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FINANCIAL FACELIFT: Can Russ, 55, and Vicky, 47, retire early and live comfortably without exhausting their life savings

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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.

gam-masthead
Written by:
Special to The Globe and Mail
Published October 21, 2022

When Russ’s employer offered him a buyout package a few months ago, it was an offer he was keen to accept. He was earning $87,000 a year working in manufacturing.

Russ’s plan is to work part time for a few years. His wife, Vicky, plans to retire at age 55. Vicky earns $42,000 a year working in health care. Both have defined benefit pension plans but only Vicky’s is indexed to inflation. Russ is age 52, Vicky 47.

They have two children, one still at home and going to university. Among their short-term goals is doing some work on their Southern Ontario house.

Naturally, they wonder whether their pensions and savings will allow them to live comfortably for the rest of their lives. They also ask, what is a reasonable replacement ratio for employment income in the current high inflation environment – in short, how much will they need to maintain their lifestyle? Their tentative retirement spending goal is $68,000 a year after tax.

We asked Matthew Ardrey, a financial planner and portfolio manager at TriDelta Financial in Toronto, to look at Russ and Vicky’s situation. Mr. Ardrey holds the certified financial planner (CFP), the advanced registered financial planner (RFP) and the certified investment manager (CIM) designations.

What the expert says

Russ and Vicky want to make sure that they can make their retirement plan work given the early retirement age they have planned, Mr. Ardrey says.

Upon accepting his retirement package, Russ will receive a retiring allowance of $60,000, of which he can transfer $46,000 to a registered retirement savings plan – $6,000 via the eligible retiring allowance provision in the Income Tax Act and $40,000 from his available RRSP room, the planner says. The rest will be taxable to him. Additionally, he will get a $20,000 gross car allowance with a $6,000 withholding tax on it.

Russ plans to continue to work for the next five to 10 years part-time, earning $35,000 to $40,000 a year. In preparing his forecast, Mr. Ardrey assumed Russ works another seven years earning $37,500 a year. Additionally, he will have a non-indexed pension of $24,900 a year plus a bridge to age 65 of $17,300 a year.

When Vicky retires at age 55, they will begin drawing on their savings. She will have an indexed pension of $19,100 a year, plus a bridge to age 65 of $9,700 a year. Inflation is assumed to be 3 per cent.

Because they are retiring early, the planner assumes 75 per cent of maximum Canada Pension Plan benefits for Russ and 50 per cent for Vicky, starting at their age 65, along with maximum Old Age Security benefits at age 65.

Their current investment asset mix is 53 per cent stocks, 20 per cent bonds and 27 per cent cash, mostly in guaranteed investment certificates. The stocks are 40 per cent Canadian, 40 per cent U.S. and 20 per cent international. This asset mix has a future projected return of 4.11 per cent (net of 0.25 per cent in fees for exchange-traded funds).

Next, the planner looks at how much the couple will need to maintain their lifestyle. Russ and Vicky save $6,000 a year each to their tax-free savings accounts, plus another $1,000 a month combined to their non-registered bank accounts. “This, when added to their reported spending, shows a leakage in spending of an additional $10,000 per year over their reported spending of $68,000, which includes the TFSA savings,” Mr. Ardrey says. “Thus, we used a projected expense amount of $78,000 per year instead of the $68,000 indicated to achieve a more accurate projection.”

In 2023, Vicky and Russ plan to have home repairs of $22,500 completed. These could be funded by the savings in their bank account, the planner says.

Based on the above assumptions, Russ and Vicky likely are able to achieve their retirement spending goal of $78,000 a year, Mr. Ardrey says. “That being said, it is always important to stress-test their retirement projections, as investment returns are not earned in a straight line and will vary from year to year,” he says.

The planner stress-tests the forecast using a Monte Carlo simulation, which introduces randomness to a number of factors, including returns. For a plan to be considered likely to succeed by the program, it must have at least a 90 per cent success rate. If it is below 70 per cent, then it is considered unlikely to succeed. Results in between are considered somewhat likely to succeed.

“Unfortunately, Russ and Vicky’s base case plan fails the stress test, with only a 64 per cent probability of success,” Mr. Ardrey says. What causes the concern is the other 36 per cent of the time when it does not work, he says.

“To increase the probability of success, they could certainly do things like work longer, spend less, save more or the ever-unpopular die earlier,” the planner says. Or they could try to improve their investment returns.

A portfolio that is essentially 50 per cent stocks, 20 per cent fixed income and 30 per cent cash equivalents is not the best positioned for today’s investing and inflation environment, the planner says. Instead, they should look to minimize cash holdings, increase their fixed income allocation and include an allocation to more non-traditional asset classes such as private real estate funds, he adds. Historically, these investments have offered attractive returns with little to no correlation to the equity and fixed income markets. The biggest risk would be the lack of liquidity in these investments.

For example, private real estate investment trusts that invest in a large, diversified residential portfolio or perhaps specific areas such as wireless network infrastructure are preferable to ones that have a large exposure to retail.

