Marie and Jonathan Face Retirement Questions
At 69 and 73, Marie and Jonathan are entering a critical financial phase. The British Columbia couple is beginning to draw on their savings after years of building a modest investment portfolio. As Marie fully retires, she’s concerned their savings may not stretch far enough to sustain them long-term.
Until recently, Marie worked part-time, bringing in approximately $3,000 a month. Now retired, she wants their investments to replace that income. Their current monthly expenses are roughly $7,600, yet combined income — mostly from the Canada Pension Plan (CPP), Old Age Security (OAS), and Jonathan’s part-time work — totals only $5,000. This leaves a monthly shortfall of about $2,600.
Assets and Investments
The couple owns a home worth $1.4 million, with a $192,000 mortgage at 3.89% interest, costing them $752 every two weeks. They plan to stay in the home for at least five more years, reassessing their options when the mortgage renews.
They have $490,000 in an unregistered investment account, managed by a financial services firm. The portfolio is diversified across cash, money market funds, Canadian and international equities, and segregated funds. These investments have generated an annual return of 6.7%.
In addition, they hold $30,000 in a tax-free savings account (TFSA) with the same firm, delivering a 10% return, and another $10,000 in a separate TFSA at a different institution. They’ve accumulated around $160,000 in unused TFSA contribution room.
Key Financial Questions
Marie wonders if they should shift funds from their unregistered account into their TFSAs to take advantage of tax-free growth and withdrawals. The couple is also debating whether to use some of their investments to pay off the mortgage, or let the investments continue to grow.
They each have a registered retirement savings plan (RRSP) with a combined value of $12,000. However, Jonathan’s RRSP has not yet been converted to a registered retirement income fund (RRIF), even though he’s 73 — a step legally required by the end of the year he turned 71.
What the Experts Recommend
Graeme Egan, a certified financial planner and portfolio manager at CastleBay Wealth Management in Vancouver, says their investment returns are currently sufficient. However, he strongly recommends creating a comprehensive long-term cash flow projection to evaluate sustainability over time.
To address the $2,600 monthly shortfall, Egan advises setting up an automatic withdrawal plan from their non-registered account. “This withdrawal won’t be taxable, but they will owe tax on any interest and dividends generated,” he explained. “Because the account is jointly held, they can split the income, reducing their overall tax burden.”
Mortgage and TFSA Strategies
Despite the temptation to eliminate the mortgage, Egan suggests holding off. “They are in a transitional period,” he said. “It’s better to maintain flexibility and reassess mortgage repayment and potential downsizing in five years.”
On the subject of TFSAs, Egan notes that transferring funds from their unregistered account might not be tax-efficient. “Given their income will be modest and partly dividend-based, they’ll likely remain in low tax brackets,” he said. “They can gradually contribute to their TFSAs using their accumulated room.”
He also recommends consolidating the $10,000 TFSA with the $30,000 one for simpler management. This fund should serve as an emergency reserve for unexpected expenses.
RRSP and Portfolio Adjustments
Egan emphasizes the importance of converting Jonathan’s RRSP to a RRIF, as required by law. “He can reduce the minimum required withdrawal by basing it on Marie’s younger age,” he added. Marie should allow her RRSP to continue growing until she turns 71.
In terms of asset allocation, Egan recommends a 50/50 mix of equities and bonds over the next five years. “They should reassess after that period, likely reducing equity exposure as they age,” he advised.
Cost-Effective Investment Options
One concern is the cost of segregated funds, which often come with high management expense ratios (MERs). “These funds guarantee principal but can be expensive,” Egan noted. He recommends exploring exchange-traded funds (ETFs) as a more affordable alternative.
“ETFs usually have lower MERs and come in active and passive forms,” he said. “All-in-one asset allocation ETFs are available, offering balanced portfolios at a lower cost. Even with advisor support, ETFs can be a smart, diversified investment choice.”
Planning for a Financially Secure Future
Marie and Jonathan are in a decent financial position, but to ensure their funds last throughout retirement, proactive planning is essential. By setting up structured withdrawals, managing taxes efficiently, and evaluating investment costs, they can better align their finances with their lifestyle needs.
Though they face some uncertainty, expert guidance and thoughtful strategy adjustments can offer them the long-term financial security they’re seeking.
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