Family Finance: Andrew and his wife would only need a 4% return on assets to reach a target income of about $200,000
Alberta-based married couple Andrew*, 55, and Amanda, 40, are parents to two children under the age of 10. With a net worth of about $7.2 million, Andrew wants to know if he can afford to retire.
Ideally, he would like to retire this year from his full-time job so he can spend more time with his young family. Amanda would continue to work full time and retire when she turns 50.
The family’s annual expenses are typically about $150,000, and include maximizing their registered savings accounts — which they would like to continue to do. They expect their cash flow needs will be similar in retirement.
Andrew and Amanda have built a self-managed investment portfolio worth just over $5.5 million largely invested in growth stocks and equity exchange-traded funds (ETFs) generating a nine per cent return. This includes about $3.8 million in margin accounts, about $510,000 in tax-free savings accounts (TFSAs) and nearly $1.1 million in registered retirement savings plans (RRSPs). They also have about $170,000 in a registered education savings plan (RESP) and $262,000 in trusts for their children. The couple also expect to receive an inheritance of about $300,000 within the next 10 years.
“If I can retire this year, should I convert my RRSPs into a registered retirement income fund (RRIF) now?” Andrew asked. “What is the right approach to start drawing down funds from my registered accounts and when is the right time to start taking Canada Pension Plan (CPP) and Old Age Security (OAS) benefits?”
The couple purchased their primary residence about 10 years ago. It is valued at about $800,000 and they own it outright. They plan to downsize in about 10 to 15 years.
Andrew and Amanda also own a rental property valued at $150,000 — $50,000 less than its purchase price. They will likely sell before the mortgage is up for renewal in 2027. “We would use that $50,000 terminal loss to offset any capital gains from our equity margin accounts and the sales proceeds to pay off the mortgage and lines of credit totalling about $355,000,” said Andrew.
When their children are a little older, in about eight years or so, they would like to purchase a vacation property somewhere warm, which they anticipate will cost about $1 million.
“We plan to finance it instead of selling stocks, and will rent it out for six months of the year to cover costs,” said Andrew. “Is this possible, or a good idea?”
The couple’s biggest concern as Andrew heads into retirement is for their two young children. “I will be in my 70s when my children enter their 20s. I want to make sure they have a good start.”
What the expert says
Andrew and Amanda are wealthier than they realize. Andrew can comfortably retire this year without having to take on part-time employment and the family can purchase a vacation property, said Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management. With more than $5 million of investable assets and a target income of about $200,000 before tax, they would only need a four per cent return on assets, even if Andrew didn’t have a pension or government benefits, he said.
“Initial planning projections show that if Andrew retires and works part time while his wife continues to work for the next eight years, they will struggle to spend all their registered assets over the next 30 years. They’re in a situation where their TFSAs and non-registered investments will grow throughout retirement.” For this reason, Einarson said they can forgo future RRSP contributions while continuing to maximize their TFSAs.
“Andrew’s primary planning challenge will be managing the gradual withdrawal of his RRIF balance over time. Retirement income scenarios can be drawn up and compared to see what is best for current income tax, preservation of government benefits, a survivor’s taxable income and estate values.
If Andrew chooses to work part time in addition to receiving his pension — something Einarson recommended as it will help Andrew ease into retirement, he can afford to take minimal RRIF income or even delay income if he has other passive income from non-registered investments, such as dividends. “Then, once he’s fully retired, he can start taking RRIF income to meet any needs on top of his pension. At age 65, his RRIF income can be split with Amanda,” said Einarson.
“Starting CPP at 65 will give him the full amount of his government benefit which is likely worth it for him unless he is concerned about his longevity. If he also takes OAS at 65, they must be mindful of total taxable income and the clawback amount. Avoiding the loss of government benefits as much as possible should be part of the income plan.”
Since they can afford to retire comfortably without drawing down their non-registered investments, Einarson said Andrew and Amanda have the option of using some of these funds to purchase a vacation property, although Andrew prefers to finance it. “This should be discussed and worked into the retirement income planning.”
Most importantly, Einarson recommended Andrew and Amanda finalize their wills and invest in retirement and estate planning. “This will benefit them and ensure their children have a good start.”