By diversifying their portfolio and reducing cash investments, Mr. Ardrey estimates they could achieve at least a 5.25 per cent return net of fees and significantly reduce the volatility risk of the portfolio. “Additionally, many private real estate investments are tax efficient, having distributions that are part or all return of capital,” he notes.

With this adjustment, the change in the Monte Carlo simulation is material, moving up to a 90 per cent probability of success. Though this is at the low end of the likely-to-succeed range, they still have their house to fall back on in the unlikely case they do not achieve their goals.

Additionally, they should pay attention to which type of asset class is in each account. “I would not recommend cash in a TFSA, as the goal would be to maximize the tax-free withdrawals.” Instead, the couple should hold more growth assets in their TFSAs so they will increase in value. This way, when they make withdrawals, they will have a larger capital base from which to draw.

Client situation

The people: Russ, 52, Vicky, 47, and their two children.

The problem: Now that Russ has taken a package, can they afford to live comfortably for the rest of their lives without exhausting their savings?

The plan: Review their expenses to better understand their budget and stick to it. Improve their investment strategy to improve their long-term investment returns, which will remove the risk of running out of money before they run out of life.

The payoff: Easy street.

Monthly net income (past year): $7,500.

Assets: Cash $16,500; his TFSA $75,000; her TFSA $75,000; her RRSP $60,000; his RRSP $360,000; estimated present value of his DB pension $650,000; estimated PV of her DB pension $202,000; registered education savings plan $75,000; residence $750,000. Total: $2.26-million.

Monthly outlays: Property tax $360; water, sewer, garbage $80; home insurance $80; electricity, heat $230; maintenance $500; garden $55; transportation $750; groceries $1,125; clothing $120; gifts, charity $85; vacation, travel $300; dining, drinks, entertainment $175; personal care $15; club membership $10; sports, hobbies, golf $20; subscriptions $30; health care $65; health insurance $40; life insurance $140; communications $250; TFSAs $1,000; pension plan contributions $345; unallocated spending $725. Total: $6,500

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor & Portfolio Manager
matt@tridelta.ca
(416) 733-3292 x230

FINANCIAL FACELIFT: Bob, 62, was laid off last year. Can he and Roberta afford to retire with the income they want?

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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.

gam-masthead
Written by:
Special to The Globe and Mail
Published August 19, 2022

Bob had been planning to retire from his sales job this spring, but he was “packaged” – laid off with a severance package – early last year. His wife, Roberta, is planning to work until February, 2023. Bob is age 62, Roberta 59.

“With this unexpected transition, and change in income, we thought it was time for a financial checkup as we begin the next chapter of our lives,” Bob writes in an e-mail. Since he was laid off, Bob has been working part-time, which he enjoys.

Because the couple married late in life, they have had a number of major expenses over the past few years – buying their Alberta house for cash and spending a substantial sum renovating it, joining a country club and buying new vehicles. To pay for it all, they both made large withdrawals from their investment portfolios and “cleaned out” their tax-free savings accounts.

Bob, in addition to his defined benefit pension of $20,580 a year, is drawing Canada Pension Plan benefits of $12,000 a year, for a total of $32,580. Their retirement spending goal is $120,000 a year after tax.

“Can we retire as planned with our income target and not have any financial concerns?” Bob asks. How can they keep income taxes to a minimum?

We asked Matthew Ardrey, a financial planner and portfolio manager at TriDelta Financial in Toronto, to look at Bob and Roberta’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

“Looking at their situation, the first thing that jumps out is the significant amount of company stock Roberta owns,” the planner says. The shares in Roberta’s employer represents about 34 per cent of their total investable assets.

“Though the stock has been quite profitable for them, it represents a significant concentration risk in their investment portfolio,” the planner says. If something happened to Roberta’s company, it would have “major ramifications” on their ability to retire.

Including Roberta’s company shares in their investment asset mix, Roberta and Bob have about 79 per cent of their portfolio in stocks, 9 per cent in bonds, 8 per cent in equity alternative investments and 4 per cent in cash. “As they move into retirement, they will need to reduce their volatility risk and increase their focus on income,” the planner says.

Roberta is contributing the maximum to her RRSP and TSFA, which she has built up again. She is making no other savings. Bob is collecting his pension and has just started his CPP benefits.

To rebuild Bob’s TFSA, they asked whether a spousal loan from Roberta might make sense. Instead, the planner recommends an RRSP meltdown strategy in which Bob takes $20,000 a year from his RRSP from now to age 69. That would put him just over the lowest Alberta income tax bracket, which changes from 25 per cent to 30.5 per cent at $50,197 a year of income.

If Bob wanted to withdraw even more, he could do so at 30.5 per cent up to a limit of $100,392, at which point the tax rate would increase to 36 per cent. The planner’s forecast assumes Bob withdraws $20,000 a year and deposits it in his TFSA. Doing this for the next five years would enable him to catch up on his TFSA room, the planner says. Once he had contributed as much as possible, Bob could continue to contribute the annual maximum thereafter.

In 2023, when Roberta retires, she will have an additional $65,000 of income from her stock options and employee stock plan (based on the current stock price). “Thus, she would not start her RRSP meltdown until 2024,” the planner says.

