This Ontario scientist supports her family, but can she retire comfortably at 53?

Jillian, 50, has ample resources but managing her portfolio of assets is complex, expert says

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An Ontario scientist we’ll call Jillian, 50, is approaching retirement from a strong financial position.

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She brings home $12,000 per month in salary and, if her technology company has done well in the past year, she may get a bonus worth as much as $2,400 per month. Because the bonus amount varies — and could be nothing — we won’t depend on it for our calculations.

Jillian supports her retired husband, Omar, 60, and helps her 24-year-old son, Bill, with tuition payments for grad school that run to $2,000 per month. Their expenses net of rental mortgage payments, savings and tuition are $5,125 per month.

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With her career going strong and numerous savings accounts, a rental property and a house, Jillian has the financial wherewithal to tackle adversity if it arises. But can she retire early in three years — her current plan — and still comfortably support her family?

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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. of Kelowna, B.C., to work with Jillian. The planner’s initial view of her circumstance is that she has ample resources, but managing her portfolio of assets is complex.

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The first question: What to do with the rental, worth an estimated $400,000? It has a $169,000 mortgage with a variable-rate mortgage currently at 1.45 per cent but likely to rise in the near future and 17.5 years remaining on the amortization. On a yearly basis, gross rent of $22,200 less expenses of $6,353 leaves net income of $15,848. That’s seven per cent of their $231,300 equity, an acceptable return to cover costs while it should appreciate. Keep it, Moran advises.

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The question of allocation

The couple’s investment strategy is to maintain a 70 per cent equity and 30 per cent bond allocation. That’s traditional and conservative. We will assume that while this allocation is in place, their portfolio generates a six per cent total return less three per cent for inflation. They could increase their total return by reducing bond allocation by 10 per cent to 20 per cent at a cost of more volatility for their financial assets as a whole. We assume they leave the invested portfolio as is. Moreover, Jillian and Omar have $170,000 in cash. With such a large balance, they should not be forced to sell any investments to raise cash.

Omar has no earned income at present. It is therefore opportune for him to draw down his $376,000 RRSP balance. Jillian would lose the ability to claim him as a dependent, but the gain achieved by taking money out of the RRSP at a very low tax rate would more than compensate for the loss of dependent status. There would be withholding at an estimated 15 per cent of the drawdown. It would come back as a refund.

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Savings and investments

Calculating the couple’s retirement income is challenging for they have abundant savings including $170,000 in cash savings, $983,000 in RRSPs and $170,000 in TFSAs.

Jillian currently adds $19,200 to her RRSP each year with a $9,600 match by her employer, total $28,800. If they continue to do this for three years and the account grows at three per cent per year after inflation, the present RRSP balance, $983,000, will become $1,163,169. That sum would support an income flow of $50,922 for the following 37 years to her age 90.

The $170,000 in their TFSAs also grows at three per cent per year after inflation and if they add $6,000 each for three years, the accounts will rise to $223,967. That money, still growing at three per cent per year after inflation, would support payouts of $9,809 in 2022 dollars for the following 37 years.

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The couple’s taxable investments add up to $110,000 if reserves for home improvement and a new car are removed. Jillian wants to have $40,000 cash on hand at all times. The $70,000 balance invested at 4.5 per cent from dividends would generate $3,150 per year forever.  They could use a spousal loan with interest at the prescribed rate, one per cent per year now but likely to rise, to allow Omar to invest the funds while paying little to no tax.

The rental condo generates $15,852 per year but the return (ignoring capital repayments which raise their equity) on their $23,000 of present equity is just 3.7 per cent. They could refinance and lengthen the amortization or sell, invest in stocks with hefty dividends and get the dividend tax credit. We’ll assume they keep the rental and report yearly income of $15,852.

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Retirement by stages

Adding up income, they would have three stages of retirement income. First, for the two years from when Jillian retires (her age 53, his age 63) until Omar turns 65. Second, for the ten years after he turns 65, when his CPP and OAS start. Third, from Jillian’s age 65 when she can begin to draw her OAS and CPP.

The strategy for all stages will be to average RRSP and RRIF payouts, TFSA distributions, rent and taxable investment income over as long a period as possible. That means an early start for all these sources of income with reduced compounding. However, the double-digit tax advantage of an extended period of distribution beats compounding at our assumed rate of three per cent.

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In stage 1, they would have two $25,461 RRSP/RRIF incomes, two $4,905 TFSA cash flows, $15,852 rental income or $7,926 per person, and $3,150 taxable investment income. That’s $79,734. With no tax on TFSA cash flow and 12 per cent tax on the balance, they would have $71,343 to spend per year or $5,945 per month. That would cover expenses.

In stage 2, they could add Omar’s CPP at $1,800 per year and his $7,707 OAS. That would push total income to $89,241. Excluding TFSA cash flow and assuming 13 per cent average tax, they would have $78,915 to spend per year or $6,575 per month.

In stage 3, they would add Jillian’s $7,707 OAS and her estimated $10,834 CPP for total income of $107,782. Excluding $9,810 TFSA cash flow and assuming 15 per cent average tax per person, with return of TFSA cash flow they would have $93,086 to spend per year. That’s $7,757 per month.

Retirement stars: 5 ***** out of 5

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