Reba, 63, has a defined-benefit pension plan that will pay about $27,600 a year, indexed to inflation, and significant retirement savings of her own.Chad Hipolito/The Globe and Mail
At 63, Reba is counting down the days to full retirement. Earlier this year, she started a two-year phased retirement program at the college where she works. Now working reduced hours, she’s earning half of her previous salary, or about $58,000 a year, and plans to retire fully in June, 2028.
Reba is divorced with two financially independent adult children. She has a townhouse valued at about $1-million, with a small mortgage that comes up for renewal in November. She plans to pay it off using her savings.
She has a defined-benefit pension plan that will pay about $27,600 a year, indexed to inflation, and significant retirement savings of her own.
Short term, she expects to spend about $40,000 upgrading her home and another $40,000 on a vehicle.
Her retirement spending goal is $90,000 a year after tax, rising with inflation, more than the $75,000 a year she is spending now.
“Is my target of $90,000 in after-tax annual spending sustainable?” Reba asks in an e-mail. “What changes, if any, should I make to my investment portfolio to better support my retirement goals, and do my investment fees represent good value?”
We asked Barbara Knoblach, a certified financial planner at Money Coaches Canada in Edmonton, to look at Reba’s situation.
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What the expert says
Reba is in a strong financial position as she approaches the end of her working career, Ms. Knoblach says.
With phased retirement, Reba’s net employment income has fallen to about $3,430 a month, which is not sufficient to cover her spending. She has started drawing from non-registered savings and investments. She is wondering if she should continue doing this or begin drawing from registered accounts instead.
With her employment income reduced, Reba is no longer contributing to her registered retirement savings plan or tax-free savings account, although she continues to contribute to her pension plan.
When she retires fully in 2028, Reba will receive a retirement incentive equal to about six months of her former full-time salary, or about $58,000. However, about $24,000 of this amount will be required to buy back missed contributions to her defined-benefit pension plan, Ms. Knoblach says.
Reba is in good health and is considering delaying Canada Pension Plan and Old Age Security until the age of 70. Delaying CPP from 65 to 70 increases the benefit by 42 per cent, while delaying OAS increases it by 36 per cent. Deferring these benefits also creates an opportunity to draw down registered savings during the lower-income years between employment and the age of 70, the planner says.
“In the first scenario, I assumed that Reba retires as planned in June, 2028, and spends $90,000 a year in after-tax inflation-adjusted dollars,” Ms. Knoblach says. “We are not assuming additional lump sum expenses.” Under these assumptions, Reba’s projected sustainable after-tax spending is about $99,300 a year. “She is adequately funded and is not projected to need the equity in her home to finance her lifestyle.”
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If she were to spend the full $99,300 annually, her financial assets would be largely depleted by 95, which is the assumed life expectancy in this projection. The equity in her home would remain intact.
“I then added Reba’s planned one-time expenditures. I assumed that she spends $40,000 on home renovations in 2028 and an inflation-adjusted $40,000 replacing her vehicle in 2031. After allowing for these purchases, her projected sustainable after-tax spending is $96,000 a year.”
Reba wants to know whether her portfolio is appropriately structured for retirement, the returns have been reasonable, and the fees she is paying represent good value.
Her aggregate portfolio currently consists of 21 per cent cash and cash equivalents, 9 per cent fixed income and 70 per cent equities. Within the equities, there is a significant emphasis on U.S. stocks, including substantial exposure to the technology sector, followed by Canadian equities. International and emerging-market investments represent a much smaller portion of the portfolio.
“Across the accounts, there are more than 100 individual holdings consisting of single stocks, ETFs and mutual funds. Some products were introduced only recently and therefore have little performance history,” the planner says.
The investment relationship itself is relatively recent. The first accounts were introduced in 2022, and additional accounts were added during 2023. According to the brokerage statements, the portfolio produced time-weighted returns of 10.7 per cent in 2023, 9.5 per cent in 2024 and 4.4 per cent in 2025.
For perspective, the planner compared those figures with a much simpler investment approach using Morningstar asset-management software. An equal combination of a low-cost, 60-per-cent equity, balanced all-in-one ETF and an 80-per-cent equity growth all-in-one ETF would produce a 70/30 asset mix, she says. “That proxy would have returned 13.9 per cent in 2023, 18.3 per cent in 2024 and 15.1 per cent in 2025.”
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Over the three calendar years, the hypothetical portfolio compounded at about 15.7 per cent annually. Conversely, the brokerage statements for Reba’s portfolio show a three-year annualized return of 8.2 per cent for 2023 through 2025.
