Not even unemployment can scuttle this couple’s retirement plans
Andrew Allentuck Family Finance In Alberta, a couple we’ll call Matt, 52, and Deena, 57, are moving toward full retirement. Matt was laid off in the chemical industry last year and is unsure if he can find work. Deena works for a large energy company as a document manager. Her income, $5,193 per month after tax, helps them pay the bills and avoid dipping into their savings. Their problem — seeing ahead to the end of a retirement that could be longer than they expected. They have the advantage of a portfolio of well- chosen large- cap U. S. and Canadian stocks. In all, their financial assets total about $2.26 million held mostly in RRSPs and TFSAs. But how long will the money last? They are far from the usual mid- 60s retirement threshold.
“What is the maximum amount of money we can safely spend each month to last until Matt is 90?” they wonder. Family Finance asked Eliott Einarson, a Winnipeg-based financial planner with Exponent Investment Management Inc., to work with the couple. His view is that full retirement in two years, when Deena would like to quit work, is financially feasible. But there are still choices to be made along the way.
SHIFTING TO RETIREMENT
Assuming that Matt and Deena start their retirement in two years, they would lose Deena’s $ 98,000 pretax income. They could start to use $ 76,000 of dividends from their taxable stocks. In retirement, Deena would no longer be putting $ 6,000 a year into her RRSP. They could also use the $ 6,000 they save annually in their TFSAs. El i mination of Deena’s salary and a shift to spending savings will cut their tax rates, thus cushioning the financial consequences of Deena’s career termination. The age credit, which starts at 65, though it declines with income over about $ 36,000, should be helpful.
The core i ssue for the couple is maintaining their way of life for a retirement starting i n two years at Deena’s age 59 and lasting, we can assume, for 36 years to Matt’s age 90. If their present $ 2,261,000 of financial assets grow with additions of $ 12,000 a year for two years and generate 3 per cent after inflation, then they can start retirement with $ 2,423,800 in financial assets. With the same annual return, that capital would generate $111,000 a year in 2018 dollars before tax.
At 65, each could draw CPP. Deena’s would get approximately $ 13,600 per year, Matt about $ 10,900 per year. At 65, each could start Old Age Security at about $ 7,040 per year at estimated 2018 rates. They could afford to postpone the start of each federal pension to age 70 with boosts of 42 per cent for CPP and 36 per cent for OAS.
We’ll assume, however, that each starts at 65 and that their total income with both pensions flowi ng would be approximately $ 143,240 before tax. With TFSA cash flow of about $ 5,900 a year excluded and the remainder of their income split and taxed at an average rate of 20 per cent, they would have about $ 9,650 to spend after tax, about twice their present allocations.
Modest living and proficient investing have given Matt and Deena a secure retirement. Indeed, there are other assets as well. Matt and Deena have a parcel of undeveloped farm land they hold for sentimental reasons. Taxes are $1,000 a year, but that sum is affordable. One day, they might develop or sell it. Currently, they value it at $125,000.
The strength of the couple’s retirement will be their investment portfolio, Einarson says. The list of stocks is impressive. Matt is in charge and is a sophisticated investor, though he pays his stockbroker two per cent per trade for advice he does not necessarily follow. A four per cent round trip charge is traditional in the sense that this is what many people paid before discount brokers cut fees to as little as a few dollars per trade.
However, if the advice is good — and it has been — and if trades are kept down, as they are with the couple’s buy- and- hold investment style, then the costs are perhaps not too high. Overall, Matt is a value investor. He tries to avoid fad stocks and the ebb and flow of sensational companies and sectors that are flowers one month and weeds the next.
Matt and Deena have about 40 stocks. If they trade 10 of them per year, which is 10 buys and 10 sells, and if each stock is worth 2.5 per cent of the $ 2.26 million portfolio, each position is worth $56,525. Each trade at 2 per cent is $ 1,130. Twenty trades would be $ 22,600 or about one per cent of the portfolio. The cost is held down by infrequent trading. The couple could seek a flatfee model that would make frequency of trades irrelevant. Much research shows that frequent trading lowers long- term returns. The relatively high fees the couple now pays reinforce the preference for buy and hold, Einarson explains.
A SOLID STRATEGY
Matt likes to work with companies with which he is familiar. These tend to be big, familiar names. He does his research, buys when prices are down, and holds until there is a strong reason to sell. He rejects investments in faraway places he does not know and avoids mutual funds, which generate vast numbers of taxable trades yet may produce losses at the end of the year. And he holds a hefty amount of cash to catch bargains when stocks dip.
This is basic buy low and sell high. Matt is self-taught, disciplined and persistent in keeping his portfolio simple in concept and diversified by industry.
“There is no need for Matt to go back to work,” Einarson says. “He and Deena have more than sufficient money to maintain their way of life to age 90 or beyond.”