Strong portfolio helps Quebec couple ease into retirement after layoffs
COUPLE’S ANNUAL INCOME GOAL IN RETIREMENT $80K
In Quebec, a couple we’ll call Louis and Mathilde, both 55, make their home with three children in their early to mid-20s. After careers as management consultants at the same firm, both were laid off two years ago. They received severance packages, but those benefits have been used up. Their resources: $1,916,000 of financial assets in registered and non-registered portfolios, a $600,000 house and cars worth $20,000. They aren’t poor, but they still face challenges in planning their retirement.
“Our goal was to retire early, at 55 in fact, and because of our layoffs, we have done that,” Matilde explains. Now they worry that their money may not last.
“Will we be able to achieve a retirement income of $80,000 per year before tax, invest $50,000 in our house and buy a new car for $25,000 to replace an old one?” she asks.
Family Finance asked advice-only planner Owen Winkelmolen, head of Planeasy.ca in London, Ont., to work with Louis and Matilde. “They have a strong net worth, no debts and a paid-up home. At present, they are still housing and feeding their three kids, all in post-secondary education. They have no educational savings, so, even allowing for kids’ summer jobs, they have to cover remaining school costs with out-of-pocket transfers to them.” They estimate they need $85,000 per year after tax while their children live at home.
INVESTMENT COSTS
Achieving that income depends on their returns on their financial assets. Their portfolios are made up of Guaranteed Investment Certificates and high-fee mutual funds. The GICS have an average return of 2.5 per cent per year. Their mutual funds generate seven per cent per year before management fees averaging 2.16 per cent per year. One U.S. dividend fund has a 2.51 per cent annual fee on $26,400 of assets. That fee alone costs them $663 per year. That’s onethird to one-half of its average annual return.
A portfolio manager handling their assets might charge 0.5 to 1.5 per cent of net asset value per year. Louis and Mathilde would have to shop around, but the reduced charges could be half of those they pay now. If Louis and Mathilde switch to a low-cost portfolio of exchange traded funds, they could reduce fees even further. That could mean dispensing with professional management entirely. The value vs. cost of management is a complex issue they would have to evaluate, Winkelmolen adds.
Moving money from highfee funds could have disposal costs and for non-registered funds could take tax management. Fees for taking money out of funds sold with deferred sales commissions that require five or six years in the funds to avoid penalties could be high. Research and patience will pay.
CAPITAL MANAGEMENT
To control taxes on their approximately $520,000 of non-registered assets, they can sell with a view to balancing capital gains with any losses and put what they wring out of their taxable funds in their Tax-free Savings Accounts. They have used up their limits for now and can thus only switch $6,000 each per year.
The couple’s wish for a new car for perhaps $25,000 and a $50,000 home renovation is problematic. If they cash out $75,000 of their investments, about four per cent of their approximately $1.9 million portfolio, their income would decline in similar proportion. It’s a potentially risky move so early in retirement. To conserve capital, they can buy the new car but defer the renos a few years until the kids have left home and spending needs decline.
MANAGING CASH FLOW
Their registered RRSPS with a present value of $1,258,000 invested at three per cent after inflation can generate taxable income of $52,840 per year indexed to inflation for 40 years. All capital will have been paid out by either partner’s age 95.
Their Tax-free Savings Accounts, with a present value of $137,000 can provide $5,755 in non-taxable income with the same assumptions. We also assume that present contributions of $12,000 per year cease immediately.
Their non-registered assets of $521,000 reduced to $446,000 by $75,000 for renovations and a new car can generate $18,733 for 40 years at 3 per cent per year after inflation.
Adding up the numbers, the couple can have pre-tax income of $77,328, which, after taxes estimated at 15 per cent (excluding TFSA payouts), would leave them $66,600 per year. They could make up the gap to the $85,000 needed for a few years before the kids leave home by dipping into non-registered capital. That could reduce those funds, but when both parents are 65, their incomes will soar.
On top of $77,328 income before 65, they can add government pensions: $5,268 QPP and $7,290 OAS for Louis, $4,668 QPP and $6,014 OAS for Matilde, based on her 33 years of residence in Canada. Foreign pensions will add $17,400 for total annual income of $117,968. After splits of eligible income and 21 per cent average tax and addition of TFSA income, they would have annual cash flow of $94,403 or $7,870 per month to spend, which is more than present spending with kids at home. The additional income will pay for travel and other pleasures they postponed during the time between their unexpected retirement and the time their various pensions start to flow. It can also provide reserves for emergencies, care in old age and inheritances for their children.
“This couple can surpass their retirement income goal, $80,000 per year before tax,” Winkelmolen concludes.
“Disciplined saving and successful, though high-fee investing have created a secure retirement.”