“In 2024, I assume a $25,000 RRSP withdrawal for Roberta and a redemption of company shares of $50,000,” the planner says. Roberta will sell the company stock over 10 years to mitigate capital gains taxes and diversify the portfolio, he says.

Bob and Roberta assume they will live to age 95. Because of that and the meltdown strategies, the planner recommends Roberta wait until age 70 to take her CPP. This will increase Roberta’s CPP benefit by 42 per cent from age 65 and Old Age Security benefits for both of them by 36 per cent.

“This is an important consideration given their expected longevity and inflation,” which the planner estimates will average 3 per cent a year. The forecast rate of return on a balanced portfolio is 5.25 per cent before retirement, and 4.5 per cent after.

The annual fees on their investments average 1.22 per cent, excluding Roberta’s company shares. “They are being charged an account fee of 0.80 per cent, included in the 1.22 per cent,” the planner says. This 0.80 per cent fee is assumed to be on the company shares.

“I would suggest Bob and Roberta request that the fees on the Roberta’s company stock be waived,” the planner says. “I have clients in similar situations and do not charge for holding their company shares. It is a material expense – about $8,000 per year.”

Based on the above assumptions, Bob and Roberta likely can meet their retirement goal of spending $120,000 per year, the planner says. To be sure, he stress tests the projection using a Monte Carlo simulation, which introduces randomness to a number of factors, including returns.

For a plan to be considered likely to succeed, it must have at least a 90-per-cent success rate. If the rate is below 70 per cent, success is considered unlikely. Bob and Roberta’s simulation indicates a probability of success of 76 per cent.

They could benefit by further diversifying their portfolio, and potentially increasing their returns, by adding exposure to non-traditional asset classes such as income-producing, privately owned real estate funds, the planner says. These investments tend not to move up and down with the stock market. As well, they can be expected to offer higher returns than fixed-income securities such as bonds.

“Real estate investment trusts that invest in a large, diversified residential portfolio, or perhaps in specific areas like wireless network infrastructure, are preferable to REITs that have a large exposure to retail,” the planner says.

“By diversifying their portfolio, we estimate could achieve at least 5 per cent return net of fees (post-retirement) and significantly reduce the volatility risk of the portfolio.”

Many private real estate investments are tax efficient because their distributions are part or all return of capital, the planner says. “With this adjustment, the change in the Monte Carlo simulation would be material, moving up to a 97 per cent probability of success.”

Client situation

The people: Bob, 62, and Roberta, 59.

The problem: Can they still achieve their retirement goals even though Bob was laid off?

The plan: Bob begins to melt down his RRSP now. When Roberta retires, she does the same. She also begins to sell off her company stock. They take steps to improve their rate of return.

The payoff: All their goals achieved.

Monthly net income: $14,265.

Monthly outlays: Property tax $525; water, sewer $165; home and car insurance $375; electricity $170; heating $195; maintenance, security $120; garden $100; transportation $250; groceries $1,000; clothing $310; bank fees $75; gifts, charity $210; vacation, travel $3,000; dining, drinks, entertainment $1,050; personal care $300; club memberships $1,000; golf $400; hobbies $105; subscriptions $80; health care $200; health, dental insurance $300; communications $360. Total: $10,290. Surplus goes to RRSPs, TFSAs, health care and other unallocated expenses.

Assets: Her bank account $49,000; his bank account $40,000; her registered stock plan $36,000; her non-registered company stock $95,000; her non-registered investment portfolio $1,107,120; his portfolio $6,600; her TFSA $121,315; her RRSP $1,381,995; his RRSP $571,000; residence $850,000. Total: $4.25-million.

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor & Portfolio Manager
matt@tridelta.ca
(416) 733-3292 x230

FINANCIAL FACELIFT: Should Leo and Linda reboot their retirement spending plan to buy a bigger townhouse?

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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.

gam-masthead
Written by:
Special to The Globe and Mail
Published July 10, 2022

In their early 50s, with well-paying executive jobs, Leo and Linda want to sell their two-bedroom Toronto townhouse and buy a larger one, which would mean taking on substantial new mortgage debt.

They have no children “and are in the sweet spot of our respective careers,” Leo writes in an e-mail. He grosses $200,000 a year while she makes $125,000. Their existing townhouse is valued at $800,000 with a mortgage outstanding of $180,000 that they plan to pay off in four years. They have some savings but no work pensions.

“Can we afford to upsize our house and still hit our retirement goals?” Leo asks. “Is it advisable to carry mortgage debt into retirement?”

Leo plans to retire from work at age 67, Linda at 65. They plan to travel extensively for the first few years. Their retirement spending goal is $120,000 a year. “This covers our typical living and spending patterns and would provide a sleep-at-night factor,” Leo writes.

We asked Matthew Ardrey, a vice-president and portfolio manager at TriDelta Financial in Toronto, to look at Leo and Linda’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

“First, we looked at a base case scenario where they did not buy a larger home,” Mr. Ardrey says. Each month, they save $2,000 to Leo’s RRSP and $1,400 to Linda’s. They save another $1,000 a month to Leo’s tax-free savings account. Each year, they have a surplus that also goes to savings. They spend about $9,500 a month on their lifestyle, plus another $3,400 on accelerated mortgage payments.

