Can Robert and Cynthia spend $ 130,000 a year in retirement and still have enough for their later years?
It’s a dilemma many Canadians face as they approach retirement: How much can they afford to spend without running out of money? So it is with Robert and Cynthia, a couple in their early sixties. Robert has already hung up his hat, leaving behind a sales job that earned him $ 150,000 a year on average. Cynthia is self-employed and earns $ 60,000 per year. She is in receipt of a work pension and plans to retire fully this year. Together, they make about $ 122,000 a year.
Their years of high income saved the couple a substantial sum on top of their $ 1.4 million suburban Toronto home. They don’t have children, so don’t worry about leaving a large estate.
“How should we allocate our resources so that we enjoy our money while we are young and healthy, but still have enough for extra needs when we are old?” Robert writes in an email. “Which assets should we tap into first and in what order? he adds. “We have been very conservative and low risk with our investments,” writes Robert. “Is our portfolio suited to our needs? “
Their aspirations include traveling to Europe every year until the age of 80, perhaps renovating their homes, and donating to charity.
We asked Cherise Berman, financial planner and director of Bespoke Financial Consulting in Toronto, to review Robert and Cynthia’s situation. Bespoke is a fee and advisory only financial planning firm. In addition to her financial planning credentials (Chartered Financial Planning and Advanced Chartered Financial Planner), Ms. Berman is a Chartered Professional Accountant.
What the expert says
Robert and Cynthia spend an average of $ 102,000 a year, including travel, and save $ 12,000 in their tax-free savings accounts, Ms. Berman says.
“In retirement, they would like to increase their discretionary spending on travel, home renovations and charitable donations,” notes the planner. Their spending target is $ 130,000 per year. “They want to know if they can maintain this higher level of spending and still have enough assets for additional needs such as higher healthcare costs and / or care in their later years,” she says. . “They don’t have children – so no one to care for them as they get older – and need to be self-reliant.”
Cynthia’s pension plans and their government benefits will cover more than their fixed expenses when they retire, Berman says. Cynthia receives $ 52,800 per year, indexed to inflation, from her defined benefit pension plan, plus a bridging pension of $ 10,000 per year until age 65. 65 from a former employer.) Robert has a locked-in retirement account (LIRA) from a former employer. With inflation, their government benefits (Canada Pension Plan and Old Age Security) are estimated at $ 20,700 a year for her and $ 21,400 for him from age 65, according to the planner.
“They can comfortably increase their total spending to at least $ 130,000 per year and still have a cushion of retirement assets to fund additional needs, including health care costs if needed,” she says. Its forecast assumes an average rate of return on their investments of 2% net of fees.
Even if they could collect CPP benefits sooner, Robert and Cynthia would have to defer them until age 65 to avoid the hefty penalty for receiving them earlier, Berman says. She recommends that they start collecting OAS benefits at age 65 rather than postponing them.
“While they may wait to age 70 and be eligible for more, OAS is based on income and their combined income when they turn 70 (withdrawals from the CPP, pension plan and registered income fund). pension) exceed the OAS income limit must be repaid to the government. She recommends that they continue to contribute to their TFSA as long as they have unregistered assets to contribute. “This will reallocate some of the unregistered savings to tax-free savings, which will be more tax-efficient when they eventually withdraw those funds. “
Next, Ms. Berman examines the couple’s portfolio, which they describe as “very conservative.” Although they say they’re risk averse, they have 83 percent of their investments in stocks, exchange-traded funds, and index funds – investments more suited to a growth investor, she says. “Robert recognizes that the high level of stocks in their portfolio is not what you would expect from a conservative investor,” said Ms. Berman. “He says he invested in stocks rather than fixed income assets simply because of a lack of attractive alternatives.”
Robert and Cynthia are taking a lot more risk than they realize by holding a large portion of their portfolio in stocks, “even though their portfolio includes blue-chip, dividend-paying stocks,” Ms. Berman said. “These are always risks. They don’t need to take unnecessary risks to meet their retirement goals, she adds. With an average rate of return of 2% net of fees, they still have a substantial cushion in their old age.
As to which savings pool they should tap into first, “There is no simple strategy or rule of thumb. We need to analyze the sources and types of retirement income, identify a reasonable rate of return based on their risk tolerance, and consider income taxes, ”said Ms. Berman. Given Robert and Cynthia’s situation, they should start tapping into their non-registered portfolio at early retirement to supplement Cynthia’s retirement income, according to the planner. “They will withdraw between $ 60,000 and $ 75,000 each year until their government benefits and RRIF payments start,” she says. (RRSPs convert to registered retirement income funds, or RRIFs, at age 71, and mandatory minimum withdrawals begin in the year the taxpayer turns 72.)
“They should keep $ 250,000 in cash and short-term guaranteed investment certificates to fill them until they start receiving these other sources of income,” she says. They could put $ 75,000 in a high-interest savings account to cover their retirement expenses for the first year, with the remaining $ 175,000 in the form of one-year and two-year Guaranteed Investment Certificates. TFSAs should continue to grow and be used last, says Berman. “This will provide a tax-efficient pool to tap into in their final retirement years for unforeseen expenses and to fund potential health care needs. “
People: Robert, 61, and Cynthia, 62
The problem: How much can they afford to spend without running out of money? Are their investments suitable? In what order should they draw their savings?
The plan: Set aside a cash reserve to carry them forward until other sources of income begin. Tap their unregistered wallet first, leaving TFSAs as long as possible. Diversify investments to reduce unnecessary risks.
The reward : A better understanding of the process of “decumulation”
Monthly net work and retirement income: $ 8,480
Assets: $ 32,000 in cash; short-term investments (GICs) $ 205,000; shares $ 615,000; his locked-in retirement account of $ 580,000; his TFSA $ 89,500; his TFSA $ 89,500; his RRSP of $ 680,000; his RRSP $ 250,000; estimated present value of his DB pensions $ 1.3 million; $ 1.4 million residence. Total: $ 5.24 million
Monthly expenses: Property tax $ 585; home insurance $ 115; utilities $ 245; maintenance, garden $ 740; transportation $ 545; groceries $ 1,040; clothing $ 175; gifts, charity $ 815; vacation, travel allowance $ 835; meals, drinks, entertainment $ 570; personal care $ 415; sports, recreation, club membership $ 310; subscriptions $ 55; health care $ 195; health insurance $ 215; communications $ 225; other $ 430; TFSA $ 1,000. Total: $ 8,510
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