Tom and Judy's retirement plan is a complex financial puzzle, and it's a good thing they have a financial planner to help them navigate it. With a $1.16 million portfolio, they're in a strong position, but there are still some key decisions to be made. The question is, can Tom afford to retire by 63 with their current financial setup? The answer lies in a careful balance of tax efficiency, investment strategy, and lifestyle choices. Here's a breakdown of their situation and the expert advice they've received.
The Numbers Game
Tom and Judy's financial situation is impressive. They have a combined portfolio of $1.16 million, with $620,000 in registered retirement savings plans (RRSPs) and $460,000 in a locked-in retirement account. These accounts are heavily invested in equities, providing a solid foundation for their retirement goals. Additionally, they have $80,000 in tax-free savings accounts (TFSA) with a similar equity allocation. Their employer pension, worth approximately $100,000 annually, and the potential for Canada Pension Plan (CPP) and Old Age Security (OAS) benefits further strengthen their financial position.
However, the key question is whether they can achieve their desired after-tax retirement income of $120,000 per year. According to Ed Rempel, a financial planner, they are already well ahead of their goal. He estimates that they need $510,000 to achieve their desired retirement income, and with their current portfolio, they have a comfortable $1.16 million, which is 128% more than needed.
Tax Efficiency and Pension Timing
One of the critical decisions Tom and Judy face is whether to delay their employer pension until age 65 or later. Rempel advises against this, suggesting that income splitting when the pension starts and maximizing their investment returns are better strategies. Pensions typically offer a guaranteed rate of return, but Tom and Judy's equity-heavy investments may provide a higher return, potentially offsetting the loss of lifetime income from delaying the pension.
Deferring CPP from age 60 to 65 could generate an implied return of 10.4% per year on their investments, which is significantly higher than the pension's guaranteed rate. Deferring until age 70 provides a more modest 6.8% return. Therefore, starting CPP and OAS at age 65 seems to be the optimal choice.
Bicoastal Lifestyle and Housing Decisions
The couple's desire for a bicoastal lifestyle adds another layer of complexity. They are considering dividing their time between British Columbia, where their son lives, and Nova Scotia, where they own their principal residence and a cottage. The question arises: should they purchase a home in British Columbia or rent? The tax benefits of living in a lower-tax province could be significant, but the higher house prices in B.C. must be considered.
Rempel suggests that the maximum home they could afford with a safety margin is about $1.25 million. Selling their Nova Scotia home for $750,000 and clearing just over $700,000 could allow them to purchase a home in B.C. for around $850,000, with a mortgage of $125,000. This would provide a similar cash flow to their current situation. They have a substantial margin of safety, with approximately $800,000 more than needed for their desired lifestyle.
Rempel advises keeping between $100,000 and $200,000 as a margin of safety, allowing them to use up to $600,000 for mortgage payments. They could withdraw 4% annually, or $24,000, which would be about $17,000 after tax, to make payments on a mortgage of around $400,000. The sale of their cottage should not be factored in immediately, as they may keep it for many years, and their equity investments should provide a higher return than mortgage rates over time.
In conclusion, Tom and Judy's retirement plan is well-positioned, but careful financial planning is essential. By following the expert advice, they can navigate their complex financial decisions, achieve their retirement goals, and enjoy their desired bicoastal lifestyle without breaking the bank.