“In this scenario, we first assume from their surplus that they maximize their RRSPs,” the planner says. “Being in high tax brackets, this makes sense for their retirement.” The remaining surplus is assumed to be split between each of their TFSAs.

By 2026, Leo’s TFSA is maximized and by 2028, so is Linda’s, Mr. Ardrey says. They continue to make maximum annual TFSA contributions and any additional surplus is saved in a joint non-registered investment account.

Leo and Linda both spent part of their lives working abroad so they will have a slight reduction in their Old Age Security and Canada Pension Plan entitlements. Some of the CPP benefits may be offset by other social security agreements.

Leo and Linda went into the recent tumble in financial markets fully invested in stocks. They have since pared their holdings to 60 per cent with the balance in cash. They intend to rebuild their stock portfolio in time. They’ve asked the planner to assume they are 100 per cent in stocks going forward while they are working.

“Though I did use their assumption, I do have concerns with them liquidating a substantial part of their portfolio during a downturn,” he says. “I feel that their asset mix may not have been appropriate for their risk tolerance.” Indeed, “history has shown us that one of the worst things you can do for your returns is to exit when the market goes down. Not only do you crystalize your losses, but you also often miss out on a good part of the market recovery.”

In preparing his forecast, Mr. Ardrey assumes Leo and Linda shift from 100 per cent in equities to a balanced portfolio of 60 per cent stocks and 40 per cent bonds when they retire. He assumes they live to age 95 and the inflation rate averages 3 per cent. They earn 6.01 per cent on their investment while they are working and 4.74 per cent after they have retired. Total assets at Leo’s age 65 are estimated to be $3.1-million in future dollars.

“Under these assumptions, they do not meet their spending goal,” the planner says. Leo runs into a shortfall at age 92. “When we run the Monte Carlo simulation, the result is only a 38-per-cent probability of success.” (A Monte Carlo simulation is a computer program that tests a forecast against a number of random factors.) For a plan to be considered likely to succeed, it must have at least a 90-per-cent success rate.

Leo and Linda could benefit by further diversifying their portfolio, and potentially increasing their returns, by adding exposure to non-traditional asset classes such as private real estate funds that are not correlated to the stock market, Mr. Ardrey says. As well, many private real estate investments are tax efficient because they have distributions that are part or all return of capital, he adds.

Real estate investment trusts that invest in a large, diversified residential portfolio, or perhaps specific areas such as wireless network infrastructure, are preferable to ones that have a large exposure to retail, the planner says.

For Linda and Leo to reach the likely to succeed range, they will need to not only improve their investment returns, but also reduce their spending in retirement to 90 per cent of their target; that is, from $10,000 a month to $9,000, “which is not unrealistic.”

In the second scenario, the planner looks at what would happen if Leo and Linda sell their current home and buy a larger one for $1.5-million. They would need to take on a mortgage of about $870,000.

“It’s not surprising that the larger home purchase further impairs their ability to retire as planned.” They face their first shortfall at Leo’s age 81. The Monte Carlo simulation shows only a 6-per-cent probability of success.

To reach the likely area in the Monte Carlo simulation, they would need to improve their investment returns and also reduce their retirement spending to 60 per cent of their target, the planner says. This would be a material change in their lifestyle. “Linda and Leo must decide what is more important to them, a larger home or a larger lifestyle.”

Unfortunately, there is no magic bullet when it comes to retirement planning, Mr. Ardrey says. “If the plan is not working, we have to look to higher returns, an increase in the amount and duration of savings or a reduction in spending.”

With the increasing cost of housing in Canada’s major cities, the decision facing Leo and Linda is the one facing many Canadians, the planner says: their house or their lifestyle.

Client situation

The people: Leo, 55, and Linda, 52

The problem: Can they afford to buy a bigger house without jeopardizing their retirement spending goal?

The plan: Give up the idea of upsizing and taking on debt. Take steps to improve investment returns and lower expectations for retirement spending from $10,000 a month to $9,000.

The payoff: Understanding their financial limitations, which will help them feel more satisfied with what they have.

Monthly net income: $19,870

Assets: Bank account $30,000; his TFSA $13,000; her TFSA $1,000; his RRSP $225,000; her RRSP $300,000; residence $800,000. Total: $1.37-million

Monthly outlays: Mortgage $3,400; property tax $250; home insurance $50; electricity, heat $250; maintenance $1,050; transportation $600; groceries $1,300; clothing $300; car loan $700; vacation, travel $1,200; dining out $1,000; entertainment $1,000; other personal $1,000; health care $225; health, disability insurance $250; communications $350; RRSPs $3,400; RESP for niece and nephew $350; TFSAs $1,000. Total: $17,675

Liabilities: Mortgage $180,000 at 3.17 per cent; car loan zero per cent $9,000. Total: $189,000

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor & Portfolio Manager
matt@tridelta.ca
(416) 733-3292 x230

FINANCIAL FACELIFT: Can Brandon and Michelle achieve financial independence in six years’ time?

