The Globe and Mail - 02.11.2019

SATURDAY, NOVEMBER 2, 2019 | THEGLOBEANDMAIL O REPORTONBUSINESS | B11

A

health scare last year has
Harry looking to retire
early. He’s 53 and hopes to
hang up his hat in a couple of
years. His wife, Laila, who is 48,
plans to work another seven
years or so.
Harry brings in $112,000 a year
in a senior corporate job, while
Laila earns $36,200 a year work-
ing for the government. They
have two children in university
and a small mortgage remaining
on their East Coast home.
Harry is paying into a defined
contribution pension plan at
work where his contributions are
matched by his employer. Laila is
contributing to a defined-benefit
pension plan that will pay her
about $6,000 a year at 65. She is
making extra contributions in
order to “buy back” some years
of service.
Harry knows retiring early will
be a challenge. Given their ages,
“is it possible to think of retire-
ment?” he asks in an e-mail. “Do
we need to downsize our house?”
They wonder, too, whether they
should set aside some money for
their children’s university costs
and in time, their weddings.
“If my wife keeps working, is it
a good idea for me to start with-
drawing from my RRSP when I
retire?” Harry asks. He would
draw enough so that his income
would be taxed at the lowest in-
come tax rate (combined federal
and provincial), which cuts off at
about $44,000.
The couple’s retirement
spending target is $45,000 a year
after tax.
We asked Ian Calvert, portfolio
manager and financial planner at
HighView Financial Group in To-
ronto, to look at Harry and Lai-
la’s situation.

WHAT THE EXPERT SAYS

Harry and Laila’s main goal is to
retire early, Mr. Calvert says.
“They wonder if they can accom-
plish this without downsizing
their house or changing their
lifestyle.” They hope to preserve
as much of their savings as pos-
sible, living mainly off their divi-
dend income.
The family has total assets of
about $1.58-million, of which
$500,000 is their primary resi-
dence, the planner says. By the
time Harry retires in 2021, their
assets are forecast to have grown
to $1.66-million. That assumes
an average annual rate of return
on their investment portfolio of 5
per cent a year (dividends and
capital gains), a 2-per-cent infla-
tion rate on their residence, and
that both continue to contribute
to their pension plans at work.
Laila has the option to buy
back years of service on her de-
fined benefit pension plan back
to 2015, Mr. Calvert says. “Taking
advantage of this is a great idea,”

he says. “Having any amount of

indexed defined benefit pension

income in a retirement plan is a

valuable component.”

In addition to their registered

savings, Harry has $290,000

worth of stocks in a holding com-

pany (jointly owned with Laila),

assets earned when he was an in-

dependent consultant. He kept

the surplus income in his corpo-

ration. The holding company will

provide flexibility in their retire-

ment, the planner says. “Harry

can strategically control his with-

drawals and taxable income in

the form of dividends from this

account,” Mr. Calvert says. “For

instance, he can choose to with-

draw nothing in one year and a

large amount in another, based

on their needs and taxable in-

come.”

To achieve their $45,000

spending goal, Harry and Laila

will need income from several

different sources over the course

of their retirement, the planner

says. In 2022, the first full year in

which Harry is not reporting em-

ployment income, he should

convert his registered retirement

savings plan to a registered re-

tirement income fund (RRIF)

and his pension plan to a life in-

come fund (LIF) and begin with-

drawing more than the mini-

mum, the planner says. Laila

should do the same when she re-

tires in 2026. She would start

withdrawing from her RRSP/

RRIF in 2027.

In his forecast, Mr. Calvert as-

sumes they begin getting Canada

Pension Plan and Old Age Securi-

ty benefits at 65.

“The goal is to keep each of

their incomes at or below

$44,000 a year to have this in-

come taxed at the lowest com-

bined marginal tax rate,” Mr. Cal-

vert says. “The years between re-

tirement and age 65 will be their

lowest-income years so they

should take advantage of this.”

If they both withdraw the

above amount from their sav-

ings, they would have more than

they need for lifestyle spending,

the planner notes. “They should

establish a plan of withdrawing

from their RRSPs, spending what

they need, and using the surplus

funds to build up their tax-free

savings accounts,” he says. “Over

time, they should be watching

their RRSPs decline while their

TFSAs grow, with the goal of

maintaining their net worth.”

