Globe and Mail: What’s the best strategy for this 66-year-old to join his wife in retirement?


 At 66, Vinnie is planning to hang up his hat come Jan. 1 and join his wife, Violet, 69, in retirement. He will be leaving behind earnings of $130,000 a year.  GLENN LOWSON/THE GLOBE AND MAIL

At 66, Vinnie is planning to hang up his hat come Jan. 1 and join his wife, Violet, 69, in retirement. He will be leaving behind earnings of $130,000 a year.

GLENN LOWSON/THE GLOBE AND MAIL

DIANNE MALEY

SPECIAL TO THE GLOBE AND MAIL

PUBLISHED DECEMBER 18, 2015UPDATED MAY 28, 2018


At 66, Vinnie is planning to hang up his hat come Jan. 1 and join his wife, Violet, 69, in retirement.

Thanks to his career in financial services, Vinnie knows it may be tight. He will be leaving behind earnings of $130,000 a year.

Vinnie has two questions: Is it reasonable to plan on withdrawing $80,000 a year from their registered savings (RRSPs/RRIFs) assuming a 7.5 per cent annual return? "Secondly, to give us some breathing room, should I take the cash surrender value of my paid-up life insurance policy ($102,000) early next year, place it in an RRSP and recover about $50,000 in income taxes?" The policy would pay $250,000 to his beneficiaries if he were to die. He would use the tax refund resulting from the RRSP contribution to pay off the car loan, giving them more cash flow. Car payments are $782 a month at no interest with about 23 months remaining.

Vinnie has no work pension. Violet gets a pension of $2,100 a year, which gives them health and dental coverage.

They have two grown children who do not depend on their parents for support.

Violet and Vinnie have a suburban Toronto house, which they plan to downsize at some point, and a cottage.

"With our RRSPs [registered retirement savings plans] converted to RRIFs [registered retirement income funds], can we expect to outlive our money based on our current budget?" Vinnie asks in an e-mail. Their retirement spending goal is $72,500 a year after tax, plus another $6,600 a year for travel.

We asked Jason Pereira, a partner and financial planner at Woodgate Financial Inc. in Toronto, to look at Vinnie and Violet's situation.

What the expert says

Vinnie should surrender the insurance policy and take the cash value, Mr. Pereira says. "This income will be partly taxable."

Based on his income and his contribution room, he should put $50,000 in his RRSP, which would generate a tax refund of $21,086, the planner says. He should use the remaining insurance proceeds to pay down his line of credit, but not the zero-interest car loan.

In drawing up his plan, Mr. Pereira assumes Vinnie retires Jan. 1, 2016, that they spend $72,500 a year, plus $6,600 a year travelling, and that inflation averages 3 per cent a year. He factors in car purchases of $50,000 in 2019 and $30,000 in 2025. As well, he assumes the couple sell their home and buy a condo valued at $200,000 less. The cost of the move is estimated at 7 per cent of the home's value.

After Vinnie cashes in his insurance policy and retires, their assets, excluding real estate, will add up to $996,436.

"Based on their nest egg, the plan is rather tight," Mr. Pereira says. The plan would not work if they earned 3 per cent to 5 per cent on their investments rather than the targeted 7.5 per cent, he adds. "The plan requires a minimum return of 6 per cent to succeed."

In 2016, Vinnie will get a one-time benefit from cashing in his insurance policy, which will skew their income. In 2017, the first year of regular retirement income, they will get a combined $104,605 a year, or $89,318 after tax, broken down as follows: a combined $34,710 in government benefits, $15,619 in pension income (her pension and withdrawals from his LIRA) and the remainder from their RRSP/RRIF withdrawals.

The questionnaire Vinnie and Violet filled out pegged them at "average" risk tolerance, the planner notes. A portfolio of 60 per cent stocks and 40 per cent bonds could be expected to yield an average return of 7.4 per cent a year. This would fall to 5.8 per cent over time as they grew older and shifted more assets to fixed income.

"The clients' portfolio is much more aggressive than that, with less than a 20 per cent allocation to bonds," the planner says. "While the higher equity weightings provide the potential for higher returns, the increased volatility exposes the clients to a greater sequence of events risk and endangers the clients' retirement," Mr. Pereira says. He is referring to the danger that the stock market could fall early on in the couple's retirement, forcing them to draw income from a smaller savings pool.

"If the clients are to be successful, they need to adopt a sounder asset allocation strategy." At some point, Violet and Vinnie should use part of their savings to buy an annuity, guaranteeing an income stream for life.

After Vinnie has retired, the couple can split their RRIF withdrawals and pension income, so they will both stay below the clawback threshold for OAS benefits, the planner says. Any future saving should go to their tax-free savings accounts.

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CLIENT SITUATION

The people: Vinnie, 66, and Violet, 69.

The problem: Can they afford for Vinnie to retire Jan. 1?

The plan: Retire as planned. Cash in the insurance policy and pay off the line of credit. Take immediate steps to reduce their investment risk by shifting to a more diversified portfolio. Consider using some of their savings to buy an annuity at some point.

The payoff: A financially secure retirement with their real estate to fall back on.

Monthly net income: $8,870

Assets: Non-registered $10,000; RRSPs $586,258; his TFSA $10,000; his locked-in retirement account $288,178; cash surrender value of his life insurance policy $102,000; house $600,000; cottage $300,000. Total: $1.9-million

Monthly disbursements: Property insurance $162; maintenance and improvements $583, utilities $1,076, miscellaneous shelter $166; grocery store $900; clothing $100; personal care $75; entertainment, restaurants $900; clubs $30; hobbies $120; charitable $20; alcohol/tobacco $450; travel, vacation $550; cottage maintenance $50; cottage taxes $254; cottage insurance $162; cottage utilities $275; auto insurance $170; auto maintenance $180; fuel, oil $360; parking $10; line of credit $140; car loan $782; RRSP contributions $284. Total: $7,799

Liabilities: Car loan $17,205; line of credit $44,417. Total: $61,622

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