The comparison should not be interpreted as a precise performance benchmark, Ms. Knoblach says. Reba’s 30-per-cent defensive allocation consists of 21 per cent cash and 9 per cent fixed income, rather than the 30-per-cent fixed-income allocation used in the simple proxy.
“More importantly, I do not know whether the portfolio’s asset mix in 2023 or 2024 resembled what she owns today,” the planner says.
“Reba should ask her adviser to explain how the portfolio’s asset mix evolved, which benchmark the firm considers appropriate for measuring performance, and whether changes in the portfolio account for the difference between the brokerage-reported returns and the returns suggested by the current holdings,” Ms. Knoblach says.
Fees are another important consideration. Reba provided fee information for only some of her accounts, and those accounts appear to carry an annual advisory fee in the range of 1.5 per cent of assets.
If a 1.5-per-cent advisory fee applied to her entire $1.39-million investment portfolio, it would amount to about $20,850 a year, the planner says. “By contrast, diversified all-in-one ETFs are available with management-expense ratios of about 0.2 per cent, so the cost on $1.39-million would be roughly $2,780 annually.”
A higher fee can be entirely reasonable if the client receives sufficient value in return, Ms. Knoblach says.
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Reba should request a complete statement of the annual costs associated with all her accounts, expressed both as percentages and dollar amounts, the planner says. She should also confirm whether the advisory fees include all investment-management costs or whether underlying ETFs and mutual funds impose additional expenses.
“If Reba remains with the current advisory firm, I recommend regular reviews of the portfolio’s structure, performance and costs to determine whether the investment management and other services she receives justify the ongoing cost.”
Regardless of who manages the investments, Reba is moving from accumulation to decumulation.
Her RRSPs should contain enough cash equivalents or secure fixed-income investments, such as guaranteed investment certificates, to cover several years of anticipated withdrawals. This reduces the risk that she will have to sell volatile equity investments during a market decline simply to meet spending needs.
Once Reba has fully retired, registered-account withdrawals can be used to bridge the difference between her defined-benefit pension income and her desired spending. Because her taxable employment income has already fallen, it may make sense to begin modest RRSP withdrawals before full retirement, with the amounts determined through annual tax planning.
In 2028, her taxable income will be more complicated because she will receive employment income for part of the year, as well as her retirement incentive and pension income. “After that transition year, the period before CPP and OAS beginning at age 70 provides an opportunity to draw down RRSPs at comparatively favourable marginal tax rates,” the planner says. Properly managed, this can reduce future mandatory RRIF withdrawals and help limit future exposure to the OAS recovery tax.
Reba also has a small locked-in retirement savings account, which will eventually need to be converted into a life income fund before withdrawals can begin. Because LIF withdrawals are subject to prescribed minimums and maximums, she should consider making the conversion before the end of 2026 and begin withdrawals in 2027.
RRSP and LIF withdrawals, non-registered investment income, the defined-benefit pension, CPP and OAS will create multiple income streams, which need to be co-ordinated with each other, Ms. Knoblach says. “Planning withdrawals each year will be more valuable than following a rigid rule.”
The forecast assumes an average annual rate of return of 5.5 per cent and an inflation rate of 2.1 per cent.
Client situation
The person: Reba, 63.
The problem: Is her spending goal sustainable? Is her portfolio properly structured and do the fees represent good value?
The plan: Consider making early withdrawals from her LIF and RRIF. Ask her financial adviser for a detailed breakdown of performance relative to a suitable benchmark, as well as details about how fees are determined and what they include.
The payoff: Ensuring her retirement income plan is sound.
Monthly after-tax income: Salary of $3,430, supplemented by savings.
Assets: Combined RRSPs and LIRA $807,000; TFSA $172,000; non-registered investments $410,000; residence $1,000,000. Total: $2,389,000.
Estimated present value of defined-benefit pension: $500,000. That is what someone with no pension would have to save to generate the same retirement income.
Monthly outlays: Mortgage $700; condo fees $990; property tax $415; home insurance $70; electricity, heating $100; maintenance $250; transportation $710; groceries $900; clothing $150; gifts, charity $300; vacation, travel $750; dining, drinks, entertainment $400; personal care $250; sports, hobbies $400; subscriptions $220; doctors, dentists $300; drugstore $110; vitamins $50; communications $180; pension plan contributions $230. Total: $7,475.
Liabilities: Mortgage $89,905 at 3.35 per cent variable.
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