Can Ezra, 52, retire early without jeopardizing the lifestyle he and Daphne want in retirement?

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Daphne does occasional contract work, while Ezra earns $120,000 a year in his management job.Galit Rodan/The Globe and Mail

Ezra was diagnosed with prostate cancer and underwent surgery recently. He is 52. As of now he’s in good health, Daphne, his wife, writes in an e-mail, but they can’t help but worry that the cancer will return.

Rather than working until the traditional retirement age, they should be enjoying life more, Daphne writes. She is 51 and does occasional contract work. Ezra earns $120,000 a year in his management job. They have two teenage children who they expect will be financially dependent on them for some time yet.

So the big question is, can the family afford for Ezra to hang up his hat? His target retirement age is 55.

“I think we will be fine financially, but maybe that’s just wishful thinking,” Daphne writes. “I don’t want hubby to keep working if he doesn’t need to,” she adds. But shifting from saving to spending their savings might be difficult. “He’s a worrier and says that the thought of spending down our savings is a bit anxiety-inducing.”

They also ask about tax-efficient withdrawals from their substantial savings and investments and when they should start taking government benefits. Their retirement spending goal is $75,000 a year after tax.

We asked Gordon Stockman and Gregor Daly of Efficient Wealth Management Inc. of Mississauga, to look at Ezra and Daphne’s situation. Mr. Stockman holds the chartered account (CA), certified financial planner (CFP) and chartered investment manager (CIM) designations. Mr. Daly is a CFA level 2 candidate and has passed the CFP exam.

What the experts say

Based on their assets and spending goal, Ezra and Daphne will have no issue funding their retirement, Mr. Stockman and Mr. Daly say in their report. That includes the cost of private insurance coverage if they feel they need it, although “their wealth would allow for self-insuring instead,” the planners write.

By the time Ezra retires in three years, they will have paid off the remaining balance on their mortgage. “Outside of planned education expenses for their two children ($25,000 a year for each child for four years), which are fully covered by the existing registered education savings plan, the spending for family in retirement is slightly more than $75,000 annually in today’s dollars.

Ezra and Daphne have sizable RRSPs and locked-in retirement accounts (LIRAs). If Daphne were to end up owning both RRSPs later in life – after Ezra’s passing – the mandatory distributions would push her into a tax bracket of more than 45 per cent, the planners note. So Daphne and Ezra should start drawing on these accounts early to keep them from getting too big.

“If Daphne and Ezra withdraw $45,000 (in today’s dollars) each annually starting when Ezra retires at age 55 (in 2025), they could stay in the 20 per cent tax bracket and cover all expenses plus the tax bill.”

Ezra and Daphne also mentioned more travel in retirement, and that they would probably extend their trips from a few weeks each year to a couple of months in the future. They spend about $12,000 annually on their travel. “We actually have found that when extending stays, the costs tend to stay quite similar to shorter ones,” the planners write. This is because renting a house for a few months often costs about the same as renting a room in a nice hotel for a few weeks, they note. As well, people who book longer stays tend to eat out at fancy restaurants less often and instead prepare their own food.

To gauge the effect of more expensive travel on their cash flow, the planners added another $12,000 a year to their vacation budget. “This is doable; however, it will push them into the next tax bracket if they take this money from their RRSPs.”

Next, the planners look at the couple’s investment portfolio. “It’s very aggressive (about 85 to 90 per cent equities), which was fine for asset accumulation,” they say. But being that exposed to the stock market will create a lot of volatility – a major risk factor in the asset decumulation phase. “This is particularly true with clients who are aiming for an early retirement because one or both are likely to be depending on the assets for a long-time horizon.”

Beginning at Ezra’s age 55, they will be drawing around 3 to 3.5 per cent of their portfolio annually to cover all expenses and income taxes. Their portfolio currently produces nearly 2.5 per cent in dividends. This means that they will have to sell holdings each year in order to cover their expenses.

Instead, the planners recommend Ezra and Daphne lower the risk in their portfolio by paring their stock holdings to about 70 per cent. They already hold guaranteed investment certificates, so having GICs laddered to mature each year to provide a guaranteed income would work well for them.

With concerns over Ezra’s health, they were targeting a start date for Old Age Security and Canada Pension Plan benefits of age 65. “We often like to work with the assumption of beginning these benefits at age 70 and working backward from there if there is financial need or serious health concerns,” the planners write. Many people think it makes sense to take the benefits at 65 “to get the best deal from government.” But the greatest risk financially speaking for Canadians in retirement is outliving their assets, not passing away early without maximizing government benefits. “Thus, for most it is better to delay if it does not create a financial burden to do so.”

They could plan to start government benefits at 65, “but we would advise that they revisit this decision later when they have a better idea of his health,” they add. “If there is a positive outlook, delaying until age 70 would be a good financial decision.”

Once benefits begin at either age 65 or 70 and mandatory RRIF/life income fund distributions begin at age 72, they will be forced into higher tax brackets, the planners write. “There is nothing that can be done to avoid that.” Drawing from RRSPs between the ages of 55 and 72 will help to reduce future taxes as much as possible.

Investments with the highest expected return (such as emerging markets or small-cap U.S. stocks) should be held in tax-free savings accounts, where growth is sheltered from all taxes; interest-bearing or inflation-linked investments should be held within an RRSP, where the income is sheltered from taxation; and the non-registered accounts should hold mainly Canadian equities, where they can benefit from favourable capital gains and dividend taxation.

Based on the above assumptions, an inflation rate of 3 per cent and a lifespan of age 95, Ezra and Daphne’s estate will be worth more than $8-million, broken down as follows: their home $3.8-million, the non-registered investments $1.3-million, and their TFSAs $3-million, “an estate that is very tax-friendly for their heirs.” If their children are to inherit, naming them as beneficiaries of their TFSAs would ensure the accounts go directly to them and not through probate.

Client situation

The people: Ezra, 52, Daphne, 51, and their children, 15 and 19

The problem: Can Ezra afford to retire early without jeopardizing their lifestyle?

The plan: Ezra retires in three years and they begin drawing on their RRSPs and RRIFs. They consider postponing government benefits to age 70.

The payoff: The comfort of knowing they have nothing to worry about financially.

Monthly net income: $7,115

Assets: Bank accounts $125,000; GICs $100,000; stocks $360,000; his LIRA $220,000; her LIRA $40,000; his TFSA $130,000; her TFSA $115,000; his RRSP $927,000; her RRSP $800,000; his employee pension plan $13,000; RESP $180,000; residence $1.6-million. Total: $4.6-million

Monthly outlays: Mortgage $170; property tax $550; water, sewer, garbage $150; home insurance $180; electricity $200; heating $100; maintenance $100; transportation $700; groceries $1,000; clothing $100; charity $50; vacation, travel $1,000; dining out, entertainment $600; pets $100; subscriptions $100; health care $340; cellphones $320; TV, internet $155; registered disability savings plan $200; TFSAs $1,000. Total: $7,115

Liabilities: Mortgage $30,000 at 1.97 per cent

Want a free financial facelift? E-mail [email protected].

Some details may be changed to protect the privacy of the persons profiled.

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