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Can Michael and Lisa enjoy their desired lifestyle if he steps back from full-time work?

This article, written by Dianne Maley, was originally published by The Globe and Mail on December 30, 2022, and features insights from Matthew Sears, Private Wealth Advisor, Associate Portfolio Manager

Michael and Lisa plan to retire early. They earn a combined salary of $350,000. Michael, an Account Manager, also receives an annual bonus and a car allowance. He has considerable registered savings. Lisa, a government employee, has an inflation-indexed defined benefit pension plan that will pay her $126,000 per year at age 61.

So it’s fair to say that the main reason why they want to retire early is because they can. He’s 50, she’s 51.

They have a teenager living at home and a house in Ontario with an outstanding mortgage.

“I want to retire at 55,” Michael wrote in an email. He would continue to work part-time.

“My wife could retire early, but she would pay a penalty [a lower pension] if she retires before 61,” he adds.

Your retirement spending goal is $100,000 per year after taxes, indexed for inflation.

“We are paying off our mortgage aggressively and will be paying it off in full in four years,” Michael writes. “Should we invest this money with a focus on our tax-free savings accounts instead?”

Most of Michael’s investments are in dividend stocks. “Should I diversify my bond investments as I approach retirement?”

We asked Matthew Sears, a financial planner and associate portfolio manager at CWB Wealth in Toronto, to look at Michael and Lisa’s situation. Mr. Sears holds the designations Chartered Financial Analyst and Certified Financial Planner.

What the expert says

In making his forecast, Mr. Sears assumes Michael will retire in January 2028 and work part-time for another four years to 60. Lisa retires at 61.

“Reaching your retirement goal at age 61 is very achievable,” he says, thanks to your pension. At 65, they would receive both Canada Pension Plan and Old Age Security benefits. Additionally, Michael can tap into his registered retirement plan.

That would maintain their spending goal of $100,000 a year, the planner says.

“Taking into account Michael’s RRSP accounts, they could sustain about $120,000 per year in today’s dollars,” says Mr. Sears.

In fact, her $100,000-a-year goal seems “very reasonable” considering her current spending — excluding debt service and savings — is about $81,100 a year.

The forecast assumes they live to be 95, earn an average return on their investments of 5.45 percent, and inflation averages 2.2 percent.

“Michael’s savings are needed because they have some short-term and longer-term goals that aren’t accounted for in this spending forecast, such as: B. a new car and a renovation project for the house,” says the planner.

Should they aggressively pay off their mortgage or invest in their TFSAs?

“There is no right answer, in my opinion, to that question,” says Mr. Sears. “Usually it comes down to either the opportunity cost or how someone feels about bearing debt.”

Both have reasonable TFSA contribution margins that would allow them to invest in a tax-protected account, the planner says. If you think you could get a better return from investing than you can pay for the debt, it’s usually better to invest. They pay 4.3 percent on their mortgage and line of credit.

“With Michael’s plans to retire [from full-time work] four years from now, it may be prudent to pay off the debt faster and eventually divert excess cash flow to her TFSAs, Lisa’s new car, or home renovations,” says Mr. Sears.

“Having the debt paid off before Michael retires helps their cash flow and allows them to be less dependent on their savings until Lisa retires,” he says. Without the mortgage payments, Lisa’s salary would cover her living expenses.

Once Michael retires and the debt is paid off, they might consider some tax planning strategies, says Mr. Sears. During the years that Michael is retired and Lisa is still working, there is no income sharing opportunity on Lisa’s salary. Michael should then attempt to reduce some of his RRSP even if the funds are not needed during those years. This will use up any available tax credits he may have and also smooth out some of the income tax he will pay on the withdrawals. The funds could then be used to top up their TFSAs, finance the new car, or pay for planned renovations.

Once Lisa retires, her pension can be shared with Michael. With an estimated pension of $126,000 a year, Lisa could split up to $63,000 with Michael in her first full year of retirement. In the first full year of retirement (assuming the debt is paid off), her expenses are $125,445. Michael will withdraw approximately $25,000 from his RRSP to cover the difference between Lisa’s pension and her pension costs.

Should Michael diversify his investments as he nears retirement?

To manage investment risk, it’s recommended that an investment portfolio be broadly diversified by asset class, geographic region and investment style, the planner says.

“Michael should focus on determining his portfolio’s long-term target allocation, as that is the most important part of the investment decision,” says Mr. Sears.

Several exchange traded fund providers have online questionnaires that Michael could look at to help determine the right mix. Alternatively, he could look for an investment advisory firm to prepare an investment policy for him. This helps determine its allocation to cash, fixed income or fixed income alternatives, and stocks. “For that, Michael and Lisa should review their risk appetite and ability to take risks.”

Customer situation

The people: Michael, 50, Lisa, 51, and their daughter, 14

The problem: Can they afford for Michael to step down from full-time employment in four years and still enjoy their desired lifestyle?

The plan: Your spending goal will be easily reached. Michael will continue to work part-time for a few more years after his retirement. He withdraws a portion of his registered savings in his lower income years before he has to start withdrawing from his RRSP/registered retirement income fund. He moves to a more diversified portfolio depending on his risk tolerance and capacity.

The Payout: Goals achieved.

Monthly Net Income: $15,658

Financial assets: bank account $10,000; house $1,400,000; his TFSA $5,000; her TFSA $2,000; his RRSP $728,666; her RRSP $30,000; Present value of her defined benefit pension $1,489,724 (calculated earned pension to date of $90,000/year indexed at 2 percent); registered child’s education savings plan $87,000. Total: $3.75 million.

Monthly expenses: mortgage $3,208; property tax $675; water, sewage, garbage $100; home insurance $400; electricity, heat $600; Security; Maintenance $500; Transportation $600; groceries $900; clothing $400; dry cleaning $100; Credit Line $896; Credit Cards $500; vacation, trip $200; Food, drinks, entertainment $700; Personal Care $100; Pets $250; Sports, Hobbies, Club Memberships, Subscriptions $215; vitamins $50; communications $475; MSRP $2,000; TFSA’s $400. Total: $13,269. Surplus $2,389.

Liabilities: Mortgage $149,322 at 4.3 percent variable; Credit Line $113,485 at 4.3 percent, variable. Total: $262,907.


The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional. No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability or its contents or for any consequences arising from its use.