Electronic income

How can Andrew and Abigail protect their desired retirement income?

TODD ​​KOROL/The Globe and Mail

Last year, a health problem prompted Andrew to step down from his high-pressure managerial job and take early retirement. He is 59 years old. He would leave behind a salary of $200,000 a year. His wife, Abigail, is an independent consultant whose business income ranges from $50,000 to $100,000 per year. She is 58 years old.

They have a mortgage-free house in Alberta and no debt.

Abigail and Andrew have three children, aged 16 to 20, the youngest of whom is still at home and another partly dependent.

“This health episode has really made me look at how long I want or need to work,” Andrew wrote in an email. “Maybe it’s time to slow down.” They set aside money in a registered education savings plan and in trust accounts for their children’s higher education.

“We’re not big travelers, so in retirement we might take a trip to Canada every year to visit relatives,” writes Andrew.

“How soon can I retire with an after-tax income of $120,000 a year?” he asks. “When should we sell our house to supplement our depleted savings?”

We asked Clay Gillespie, financial planner and managing director of RGF Integrated Wealth Management Ltd. in Vancouver to review the situation of Andrew and Abigail.

What the expert says

“This couple is in very good financial health,” says Mr. Gillespie. Andrew already receives a defined benefit pension of approximately $39,600 per year, indexed to inflation, from a former employer.

“The first analysis we did was to see how much income they could generate if they retired today,” says the planner. “It gives us a starting point.” If they both retired today, they could generate a net income, after taxes and inflation, of about $100,000 a year. This assumes they earn a 4% rate of return on their investments after inflation. This analysis did not include the value of their home. The forecast also assumes a life expectancy for Abigail of 95 years.

The second analysis looked at when they would need to use the equity in their primary residence if they were generating $120,000 in net disposable income today.

“If they were retiring today and generating $120,000 after tax, they should be using some of the equity in the principal residence in about 17 years,” says Gillespie. They could sell the house and rent it out, buy a smaller one, take out a home equity line of credit or even a reverse mortgage.

If they wait three more years to retire, he estimates they could generate about $113,000 a year until Abigail’s 95, below their goal, without tapping into net worth. of their house. If they really want $120,000 a year, they may have to use the equity in their primary residence around 2050, he says.

“It looks like this couple can retire on January 1, 2025 and maintain their desired retirement income until Abigail turns 95,” says the planner. Depending on their income needs in future years, they may never have to sell their home.

The analysis assumes that their income increases every year with the rate of inflation. However, a growing body of work suggests that’s not how it works, he adds.

The first two or three years of retirement tend to be the most expensive because people face pent-up demands they couldn’t meet working full time, the planner says. The last two years can also be very expensive due to long-term care costs.

“But we also found that you don’t need to increase your income each year by the rate of inflation to maintain your lifestyle in retirement,” he says. In most cases, people usually increase their income every three or four years. “We’ve found that clients can start with an initial withdrawal rate of up to 5.5% of their savings while maintaining their lifestyle throughout retirement,” says Gillespie.

Andrew is in a high marginal tax bracket. When he retires, he will be in a lower marginal tax bracket. As long as he works, André should increase the contributions to his registered retirement savings plan. “In fact, we recommend that he transfer part of his tax-free savings account to his RRSP. If you are in a lower tax bracket in retirement, then an RRSP is the best alternative.

The planner recommends that Andrew and Abigail begin collecting Old Age Security benefits at age 65. “They should design their income strategy to avoid the OAS recovery tax,” he says. If they split their income in retirement, they will need to generate a gross income of approximately $77,000 per year each. This will give them an after-tax income of about $60,000 each. The “clawback” begins at annual income of $81,761 and OAS is fully clawed back when taxable income reaches $133,141.

He suggests that they delay collecting Canada Pension Plan benefits until age 70. This will increase their benefit by 8.4% per year, making the benefit 42% higher than if they had taken it at age 65. advice is health related,” says Gillespie. “If they’re worried about Andrew’s health, I’ll start CPP on retirement.

As for their portfolio, they can keep the strategy of 60% equities and 40% fixed income in retirement, says the planner. However, they must have a strategy to generate the desired income. “We believe you should prepare for a stock market correction every day in retirement. You don’t want the stock market to dictate your retirement income in any given year.

As part of their fixed income, the planner suggests they transfer three years’ worth of their estimated annual withdrawals into cash and short-term securities such as guaranteed investment certificates to protect them from a possible downturn in the markets. . “At retirement, we suggest they have one year of withdrawals into a high-yield savings account, one into a one-year GIC and one into a two-year GIC,” says Gillespie.

If at the end of the year the stock market is up, they will take the next year’s pullback from the equity side of the portfolio. If the stock market is down, they would pull it out of the maturing GIC.

If the GIC is not needed, it will be reinvested for a guaranteed period of two years.

“This strategy means that unless we have a stock market downturn that lasts longer than three years, Andrew and Abigail shouldn’t be forced to earn income from their investments as they decline in value,” Gillespie said. . “This strategy works because they avoid selling investments when their value is falling.”

Status of customers

The people: Andrew, 59, Abigail, 58, and their three children

The problem: Can Andrew and Abigail afford to retire soon and have the buying power of $120,000 a year after tax? When will they have to exploit the value of the house?

The plan: They can retire in January 2025 and maintain the lifestyle they want until Abigail turns 95. When they retire, they must set aside three years of savings withdrawals, the first year in a high-interest savings account and the second and third in one- and two-year GICs.

Gain : Financial security

Net monthly income: $16,975

Assets: Joint bank account $10,000; his business account $85,000; common shares $70,000; his TFSA of $51,000; his TFSA $0; his RRSP $188,000; his RRSP $434,000; his defined contribution pension plan $130,000; estimated present value of his DB pension $1.32 million; registered education savings plan $102,000; $1 million residence. Total: $3.39 million

Monthly expenses: Property tax $550; water, sewer, garbage $100; home insurance $160; electricity, heating $500; security $45; maintenance, garden $750; transportation $975; groceries $1,400; clothing $700; gifts, charity $800; vacation, travel $750; child financial assistance $1,000; meals, beverages, entertainment $800; club memberships $505; sports, hobbies $300; subscriptions; health insurance, dental $400; cell phones $300; telephone, television, internet $300. Total: $10,335. Surplus goes to savings, big ticket items, and unrestricted expenses.

Passives: Any

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