By DIANNE MALEY
Special to The Globe and Mail
Saturday, April 7, 2018
Despite their substantial savings, Rolly and Dawn wonder whether the income from their investments, plus government benefits, will be enough to sustain their lifestyle for the next 30 years. He is 60 and recently retired, she is 58 and working part time for $25,000 a year. Neither has a company pension plan.
"We have both toiled throughout our entire working lives and have been pretty good savers," Dawn writes in an e-mail. They raised two children who are well established in their respective careers. Dawn plans to work a couple more years because she's "not quite ready to give up my connection to my clients."
They wonder how much they can spend without running out of savings. "We have saved all our lives to get to this point, but is it enough?" Dawn asks. They are concerned, too, about the safety of their investments and having enough money on hand for unexpected health-care costs in future.
Rolly wonders if he should begin drawing reduced Canada Pension Plan benefits now that his employment insurance has expired.
We asked Tom Feigs, a certified financial planner at Money Coaches Canada, to look at Rolly and Dawn's situation.
WHAT THE EXPERT SAYS
In preparing his estimate, Mr. Feigs makes a number of assumptions, including that Dawn works part-time for another two years, retiring in 2020. He assumes a rate of return on investments of 5 per cent a year after fees, which gradually goes down as they grow older and shift to more conservative investments. He assumes an inflation rate of 2 per cent a year, home-price appreciation in line with inflation and that both live to the age of 95.
First off, Rolly and Dawn should immediately move funds from their savings accounts to their tax-free savings accounts to take advantage of their unused contribution room, Mr. Feigs says.
TFSA funds can be invested for the long term just like an RRSP.
"Continue to move funds from non-registered savings to TFSAs each year to build up investment growth that is not taxed."
He suggests they begin drawing CPP benefits at 65. "As long as each of you lives beyond age 74, your total CPP benefit starting at age 65 will catch up and be higher than if you had taken reduced CPP starting at age 60."
Rolly and Dawn's investments are currently distributed among four firms. "This is the time to consider the investment service desired, how much is reasonable to spend on investment fees, and how you are going to monitor investment performance," Mr. Feigs says. "I recommend a consolidation to one or two service providers with all-in investment fees no more than 1 per cent of assets under management each year," he adds. "Consolidation also makes it easier to monitor your overall investment performance, which is the key to ensuring you remain on track."
With savings of $1.6-million, Rolly and Dawn can retire as planned without having to sell their house and downsize, Mr. Feigs concludes. He ran a number of scenarios, one in which they spend a constant $81,800 a year.
That would provide the surviving spouse with an income of $60,000 a year and leave their home to the estate.
In this forecast, "The home is not sold unless it is necessary to liquidate and move permanently into assisted living," Mr. Feigs says. Then the remainder of their equity would be left to their estate.
Their income starting this year would come from her part-time salary ($25,000), her RRSP ($20,000), her non-registered savings ($5,850); his earnings earlier in the year ($6,000), his RRSP ($23,800) and his non-registered savings ($13,000), for a total of $93,650 before taxes and deductions. Subtracting income tax of $11,850 would leave them with $81,800 a year.
At 65, they would begin drawing CPP and OAS benefits, so the amount of money they would have to draw from their savings would drop.
Alternatively, they could spend $89,600 a year from the time they hang up their hats until Rolly is 77 and Dawn is 74. This would allow for greater travel spending in the early years of retirement. After that, their spending would drop to $70,000 a year. They would leave their home to their estate.
The picture changes if the couple wanted to leave their investment principal intact and live only on the income generated. In that case, they'd be able to spend no more than $72,000 a year, the planner says. But they'd leave an estate of $1.6-million plus their home - "a very conservative approach."
Aside from running out of money, Rolly and Dawn are worried about unexpected healthcare expenses, Mr. Feigs notes.
"Personal health outcomes are extremely hard to predict." He suggests they explore the pros and cons of the various types of health-care insurance compared with having a health-care contingency fund. They should consider extended health and travel insurance at the very least, he says.
In his plan, Mr. Feigs set aside $80,000 of savings for supplemental health costs not covered by health insurance, such as private home care or home adjustments for mobility.
For their RRSP investments, Mr. Feigs suggests starting with a portfolio that is 60-per-cent equities, 35-per-cent fixed income and 5-per-cent cash. The balance would tilt more toward fixed income as the years go by. For their TFSAs he recommends a more growth-oriented portfolio of 70per-cent equities and 30-per-cent fixed income.
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THE CLIENT SITUATION
The people: Rolly, 60, and Dawn, 58 The problem: They need to confirm what amount of income can be sustained throughout retirement and how to be sure they are on track.
The plan: Shift savings to TFSAs, draw government benefits at 65 and consolidate investments portfolios to save costs and make it easier to monitor performance.
The payoff: Peace of mind.
Monthly net income: $5,607 Assets: Bank $7,000; her RRSP $557,815; his RRSP $786,074; her TFSA $27,600; his TFSA $16,309; non-registered savings $201,231; residence $725,000.
Total: $2.32-million Current monthly outlays: Property tax $300; condo fee $100; home insurance $80; water, sewer, hydro, heating $250; cable, Internet $100; cellphone $160; car insurance $200; extended health, vitamins $275; gasoline, parking $185; car repairs $100; groceries $800; personal grooming $15; entertainment, dining, movies, drinks $250; home repairs $50; clothing, shoes $150; gifts $175; sports/hobbies $300; charitable $40; subscription $12; travel $2,000; bank fees $15; other $50. Total: $5,607 Liabilities: Car loan $18,000 at zero interest.
JEFF BASSETT/THE GLOBE AND MAIL