”
Their retirement spending goal is $85,000 a year after tax.
“Is retirement at 50 possible?”
We asked Adam Weinstock, senior wealth adviser, portfolio manager with Scotia Wealth Management, and Francesco Viviani, a senior financial planner, also with Scotia Wealth Management, to look at Simon and Samantha’s situation.
What the experts say
Samantha and Simon are in an enviable position with the possibility of early retirement on the table, the planners say. They’ve saved and invested since they were young and so have a sizable investment portfolio.
“Simon wonders if retirement for him is feasible at 50 with Samantha working another few years until she turns 50 herself,” Mr. Weinstock says. “The answer is yes.” With investment assets of about $2.25-million and reasonable long-term return assumptions, they will be able to achieve their goal, he says.
Can Moira, 57, retire in three years and still leave an inheritance for her kids?
Most of their investments are in stock index funds, although Simon has a more diversified portfolio of dividend-paying Canadian and U.S. companies in his non-registered account. He financed the purchases using an investment loan.
“The equity-heavy focus of their portfolios has grown their wealth very nicely over the last 15 years,” Mr. Weinstock says. “In our analysis we assume that, until Samantha retires in 2031 – the year she turns 50 – the portfolio earns a 6-per-cent rate of return. After that we assume a 5.39-per-cent return. The returns are before tax and after any fees.”
Their retirement goal is to spend $85,000 a year after tax. “With an investment portfolio of their size, they would see their net worth grow throughout their retirement,” Mr. Weinstock says, “so the ability to spend more – or splurge every now and then – is a real possibility.”
Cash-flow planning after Simon retires will be important, the planners say. Because Simon will be in a lower tax bracket then, he should consult a tax adviser to discuss an optimal withdrawal strategy. “Starting early withdrawals from his RRSP should be a consideration.”
Larger withdrawals later in life could eat into the couple’s government benefits. So starting to draw down the RRSP accounts before the forced minimum withdrawals come into play at age 72 can help mitigate the Old Age Security clawback later in life, the planners say.
Both Samantha and Simon should continue to contribute to their tax-free savings accounts for as long as they can even if it means simply shifting assets from their non-registered accounts to the TFSAs.
The TFSAs will be the last assets they draw down. They likely won’t need to be touched until Samantha and Simon are in their early to mid-70s. This allows a lot of time for tax-free growth and compounding to work in their favour.
“We assume their expenses are indexed to inflation at 2.5 per cent a year and that they start their CPP and OAS benefits when they each turn 65.”
Samantha will receive a very small defined-benefit pension of about $175 a month from her current employer. Given that she works part-time and will not be accruing many years of service, this amount is minimal.
“This is why we assume a lower growth rate for their investments after Samantha retires; they can rebalance and reduce their equity exposure slightly to lower volatility.”
Can Luther, 52, and Bethany, 49, retire in a few years and still leave a big inheritance?
Planning for a 45-year retirement – their life expectancy for the purposes of financial planning is assumed to be 95 – comes with unique considerations, the planners say. “This will require them to have a healthy amount of equity exposure to offset the impact of inflation,” Mr. Weinstock says. “Taking a major hit on the portfolio early in retirement could negatively impact their long-term plan.”
They should build up a cushion of two or three years of their lifestyle needs that they can hold in short-term instruments like GICs so they will be able to avoid selling equities in a bad market.
As they grow older, they can adjust the portfolio’s risk profile, Mr. Weinstock says. Because they have more time before the TFSAs are needed, they have the ability to keep a heavier stock exposure in those accounts.
Their current monthly outlays include savings and payments on Simon’s line of credit. “Once they are both retired, their savings needs will stop,” Mr. Viviani says. “It would be advisable for them to pay off the line of credit then.” Eliminating the savings and the line of credit will free up more than $2,000 a month that can go toward discretionary expenses, the planner says.
Simon wonders if he should let his line of credit run.
“While there might be an argument to keep the line of credit into retirement, that is all predicated on earning more on the investments than the 4.95 per cent he is paying on the debt,” Mr. Viviani says. “Given that they do not need the extra growth that a leveraged portfolio offers, paying off the debt is a smarter move,” he says. They can wait until Samantha retires to do so. They could plan over the next three to five years to sell stocks, and trigger the gains, so they can reduce the debt when it’s opportune.
The added advantage of paying off the debt is that the $650 a month that is going towards interest payments – even though they are tax deductible – will cease and allow for more discretionary spending, the planner says.
A 45-year retirement means the couple will need to find things to fill their time with, the planners say. They should consider what they want to do when they are no longer working, and perhaps get involved with some charities or other volunteer opportunities to see what they enjoy.
How can Mandy, 64, and Syed, 65, make the most of their hard-earned savings in retirement?
Another important consideration is that they have two young children. Although the couple have set up a registered education savings plan for them to help offset postsecondary educational expenses, Samantha and Simon have a long time before the children are out of the house.
“Unforeseen child-care expenses, or health care expenses for themselves later in life, are unknowns that need some consideration and planning before they retire,” the planners say.
Client situation
The People: Simon, 49, Samantha, 45, and their children, 3, 5, 18 and 23.
The Problem: Can they afford to retire so early without jeopardizing their long-term financial well-being?
The Plan: Simon retires and starts withdrawing from his RRSP. They both take government benefits at 65. Simon pays down his line of credit after Samantha retires. Over time, they set aside two or three years of expenses and take steps to lower their investment risk.
The Payoff: Financial freedom.
(Income, expenses, assets and liabilities provided by the applicants.)
Monthly after-tax income: $7,750.
Assets: His bank account $3,795; her bank account $45,810; his non-registered stock portfolio $648,335; her non-registered portfolio $11,910; his locked-in retirement account $72,185; his TFSA $318,865; her TFSA $237,265; his RRSP $731,750; her RRSP $128,515; registered education savings plan $51,370; commuted value of her pension $20,500; house $444,700. Total: $2,715,000.
Monthly outlays: Property tax $265; water, sewer, garbage $120; home insurance $125; electricity $130; heating $100; maintenance $280; transportation $500; groceries $1,200; clothing $165; line of credit $650; gifts, charity $350; vacation, travel $895; dining, drinks, entertainment $225; pet $50; other personal $510; health care $45; communications $100; RRSPs $310; TFSAs $1,165. Total: $7,185.
Liabilities: Line of credit $154,520 at 4.95 per cent.
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