When should this couple retire?

The couple’s portfolio consists of two RRSPs – one for Bob ($220,000), one for Melanie ($280,000) – and a joint, non-registered account ($250,000). The assets are primarily in money market funds because the couple got nervous and sold all their equities when the markets went into free fall. The exception is Melanie’s RRSP, which is invested primarily in real estate investment trusts; it has had a very good rate of return. The couple don’t usually make full RRSP contributions; last year, Bob contributed $12,000 and Melanie $10,000. Both have unused RRSP room of about $80,000 each.

In terms of other assets, the couple own a condominium unit in town and a large house outside the city, both mortgage-free and both worth about $800,000 each. The couple have a line of credit attached to their condo with approximately $200,000 on it, carrying an interest rate of 4.25%. The couple currently spend about $100,000 a year before RRSP contributions and Bob’s $48,000 in spousal and child support. The couple expect to spend about $75,000 in today’s dollars once Bob retires.

This is a second marriage for both Bob and Melanie. Bob has three children from his first marriage. One of his children, a daughter with Down syndrome, is 25 and lives with her mother. Bob pays spousal support of $2,000 a month, which isn’t indexed to inflation, until he is 65; as well, he is committed to paying $2,000 a month, indexed to inflation, for his daughter until she is 65. Neither Bob nor Melanie currently has a will.

Bob’s two other children, both sons, are financially independent. Melanie also has two sons from her first marriage, one independent and the other in his second year of university.

Bob and Melanie want to know if they can get a better return on Bob’s RRSP and their non-registered account with minimal risk. The couple also want to know if their retirement goals can be met.

The recommendations: both Willis and Wronski recommend that Bob and Melanie work to age 65 as their situation is one in which working longer will make a significant difference.

If the couple insists on retiring early, their financial situation will be very tight. They will have to sell at least one home and may have to sell the other. In addition, they will need to buy insurance to make sure Bob’s financial obligations to his daughter are covered. The premiums for this insurance would reduce their standard of living because the money would have to come out of the $100,000 the couple plan to spend while working and the $75,000 they expect to spend in retirement.

Wronski’s projections show that if Bob and Melanie only work to age 60, their estate at age 95 is likely to be worth less than $100,000; however, if both spouses work to age 65, they could leave about $700,000 in today’s dollars. Wronski is assuming a 5% average annual return after fees, 3% inflation and 4% appreciation on the properties. She also assumes that regardless of when the couple retire, one of the properties will be disposed of at retirement and the other sold when they are 80.

There is more leeway in Willis’s plan because he uses a higher return of 7%. If Bob and Melanie insist on retiring at age 60, they would have to sell one of the properties, so Willis suggests doing so at age 64, when they are close to running out of non-registered assets. This would allow the couple to use up their unused RRSP room and also fully fund individual tax-free savings accounts. As a result of having much more assets in tax-sheltered savings vehicles, Willis’s projections suggest Bob and Melanie could end up with around $1.5 million at age 95.

If the couple work to 65, they could probably keep both properties and still leave an estate of around $2 million in today’s dollars, ($1.6 million of which would be in the value of the properties, which Willis assumes will appreciate in line with his 3% inflation assumption). Willis points out that keeping both properties is a luxury, one that reduces the couple’s potential estate because they don’t have a lot of assets growing in tax-sheltered accounts.

Both advisors’ projections assume that Bob’s daughter survives for the duration of the financial plans. (Many people with Down syndrome die young.) In addition, Willis notes that people tend to spend less money when in their late 70s and beyond – and that few people live to age 95. So, the couple may leave larger estates, but that is not something they can count on.

The most pressing matters for the couple are to prepare their wills and decide how to deal with Bob’s obligations to his daughter; they need to figure out the best way to take care of Bob’s disabled daughter if he predeceases her. If Bob and Melanie die without wills, the government will decide how their estates are divvied up, and that may not be in accordance with the couple’s wishes.

Bob and Melanie also need to decide what to leave to their other children. A question to consider: is the estate – after Bob’s daughter is taken care of and both Bob and Melanie have died – to be divided equally among the other children? Good estate planning is needed in a situation like this because of the possibility of one of the partners dying much earlier than the other and the survivor becoming involved in another relationship.

In terms of providing for Bob’s daughter, both financial advisors suggest a Henson trust. These trusts must be fully discretionary, which means the disabled beneficiary has no guaranteed income and thus can collect government benefits and entitlements. The obvious trustees would be one or both of Bob’s sons, but anyone can be named.

Another priority is to set up a registered disability savings plan for Bob’s daughter. As long as the disabled beneficiary has an annual income below $23,855 (the case for Bob’s daughter), there is $3,500 in matching grants for every annual contribution of $1,500. In addition, a $1,000 bond will be issued by the federal government in the beneficiary’s name, which can be redeemed 10 years after being issued.

If Bob opens a RDSP now and contributes $1,500 a year for the next 20 years – at which point the limit of $70,000 in matching grants and $20,000 in bonds will have been reached – Wronski estimates that the RDSP would have around $110,000 in today’s dollars, about four-and-a-half years of support for Bob’s daughter at a cost of just $30,000.

No other provisions would need to be made for Bob’s daughter if Bob and Melanie work to age 65. However, if the couple retire at age 60, some life insurance for Bob would be a good idea. Wronski strongly recommends that Bob buy a $100,000 life policy, costing about $4,200 a year. Upon Bob’s death, the death benefit would pay into the Henson trust for his daughter.

Wronski notes that it would be better if Bob could afford more life insurance dedicated to his disabled daughter, but that would not be possible if the couple retire at age 60. So, in addition to the RDSP, Bob will have to leave some of his assets in his will to the Henson trust.

If Bob survives his daughter, the policy could be used to supplement Bob’s retirement income or for any long-term health-care needs.

Given the anticipated 7% average annual return in Willis’s plan, he doesn’t see a need for universal life insurance. But he would suggest that if Bob were to retire at age 60, purchasing a term-10 policy on Bob’s life for $100,000 or $200,000 is a good idea. Before Bob retires, his group life insurance would provide $300,000 that could go into the Henson trust and, by the time Bob is 70, the proceeds from the sale of one of the properties will have grown sufficiently to make further insurance unnecessary.

Both advisors suggest paying off the line of credit now, as the couple have the assets and there’s no point in paying the interest.

Willis and Wronski also say that even if Bob and Melanie work to age 65, they need more exposure to equities in their assets. If most of their assets remain in money market funds, they will run out of assets quickly. As well, both advisors feel the concentration in REITs in Melanie’s RRSP is too risky, particularly given that the majority of their total assets are in real estate and that her career is also in real estate.

Willis suggests equities exposure of 60% or 70%, with the rest in fixed-income. The equities should be diversified geographically – he suggests equal allotments to Canadian, U.S. and international equities – and by investment style. He strongly urges regular, quarterly rebalancing.

Wronski favours dividend-paying funds for the couple’s non-registered assets. For Bob’s RRSP, she suggests 35% equities, with some U.S. exposure; 15% in true hedge funds that hedge at least 75% of the risk; and 50% in fixed-income, consisting of laddered corporate and government bonds. She would prefer no REITs in Melanie’s RRSP but understands her comfort with them; so, Wronski recommends equal shares of REITs, equities, true hedge funds and fixed-income.

Willis would charge $4,000-$6,000 for a plan for which he wasn’t going to be managing the assets. If managing the assets, his fee would be 2% for the first $500,000 in assets and 1% for assets above that.

Wronski’s fee would be $2,500 to develop a plan, and 1.5% of the assets for managing the assets.

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