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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.

gam-masthead
Written by:
Special to The Globe and Mail
Published May 6, 2022

Inspired by the FIRE movement, Brandon and Michelle – both in their mid-30s – have built a portfolio of income-producing properties and dividend-paying stocks they hope will free them soon from having to work. Characterized by extreme saving and investing, FIRE stands for “financial independence, retire early.” It helps if you earn a good income.

Brandon earns $127,000 a year plus bonus and employer pension plan contributions, while Michelle earns $92,000 a year. Their combined employment income totals $238,000.

Michelle has a defined benefit pension plan partly indexed to inflation. They have two children, ages one and three.

Their aspirational goal is to “become financially independent, non-reliant on employment income, before 40,” Brandon writes in an e-mail. Ideally, they could live off their dividends and rental income. Their more realistic goal, perhaps, is to have enough rental and dividend income to allow them to work part-time – “resulting in about 50 per cent of current pay” – in five years or so, Brandon writes.

Their retirement spending goal is $120,000 a year. Achieving it on half the salary will be a challenge.

“When can our passive income cover our expenses?” Brandon asks.

We asked Matthew Ardrey, a vice-president and portfolio manager at TriDelta Financial in Toronto, to look at Brandon and Michelle’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

Brandon and Michelle are looking to pull back from full-time work in mid-2028, Mr. Ardrey says. “Before engaging in what would seem like a pipe dream for many Canadians in their mid-30s, they want to ensure they are on secure financial footing,” the planner says.

In addition to their principal residence, they have four rental properties. They also rent out an apartment in their home. Their rental properties generate $1,100 a month, net of all expenses including mortgage payments, and the unit in their home another $1,600 a month. Brandon earns $400 a month for managing a relative’s rental property.

Dividend income from their non-registered accounts is about $2,500 a year, Mr. Ardrey says. Brandon’s $15,000 of employer-matched contributions is going to a defined contribution pension plan. As well, they maximize their tax-free savings accounts and contribute $2,500 per child to their registered education savings plans each year. They have no unused contribution room in their registered plans.

“After all of these savings and their spending, they still have a $50,000 a year surplus, which they put toward non-registered savings,” the planner says. He assumes they divide this surplus 50/50 to maximize tax efficiency. “This amount grows annually at a projected 4.9 per cent rate until they reach semi-retirement and have to use some of it to supplement their lower income,” Mr. Ardrey says. Inflation is projected at 3 per cent.

In mid-2028, he assumes Michelle and Brandon reduce their work by 50 per cent. Brandon will be 39, Michelle 41. Brandon’s bonus and employer contributions to his DC plan end. Michelle’s DB pension contributions drop by half. Brandon is assumed to maximize his RRSP each year based on 50 per cent of his current salary.

Adjusted for inflation, Brandon will be earning $78,000 a year and Michelle $56,000. They’ll have $3,000 in dividend income, $6,000 in property management income and gross rental income of $93,000.

At the same time, their spending is forecast to increase, the planner says. “They feel that in another five years’ time, things will be drastically more expensive. As well, less work will provide more leisure time and increased expenses. Thus, they have requested we estimate spending of $10,000 per month starting when they semi-retire in 2028 and continuing thereafter, adjusted for inflation.”

They will still be about 17 years away from full retirement. They continue working part time until Michelle is 58, when she can get an unreduced pension. “At this point we assume they move to full retirement,” Mr. Ardrey says. Michelle will be entitled to an estimated pension of $37,845. Her pension is indexed 60 per cent to inflation, or 1.8 per cent.

In their first full year of retirement, Michelle’s pension will have risen slightly to $38,526, property management income $10,000 and gross rental income $154,000. The mortgages will be paid off.

At age 65, they will start collecting Canada Pension Plan benefits (estimated at 70 per cent of the maximum) and full Old Age Security. “Under these assumptions, they meet their retirement spending goal of $120,000 a year after tax,” Mr. Ardrey says.

“However, when we stress test the scenario under the Monte Carlo simulator, their probability of success drops to 77 per cent, which is in the ‘somewhat likely’ range of retirement success,” he says. A Monte Carlo simulation introduces randomness to a number of factors, including returns, to test the success of a retirement plan. For a plan to be considered “likely to succeed” by the program, it must have at least a 90 per cent probability of success.

“Looking at their portfolio construction, it is great for accumulation, but the inherent volatility of an all-equity portfolio is less desirable for drawdowns,” Mr. Ardrey says. They have a portfolio of exchange-traded funds with a geographic breakdown of 55 per cent U.S., 25 per cent international and 20 per cent Canadian.

As they approach semi-retirement, Brandon and Michelle could benefit by diversifying their portfolio by adding some non-traditional, income-producing investments, such as private real estate investment trusts that invest in a large, diversified portfolio of residential properties, or perhaps in specific areas such as wireless network infrastructure, mainly in the United States, the planner says. Such investments are not affected by ups and downs in financial markets.

