Not even un­em­ploy­ment can scut­tle this cou­ple’s re­tire­ment plans

National Post (Latest Edition) - - FINANCIAL POST - Fi­nan­cial Post email an­drew. al­len­tuck@ gmail. com for a free Fam­ily Fi­nance anal­y­sis

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.


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.


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.”


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