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Jillian, 50, has ample resources, but managing her asset portfolio is complex, an expert says

Ontario scientist nears retirement due to strong financial position. Ontario scientist nears retirement due to strong financial position. Photo by Gigi Suhanic/National Post Illustration

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An Ontario scientist we’ll call Jillian, age 50, is approaching retirement due to a strong financial position.

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She brings home $12,000 a month in salary and, if her tech company has done well in the past year, she might get a whopping $2,400 a month bonus. Since the bonus amount varies – and can be nothing – we don’t depend on it for our calculations.

Jillian supports her retired husband, Omar, 60, and helps her 24-year-old son, Bill, with tuition as high as $2,000 a month. Their expenses, net of mortgage payments, savings, and tuition, are $5,125 per month.

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With her successful career and countless savings accounts, a rental property and a house, Jillian has the financial resources to deal with adversity as they arise. But in three years’ time, will she be able to retire early — her current plan — and still comfortably support her family?

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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. from Kelowna, BC, to work with Jillian. The planner’s initial view of her circumstance is that she has adequate resources, but managing her portfolio of assets is complex.

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The first question: what to do with the rent, which is estimated to be worth $400,000? It has a $169,000 mortgage with a floating rate mortgage that is currently at 1.45 percent, but is likely to rise in the near future and have 17.5 years left of depreciation. On an annualized basis, gross rent of $22,200 minus expenses of $6,353 leaves a net income of $15,848. That’s seven percent of their $231,300 equity, an acceptable return to cover costs when it should be rising. Keep it, Moran advises.

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The issue of assignment

The couple’s investment strategy is to hold a 70 percent equity and 30 percent bond allocation. That is traditional and conservative. We assume that, as long as this allocation is in place, their portfolio will generate a total return of six percent minus three percent inflation. They could increase their total returns by reducing bond allocation by 10 to 20 percent, at the cost of more volatility for their financial assets as a whole. We assume that they leave the invested portfolio as it is. In addition, Jillian and Omar have $170,000 in cash. With such a large balance, they should not be forced to sell investments to raise money.

Omar currently has no income. It is therefore opportune for him to withdraw his $376,000 RRSP balance. Jillian would lose the ability to claim him as a dependent, but the gain made from taking money out of the RRSP at a very low tax rate would more than offset the loss of dependent status. An estimated 15 percent of the withdrawal would be withheld. It would come back as a refund.

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Savings and investments

Calculating the couple’s retirement income is challenging, as they have an abundance of savings, including $170,000 in cash, $983,000 in RRSPs, and $170,000 in TFSAs.

Jillian currently adds $19,200 to her RRSP each year with a $9,600 match by her employer, totaling $28,800. If they keep doing this for three years and the account grows at three percent per year after inflation, the current RRSP balance, $983,000, becomes $1,163,169. That amount would support an income stream of $50,922 for the next 37 years to her age of 90.

The $170,000 in their TFSAs is also growing at three percent a year after inflation, and if they add $6,000 every three years, the accounts will rise to $223,967. That money, still growing at three percent a year after inflation, would support a $9,809 payout in 2022 dollars over the next 37 years.

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The couple’s taxable investments add up to $110,000 if the home improvement reserves and a new car are removed. Jillian always wants to have $40,000 in cash on hand. The balance of $70,000 invested 4.5 percent from dividends would yield $3,150 a year forever. They could use a matrimonial loan with interest at the prescribed rate, now one percent a year, but this will likely increase so that Omar can invest the money and pay little to no tax.

The rental apartment generates $15,852 a year, but the return (not counting capital repayments increasing their equity) on their $23,000 in current equity is only 3.7 percent. They can refinance and extend the depreciation or sell it, invest in stocks with hefty dividends, and get the dividend tax credit. We assume they keep the rent and report an annual income of $15,852.

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Retirement in phases

If they add up the income, they would have three phases of retirement income. First, for the two years from when Jillian retires (her age 53, his age 63) until Omar turns 65. Second, for the ten years after he turns 65, when his CPP and OAS kick in. Third, from Jillian’s age of 65, when she can start drawing her OAS and CPP.

The strategy for all phases will be to averaging the RRSP and RRIF payouts, TFSA distributions, rent and taxable investment income over as long a period as possible. That means an early start for all of these reduced-composition sources of income. However, the double-digit tax benefit of a longer period of distribution is better than our assumed three percent rate.

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In Phase 1, they would have two $25,461 RRSP/RRIF income, two $4,905 TFSA cash flows, $15,852 rental income or $7,926 per person, and $3,150 taxable investment income. That’s $79,734. Without tax on TFSA cash flow and a 12 percent tax on the balance, they would have $71,343 to spend per year or $5,945 per month. That would cover the costs.

In phase 2, they were able to add Omar’s CPP at $1,800 per year and are $7,707 OAS. That would bring total income to $89,241. Excluding TFSA cash flow and assuming an average tax rate of 13 percent, they would have $78,915 to spend per year or $6,575 per month.

In phase 3, they would add Jillian’s $7,707 OAS and her estimated $10,834 CPP for a total income of $107,782. Excluding $9,810 TFSA cash flow and assuming 15 percent average tax per person, with TFSA cash flow refunded they would have $93,086 to spend per year. That’s $7,757 per month.

Retirement Stars: 5 ***** out of 5

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