“By diversifying their portfolio, we estimate they could add at least one percentage point to their overall net return – taking it to 5.9 per cent – and significantly reduce the volatility risk of the portfolio.” In conclusion, Brandon and Michelle are on track to achieve something only most Canadians can dream of,” Mr. Ardrey says, “semi-retirement by their early 40s and full retirement before 60.”

Client situation

The people: Brandon, 33, Michelle, 35, and their two young children.

The problem: Can they achieve financial independence in six years’ time, allowing them to work part-time and still spend $120,000 a year?

The plan: Keep saving and investing. Go part-time in 2028 and retire fully at Michelle’s age 58, when she gets her pension. Add some non-traditional, income-producing assets to their investments as they approach retirement.

The payoff: Plenty of time off to reap the benefits of their hard work while they are still relatively young.

Monthly net income: $13,910

Assets: Cash $14,000; exchange-traded funds $100,000; his TFSA $153,000; her TFSA $127,000; his RRSP $154,000; her RRSP $44,000; market value of his DC pension $188,000; estimated present value of her defined contribution pension $125,000; registered education savings plan $46,000; rental units $915,000; residence $605,000. Total: $2.47-million

Monthly outlays: Residence mortgage $1,700; property tax $385; water, sewer, garbage $145; home insurance $70; electricity, heat $255; maintenance $200; transportation $435; groceries $900; child care $415; clothing $230; gifts, charity $375; vacation, travel $300; dining, drinks, entertainment $555; personal care $50; pets $80; sports, hobbies $30; health care $75; communications $130; his DC pension plan $1,000; RESP $415; TFSAs $1,000; her DB pension plan contributions $1,000. Total: $9,745. Surplus $4,165

Liabilities: Residence mortgage $428,000; rental property mortgages $707,000. Total: $1,135,000

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor & Portfolio Manager
matt@tridelta.ca
(416) 733-3292 x230

FINANCIAL FACELIFT: Plans for early retirement need a rethink

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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.

gam-masthead
Written by:
Special to The Globe and Mail
Published March 4, 2022

Ted and Natalie have well-paying management jobs, Ted in the private sector and Natalie in government. He is age 52, she is 51. They have two children, 18 and 21. The younger one still lives at home.

Ted has earned good income over the past five years, averaging about $200,000 a year including commission. His base salary is $115,000. Natalie is making $118,000 a year, plus a bonus that ranges from $5,000 to $25,000.

Natalie and Ted bought a rental property not long ago with a small down payment; the property is barely breaking even.

Natalie recently joined her defined benefit pension plan and wonders whether she should use funds from her previous employer’s registered pension plan to “buy back” service in her new plan.

Ted, who had a recent health scare, is looking to the day they can both retire, travel extensively “while we can,” and winter in a warmer climate. Short term, they want to replace one of their cars and do some renovations to their house. Longer term, their goal is to retire from work in six years with a budget of $140,000 a year after tax.

We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Ted and Natalie’s situation.

What the expert says

Ted and Natalie have been able to pay off the mortgage on the family home, do some renovations and make other big-ticket purchases thanks to Ted’s substantial commission income and Natalie’s bonus, Mr. Ardrey says. Ted expects this extra income to fall markedly in future, averaging about $10,000 a year each.

“Unfortunately, with the reduction in this extra income, they may not be able to afford even their short-term spending in full,” the planner says. They have enough to pay for their yearly big trip ($10,000), but may not have enough for home renovations ($25,000) or a car purchase ($35,000). “If they want to proceed with these, they may either need to finance them or reduce spending in other areas.”

Ted saves 4 per cent of his salary each month in his defined contribution pension plan, which the company matches. Then he uses the remainder of his RRSP room to contribute to his group RRSP at work. He also makes a $100 contribution each month to his tax-free savings account. Natalie contributes $10,000 a year to her RRSP.

In addition to his DC pension, Ted also has a defined benefit pension that will pay him $26,400 a year when he retires at age 58, not indexed to inflation. Natalie has just joined her defined benefit plan and has the opportunity to buy back service, the planner says.

If Natalie uses the full $226,000 in her DC pension plan to buy back service with her new employer, her pension will increase from $1,000 a month to $2,500 a month, fully indexed, at her age 58. “We recommend she does this.”

Natalie and Ted recently bought a rental property worth $550,000 with a $500,000 mortgage on it. The property earns $2,700 a month gross and zero after fixed expenses. “This is concerning because at best, it is cash-flow neutral and if any ad hoc expenses come up, it will be cash flow negative,” Mr. Ardrey says. In preparing his forecast, he assumes they sell the rental property when they retire.

After all spending and saving are added up, the couple show a surplus that is not accounted for. They said they use the money for unexpected expenses such as car repairs. “Though that makes up some of the surplus, I feel that there is budget leakage in their spending,” the planner says. They should work on improving their budget so they will have a more accurate picture of their retirement needs.

If they retire at Ted’s age 58, they will get reduced Canada Pension Plan benefits. The forecast assumes they start collecting CPP and Old Age Security at age 65. They will get 80 per cent of the maximum CPP benefit at age 65 as well as maximum Old Age Security benefits, subject to any clawback.

