Below you will find a real life case study of a couple who is looking for financial advice on how best to arrange their financial affairs. Their names and details have been changed to protect their identity. The Globe and Mail often seeks the advice of our VP, Wealth Advisor & Portfolio Manager, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.
Special to The Globe and Mail
Published April 14, 2023
Mona and Tony know what they want to do when they retire from work next year: take the trip of a lifetime to the Mediterranean then return home and travel down through the United States to Mexico in an RV.
Mona is 59 and works in health care. Tony is 62 and works as a tradesman. Together they earn $153,000 a year. Both have company pension plans. They have adult children, a mortgage-free home in small town British Columbia and a paid-off rental condo that nets them $8,400 a year before tax, to which they plan to retire at some point.
“Will we have enough to retire next year and maintain our standard of living?” Mona asks in an e-mail. “Will we be able to travel?”
Their retirement spending goal is $80,000 a year after tax.
We asked Matthew Ardrey, a vice-president at TriDelta Financial in Toronto, to look at Tony and Mona’s situation. Mr. Ardrey holds the certified financial planner (CFP), advanced registered financial planner (RFP) and chartered investment manager (CIM) designations.
What the expert says
Mona and Tony are looking to retire next year and do some travelling, but before they make the transition, they want to be sure that their finances are in order, Mr. Ardrey says.
They are spending about $56,500 a year, the planner notes. They are saving $5,200 a year to their RRSPs, $27,300 to their tax-free savings accounts, $8,000 to Mona’s pension and $10,400 to their emergency fund.
In retirement, they plan to increase their spending to $70,000 a year after tax, including a $10,700 annual travel budget that runs until Tony would be 85. In preparing his forecast, Mr. Ardrey assumes the couple’s property and their expenses rise in line with inflation, which is forecast to average 3 per cent a year.
Tony and Mona provided their Canada Pension Plan statements. Based on the information provided, Tony will receive 85 per cent of maximum CPP and Mona 92 per cent. They both will start to collect their CPP and Old Age Security benefits at age 65.
Mona’s company pension plan will provide her with $31,200 a year, plus a pension bridge from retirement to her age 65 of $9,800 a year, Mr. Ardrey says. These amounts are indexed to inflation. Tony’s pension is from a former employer and starts at age 65. It will pay him $11,850 a year and is not indexed to inflation.
In addition, they have about $250,000 in savings and investments, plus $15,000 in an emergency fund, the planner says. Three-quarters of the total is invested in cash and GICs, and the remainder is in a balanced exchange-traded fund, Mr. Ardrey says. “Based on these assumptions, their net rate of return is 3 per cent.”
Mona and Tony asked about the most tax-efficient way to draw down their savings. “Looking at an RRSP drawdown strategy, the maximum benefit was seen by having Tony making a one-time withdrawal of $30,000 the year after he retires,” Mr. Ardrey says.
“That one year at age 64 is the sweet spot for the RRSP withdrawal,” Mr. Ardrey says. That’s because Tony’s income is lower than it will be when he begins collecting government benefits and company pension at age 65. So he will pay less tax on the RRSP withdrawal at 64. After that the benefit diminishes, the planner says.
The couple should continue to make annual TFSA contributions in retirement, the planner says. “This can help them build up wealth if they need to make a large lump-sum withdrawal.” Because TFSA withdrawals are not taxable, they will not affect their OAS payments the following year.
Mona and Tony plan to sell their current home around the time when Mona is 80 and move into the condo, which is their rental property. The current home has an estimated value of $475,000 and it is assumed the value grows in line with inflation until it is sold. “This will provides a substantial injection of cash into their retirement funds,” Mr. Ardrey says.
“Based on the aforementioned assumptions, Tony and Mona can make their retirement goal successfully.”
Still, it is useful to stress test the scenario, the planner says. He does so by using a Monte Carlo simulation. “A Monte Carlo simulation introduces randomness to a number of factors, including returns,” he notes.
“In this plan, we have run 500 iterations with the financial planning software to get the results.” For a plan to be considered likely to succeed, it must have at least a 90 per cent success rate, meaning at least 450 trials out of 500 succeed. If [the rate] is below 70 per cent, then it is considered unlikely to succeed.
“With their scenario, they reached 100 per cent probability of success,” Mr. Ardrey says. That’s mainly because the couple have three-quarters of their financial assets in cash, which has little to no variability when it comes to rates of return.
As well, the monthly spending form Mona and Tony submitted shows a surplus of about $18,000 a year. “Though this is mostly being spent on one-time home renovations, it does call some attention to their budgeting and understanding of their spending,” Mr. Ardrey says. “Thus, a second scenario was run where expenses were increased by that same amount in retirement.”
Even with the increased spending, the result of the Monte Carlo stress test was the same: a successful retirement projection.
Mona and Tony, though investing ultra-conservatively, can make their retirement work because of their real estate, their pensions and their reasonable budget, Mr. Ardrey says.
The people: Tony, age 61, and Mona, 58.
The problem: Will they have enough to retire from their respective jobs next year and still maintain their standard of living? Will they be able to travel as planned?
The plan: Tony makes a one-time withdrawal of $30,000 from his RRSP the year after he retires. They continue contributing to TFSAs after they retire. They sell their home and move to a condo about Mona’s age 80, adding a substantial sum to their retirement funds.
The payoff: They achieve their retirement goals with little risk.
Monthly net income: $9,585 (Excludes rental income).
Assets: Cash or cash equivalents $30,725; her TFSA $40,160; his TFSA $10,625; her RRSP $70,455; his RRSP $113,325; estimated present value of her DB pension $999,000 (assuming a 5 per cent discount rate); estimated present value of his DB pension $179,000; residence $475,000; rental condo $354,400. Total: $2.27-million.
Monthly outlays: Condo fee $390; property tax $165; water, sewer, garbage $50; home insurance $55; electricity $45; heating $100; maintenance $250; transportation $575; groceries $650; clothing $60; gifts $85; vacation, travel $900; dining, drinks, entertainment $675; haircuts $50; pets $100; sports, hobbies $150; subscriptions $5; health care $45; health, dental insurance $150; communications $210; RRSPs $435; TFSAs $2,275; pension plan contributions $665. Total: $8,080. Surplus: $1,500 goes mainly to household maintenance and improvements.
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