If they can achieve an annual

rate of return of 5 per cent on

their investable assets (divi-

dends, interest and capital

gains), they can meet their

spending goal, indexed to infla-

tion, while still preserving their

capital, Mr. Calvert says. “Howev-

er, there isn’t a tremendous

amount of flexibility for emer-

gencies, unexpected costs or

helping their kids with wed-

dings,” he says.

“Also, this is only achievable

with the inclusion of CPP, OAS

and Laila’s pension,” he says.

“The expected return on the

portfolio alone is not enough to

cover their spending and annual

taxes.” If their spending needs

turn out to be greater than

$45,000 a year, “they would have

to accept watching their capital

decline or downsize their house.”

As to Canada Pension Plan

benefits, neither Harry nor Laila

will receive the full retirement

benefit for two reasons, the plan-

ner says. Because they arrived in

Canada in 1995, they will not

have paid into CPP long enough

to get the maximum retirement

benefit. Also, Laila’s current in-

come of $36,000 a year does not

entitle her to contribute the

maximum to CPP.

Finally, Mr. Calvert looks at the

couple’s investments. Harry is a

self-directed investor who has

built a portfolio of Canadian and

U.S. dividend growth stocks.

“The dividend yield on the port-

folio is strong and the reinvest-

ment of those dividends has

been a great strategy,” the plan-

ner says. Many of their accounts

have a yield of close to 4 per cent,

“which is great for retirement

cash flow.”

However, they are heading in-

to retirement with a 100 per cent

equity portfolio. “Few investors

can stomach the ups and downs

of an all-stock portfolio,” the

planner says. “In a bear market,

the dividend income suddenly

takes a backseat to the grief ex-

perienced when watching prices

fall for weeks and even months.”

Special to The Globe and Mail

Want a free financial facelift?

E-mail [email protected].

Some details may be changed to

protect the privacy of the persons

profiled.

Isearlyretirementafeasiblegoal?

Toretirebytheir

mid-50s,couplemust

carefullyplanouthow

theydrawontheir

registeredassets

DIANNE MALEY

FINANCIALFACELIFT

VIKTORPIVOVAROV/THEGLOBEANDMAIL

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STARS AND DOGSJOHN HEINZL

GRUBHUB
PASTFIVEDAYS

ENCANA

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BEYOND MEAT

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RESTAURANT BRANDS INT.

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PASTFIVEDAYS

The people:Harry,53,Laila,48,

andtheirtwochildren.

The problem:Givenhishealth

concerns,cantheyaffordfor

Harrytoretirefromworkina

coupleofyearsandstillmeet

theirfinancialgoals?

The plan:Harryretiresat55and

beginsdrawingonhisRRSP,

whichheconvertstoanRRIF,as

wellashisDCpension,which

heconvertstoanLIF.Hedraws

enoughtotakefulladvantageof

thelowestincometaxbracket.

Lailaretiresat55andbegins

drawingonherRRSPaswell.

The payoff:Beingbetterpre-

paredforsomeoftherisks,

limitationsandpossibletrade-

offsinvolvedinretiringyoung.

Monthly net income:$9,265

Assets:Cash$12,000;holding

companystocks$290,000;his

non-registered$40,000;his

TFSA$33,000;herTFSA

$17,000;hisRRSP$225,000;

herRRSP$160,000;hisDC

pensionplan$200,000;estimat-

edpresentvalueofherDB

pensionplan$84,560;RESP

$14,000;residence$500,000.

Total:$1.58-million.

Monthly outlays:Mortgage

$1,300;propertytax$530;

homeinsurance$100;utilities

$440;maintenancegarden$300;

transportation$530;groceries

$500;clothing$50;lineofcredit

$180;gifts,charity$40;vaca-

tion,travel$300;otherdis-

cretionary$100;dining,drinks,

entertainment$80;sports,

hobbies$100;clubmembership

$40;subscriptions$30;other

personal$10;healthcare$20;

health,lifeinsurance$200;

phones,TV,internet$275;

RRSPs$500;TFSAs$865;pen-

sionplancontributions$1,000.

Total:$7,490Surplus$1,775

goestopayingdowndebt.

Liabilities:Mortgage$65,000;

lineofcredit$50,000.Total:

$115,000

CLIENT SITUATION