Their portfolio is 23-per-cent cash, 32-per-cent bonds and 45-per-cent stocks, Mr. Ardrey says. Of the stocks, 20 per cent are Canadian, 20 per cent U.S. and 5 per cent international. “With headwinds on the fixed-income side because of rising interest rates, the expected return on this portfolio is 3.04 per cent,” he says.

Inflation is now a larger concern for portfolios than it once was and this will likely last for a while, the planner says. “Thus, we are using a 3-per-cent inflation rate in this projection, meaning their investments are barely keeping pace with inflation.” Worse, the mutual funds they hold outside of their group plans have an average management expense ratio of 2.14 per cent. In comparison, the investments in the group plans would be at a relatively low cost.

Taking all of these variables into account, with their spending goal of $140,000 a year, they fall short very early in their projection, running out of savings just 10 years into retirement, in 2038,” the planner says. ”Given this drastic shortfall, we deem this scenario unviable.”

To improve their retirement plan, Mr. Ardrey recommends they hold less cash, add to their stock holdings, and add some income-producing, non-traditional investments such as private residential real estate investment trusts. “These investments provide uncorrelated and steady returns that are in excess of what we are expecting for fixed income today.”

With 55-per-cent cash and fixed income, their portfolio has embedded risk that they likely don’t recognize. “For the past 50 years or so, fixed income has been a safe haven for investing,” the planner says. “This is less so today.” An increase in interest rates leads to a decline in the price of existing bonds. Inflation also poses a risk to fixed-income securities. “If the current rate of inflation is stickier than predicted, the real rate of return on bonds will continue to be negative.”

Earning better returns improves Ted and Natalie’s retirement prospects but more is needed, he says. Mr. Ardrey puts his forecast through computer software known as a Monte Carlo simulation to gauge the likelihood of success given different variables. To improve their likelihood of success, Ted and Natalie will either have to cut their retirement spending by about a third, to $96,000 a year, or delay retiring for six additional years, from 2028 to 2034.

“Unfortunately, there is no magic bullet to retirement planning,” Mr. Ardrey says. “If you cannot achieve your goals, then it typically involves one or more of working longer, saving more, investing better, or spending less.” This is the situation Ted and Natalie must now manage through to meet their goals in the future. “Thankfully, they still have the time to do it.”

Client situation

The people: Ted, 52, Natalie, 51, and their children, 18 and 21

The problem: Can they afford to retire in six years with $140,000 in spending?

The plan: Take steps to improve investment returns, lower retirement spending expectations or plan to work much longer than anticipated.

The payoff: A clear picture of what needs to be done

Monthly net income: $15,100

Assets: Cash $2,000; his RRSP $410,000; her RRSP $235,000; his defined contribution pension $235,000; her DC pension $226,000; estimated value of his DB pension $634,000; estimated value of her DB pension $72,000; his TFSA $17,000; registered education savings plan $27,000; residence $820,000; rental property $550,000. Total: $3.2-million

Monthly outlays: Property tax $450; water, sewer, garbage $120; home insurance $170; heat, hydro $300; maintenance, garden $260; car insurance $235; fuel $700; maintenance $275; parking, transit $300; groceries $1,200; tutoring $400; clothing $250; gifts, charity $350; vacation, travel $1,000; other discretionary $600; dining, drinks, entertainment $1,300; personal care $200; club memberships $50; golf $25; pets $85; subscriptions $65; health care $100; communications $235; his RRSP and DC pension contributions $1,440; registered education savings plan $100; her DB pension plan $1,380; her RRSP $835; his TFSA $100. Total: $12,525.Surplus goes to occasional and unallocated expenses.

Liabilities: Mortgage on rental $501,590

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor & Portfolio Manager
matt@tridelta.ca
(416) 733-3292 x230

FINANCIAL FACELIFT: Have Margaret and Simon saved enough to meet their retirement spending goal?

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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.

gam-masthead
Written by:
Special to The Globe and Mail
Published January 7, 2022

Margaret is age 61 and recently retired. Her husband Simon, who is 70, retired from work five years ago. Although neither has a pension, they have a home in the Greater Toronto Area, a cottage, and substantial savings.

“We are looking for advice on how to draw down our assets for the best tax advantage and longevity of our funds,” Margaret writes in an e-mail. Over the past year or so, they withdrew $100,000 from their savings to lend to their daughter to help with a down payment. As well, they bought a new truck.

Short term, they have some foundation work to do on their cottage and they’re planning a trip to Europe.

Simon is drawing $16,800 a year from his registered retirement income fund. He’s getting $12,170 in Canada Pension Plan benefits and $8,255 in Old Age Security. Margaret recently converted her registered retirement savings plan to a RRIF as well and is wondering how much she should draw. She also wonders when to begin collecting CPP and OAS benefits.

Their retirement spending goal is $8,000 a month, or $96,000 a year, after tax. Have they saved enough?

We asked Matthew Ardrey, a vice-president and portfolio manager at TriDelta Financial in Toronto, to look at Simon and Margaret’s situation.

