Retirees Jeremiah, 66, and Kimmy, 63, have a house in Toronto valued at $2.2-million and $2.9-million in invested assets.EDUARDO LIMA/The Globe and Mail
Jeremiah and Kimmy are both retired. Jeremiah had a well-paying executive job and Kimmy a career in marketing. He is 66 years old and she is 63. They have two adult children, one working and the other in medical school, Jeremiah writes in an e-mail.
They have a house in Toronto valued at $2.2-million and $2.9-million in invested assets. Kimmy has only a small defined-benefit pension of $3,000 a year and Jeremiah has none, but they have substantial sums in their registered retirement income funds (RRIFs).
“Our primary question is whether we can afford to spend quite aggressively for the next few years,” Jeremiah writes. “This aggressive spending is to continue to provide financial support to our children and also to include them in our travel plans while we are still healthy,” he adds. “Family vacations are the most treasured thing we spend on.”
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Their spending would subsequently drop in steps. From 2026 to 2029, they plan to spend $183,000 after tax, declining to $152,000 from 2030 to 2034, then to $122,000 in 2035 and beyond. The estimates are in 2026 dollars.
They also plan to help their daughter with the cost of medical school.
We asked Matthew Sears, an associate portfolio manager and certified financial planner at National Bank Financial in Toronto, to look at Jeremiah and Kimmy’s situation. Mr. Sears also holds the chartered financial analyst designation.
What the expert says
Jeremiah and Kimmy have set out a detailed budget that illustrates planned decreases in spending over time, Mr. Sears says. The cuts will mainly come from lower travel and gardening expenses.
Jeremiah and Kimmy have a retirement goal that is achievable with 116 per cent coverage, the planner says. That means they can spend even more than they are planning to. They’d also leave a substantial estate.
In preparing his forecast, Mr. Sears assumes an annual rate of return of 5.02 per cent and an inflation rate of 2.1 per cent. Maximum TFSA contributions continue throughout retirement.
Kimmy and Jeremiah say they expect to live well into their 80s. “As part of the stress test of the forecast, I’ve assumed that they live longer and so I’ve run the projections to Kimmy’s age 98.”
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In the forecast, the couple travel with their children for the next few years, spending $30,000 a year. As well, they assist their daughter with medical school tuition for the next four years, spending a total of $100,000. This is in addition to their desired spending of $183,000 a year.
In 2035 or so, they sell their house and buy a condo. They buy a new car in 2030 for $60,000 and set aside $20,000 for a wedding in 2028.
If as planned they sell their house and move to a condo, their expenses for gardening – a hobby that Jeremiah splurges on – would fall. Housing costs are estimated to be roughly the same.
“We looked at a volatility analysis of the projection, where we ran the scenario with 1,000 different market simulations with return rates varying each year versus a static 5.02-per-cent return,” the planner says. The results to Kimmy’s age 98 showed 814/1,000 successful trials, meaning that 814 times out of 1,000 they were projected to not run into a shortfall/deficit in retirement.
In the unsuccessful trials, the largest shortfall was an estimated $683,000 of investment assets. In that case, while they weren’t able to meet their spending goal from available investment assets, they still had the equity in their home that they could access, either by selling it or borrowing against it.
The couple plan to defer their government benefits to age 70, the planner notes. They estimate their CPP benefits at age 70 will be $21,383 for Jeremiah, and $21,249 for Kimmy. They will each get $12,105 in OAS at age 70.
“Deferring Canada Pension Plan and Old Age Security benefits to age 70 is a great strategy,” Mr. Sears says. Jeremiah is expected to see some OAS clawback until 2031. Afterward, with the reduction in spending and lower income from withdrawals, he faces no OAS clawback and will benefit from the full 36-per-cent increase in his OAS payments, the planner says.
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Deferring government benefits while withdrawing from their RRIFs and life income funds (LIFs) works in their case because the expected return on the RRIF and LIF investments is not expected to be more than the increase in CPP or OAS benefits.
Mr. Sears looks at a couple of alternative spending forecasts.
The initial $183,000-a-year spending target, if they wanted to maintain it, would not be fully sustainable for the rest of their lives, the planner says. Their investment assets would run out at age 87 and 84. “In this case they could sell the house or condo and move into a rental.” Selling the house at Jeremiah’s age 87 and using the proceeds to fund their lifestyle spending would be enough until Jeremiah is age 98 and Kimmy is 95.
Mr. Sears also looked at another scenario where they spend $183,000 until 2030 and then $152,000 a year for the remainder of lives. They’d omit the second reduction in expenses in 2035. This scenario also presents shortfalls but is sustainable until age 97 and 94. At that point they could sell the condo and use the funds to maintain their lifestyle.
Jeremiah and Kimmy consider themselves conservative investors. Their equity exposure is concentrated mainly in fewer than 20 Canadian dividend-paying stocks in the financial services, real estate and energy sectors. The fixed-income exposure is a laddered GIC portfolio with maturities from two to four years from now. The cash component is in an investment savings fund or short-term GIC maturing in less than a year.
For now, they’ve locked in reasonable yields on the laddered GICs, Mr. Sears says. “But the reinvestment risk is there, so they should consider looking at alternatives to the GICs when they come up for renewal,” the planner says. Bonds or bond funds might be a more appropriate longer-term option.
He also recommends diversifying a portion of the stock exposure geographically to U.S. and international markets. That’s because the Canadian stock market only represents about 3 per cent of the global market.
“Diversifying across geographic regions opens access to sectors that are underrepresented in Canada,” Mr. Sears says, while diversifying across different geographic regions and economies will help smooth out volatility.
Kimmy and Jeremiah have two term insurance policies for $500,000 each that renew in five years. Because they have no debt, no salaries to replace and no large tax liabilities, they may decide not to renew.
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Client situation
(Income, expenses, assets and liabilities provided by applicants.)
The people: Jeremiah, 66, Kimmy, 63, and their children, 23 and 25.
The problem: Can they afford to spend heavily over the next few years to travel with their children and help their daughter with medical school fees?
The plan: Go ahead and spend, they have enough in the way of savings and investments. Review their portfolio to achieve better diversification.
The payoff: They may find they don’t have to cut their future spending as much as they initially thought.
Monthly after-tax income (withdrawals from RRIFs and LIFs): $15,416.
Assets: Joint bank account $94,780; joint GICs $20,000; house $2,200,000; Jeremiah’s TFSA $80,483; Kimmy’s TFSA $97,199; Jeremiah’s RRIF $1,530,237; Jeremiah’s LIF $324,895; Kimmy’s RRIF $871,984; Kimmy’s LIF $69,517; estimated present value of Kimmy’s $3,000 a year pension discounted at a 5 per cent per year, $44,537. Total: $5,333,632.
Monthly outlays: Property tax $725; water, sewer, garbage $90; home insurance $175; electricity $290; heating $100; maintenance $785; Jeremiah’s gardening hobby $870; transportation $885; groceries $1,715; clothing $900; gifts, charity $600; vacation, travel $2,500; dining, drinks, entertainment $1,550; personal care $450; club membership $50; pets $50; sports, hobbies $225; subscriptions $80; health care $615; health, dental insurance $250; life insurance $585; phones, TV, internet $540; TFSAs $1,250. Total: $15,280.
Liabilities: None.
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