What the expert says

Margaret and Simon want to take stock of their situation and ensure they will have enough to enjoy their retirement, Mr. Ardrey says. They have investment assets of $800,000 ($76,000 in their tax-free savings accounts and the remainder in RRIFs) plus real estate assets of $2.1-million, which include their home and cottage. The cottage has about $400,000 in imbedded capital gains.

“They are willing to sell the cottage to make their retirement work, “but they want to keep their house. “I would agree with their thinking,” the planner says. “With rising costs of long-term care, I believe in keeping the house aside as insurance against these costs and as a financial buffer in a retirement plan.”

Aside from these assets, they have lent their daughter $100,000 toward a home down payment that she is repaying at 1-per-cent interest over 10 years. As well, they recently bought a truck using funds from their TFSAs. While there are no tax implications from this withdrawal, they might have been better off borrowing the funds, he says. “If they could have financed at a low rate, then they would have been better off doing that than using portfolio assets.”

Simon’s income consists of withdrawals from his RRIF and government benefits, for a total of $37,225 a year. The forecast assumes Margaret begins taking CPP and OAS at the age of 65 because the penalties for taking the benefits earlier are “very punitive and are generally not recommended,” Mr. Ardrey says. “We assume 75 per cent of the maximum CPP and full OAS for Margaret,” which will add another $24,865 a year in future dollars.

They want to spend $8,000 a month starting this year. “Based on the above assumptions, they are not able to meet their objectives,” the planner says.

“The goal of the projection is to have enough to cover their spending until Margaret’s age 90, leaving the principal residence intact to cover off any future health care costs,” he says. To avoid the punitive losses of taking CPP early, they must make additional withdrawals from their RRIFs, which are all taxable.

“They run out of investment assets in 2034, when Simon is 83 and Margaret is 74, where we assume they sell the cottage,” Mr. Ardrey says. Even then, they run out of investment assets a second time in 2047. Margaret, who would be 87, would be forced to sell the house at this time to fund her expenses for the remainder of her life.

“This adds the risk of failure to this projection because she would no longer have the financial cushion,” he says. “Although it could work under ideal conditions, life is not always ideal.”

Although the projection works if she sells the house, “things look worse if the projection is stress-tested using a Monte Carlo simulation,” Mr. Ardrey says.

A Monte Carlo simulation introduces randomness to a number of factors, including returns, to stress-test the success of a retirement plan. “In this plan, we have run 500 iterations with the financial planning software to get the results,” he says. For a plan to be considered “likely to succeed” by the program, it must have at least a 90-per-cent success rate, meaning at least 450 trials out of 500 succeed. If it is below 70 per cent, then it is considered unlikely.

“Even if Margaret sells the house in 2047, the probability of success in this plan is only 51 per cent,” Mr. Ardrey says. “To achieve 100 per cent success with their current portfolio construction, they would need to reduce their spending by almost 20 per cent to $6,500 per month.”

Their current portfolio has an expected future return of 2.82 per cent a year on average, the planner says. This is owing to the 60 per cent weight in fixed income. “By changing their portfolio mix to achieve a 5 per cent return (a 3 per cent real rate of return above 2 per cent inflation), the probability of success jumps to 92 per cent,” he says. In his forecast, Mr. Ardrey uses an asset mix of 60 per cent stocks, 20 per cent non-traditional investments and 20 per cent fixed income. “If in addition they lower their expenses by $500 a month to $7,500, the likelihood of success increases to 100 per cent and removes the need to sell their home.”

For the past 40 years or so, fixed income has been a safe haven for investing, the planner says. “This is less so today.” Fixed income faces risks of rising interest rates. An increase in interest rates leads to a decline in the price of existing bonds. Additionally, it has inflation risk. “If the current rate of inflation is stickier than predicted, the real rate of return on bonds will be negative.” In short, Simon and Margaret need to consider taking on more stock market risk and less interest rate and inflation risk, the planner says.

Client situation

The people: Simon, 70, and Margaret, 61.

The problem: How should they draw on their assets to meet their retirement spending goal? Have they saved enough?

The plan: Strive to cut spending. Plan on selling the cottage and investing the proceeds. Consider professional money management to boost investment returns. Margaret may have to sell the family home at some point.

The payoff: The realization they will have to temper their aspirations.

Monthly net income: $8,070

Assets: Cash in bank $50,000; combined TFSAs $76,000; combined RRIFs $724,000; mortgage to daughter $100,000; grandchild’s education savings plan $23,370; cottage $900,000; residence $1.2-million. Total: $3.07-million.

Monthly outlays: Property taxes $1,000; water, sewer, garbage $80; property insurance $290; electricity, heating $390; maintenance, garden $585; transportation $880; grocery store $895; clothing $40; gifts, charity $525; vacation, travel $350; other discretionary $200; dining, drinks, entertainment $865; personal care $25; club membership $20; pets $600; sports, hobbies $175; subscriptions $140; other personal $25; health care $350; communications $475; grandchild’s registered education savings plan $165. Total: $8,075.

Liabilities: None.

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor & Portfolio Manager
matt@tridelta.ca
(416) 733-3292 x230
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