Can Valeria, 53 With Investments Worth $1 Million In Rrsps, Tfsas And Gics, Retire In Two Years?

Valeria* is 53 and single, and wants to retire in two years. She is debt free, owns her Nova Scotia home and has built an investment portfolio worth just over $1 million. Her target monthly income in retirement is $4,500 before tax — similar to her current monthly cash flow needs. She wonders: Is this realistic?

Valeria sees her retirement lifestyle as a seamless extension of her current lifestyle, minus work. She typically takes a trip once a year and enjoys spending time with family and friends. She plans to stay in her home, valued at $350,000, for as long as possible. Before she leaves the workforce she will buy a new car, her biggest foreseeable expense.

“Is it feasible for me to retire at 55?” she asked.

Valeria’s annual income is $92,000 pre-tax. She has a defined employer pension plan with a bridge benefit to age 65 that will pay $1,190 a month at age 55, $1,460 at 56, $1,740 at 57, $2,040 at 58, $2,350 at 59 and $2,690 at 60, dropping to $2,540 at age 65.

“I definitely don’t want to work past 60,” she said.

Valeria’s investment portfolio includes $600,000 in a registered retirement savings plan (RRSP) invested in an aggressive growth bank-managed mutual fund, with $40,700 in contribution room. When she retires she will receive a long service award of $30,000 from her employer and plans to roll it into her RRSP. “Is this a good idea?” she asked.

Valeria continues to maximize her tax-free savings account (TFSA), which holds $130,000 in equities invested in technology, banks and gold; $50,000 in Guaranteed Investment Certificates (GICs), and $41,000 in a conservative bank-managed mutual fund.

She also has $100,000 in cash and $205,000 in cashable GICs. “Is there a better idea for this money?”

Valeria would also like advice on how to start drawing from her investments in the most tax efficient way when she retires, and when she should apply for Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.

“I don’t have children. My goal is to make sure my savings will allow me to live comfortably throughout my retirement. Whatever remains of my estate will go to my nieces and nephews.”

What the expert says

Valeria is well positioned financially to retire at 55, even though her lifetime pension income will drop sharply by taking early retirement , said Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management. “The sooner she works with a qualified professional to create a retirement plan that compares her income options at 55 and 60, the sooner she can confidently decide on what is going to be best for her in terms of when to retire, how to manage her asset allocation for each of her investment accounts and how different spending goals could affect her assets and eventual estate value.”

According to Einarson’s calculations, Valeria’s modest income goal and healthy RRSP balance will allow her to meet her cash flow needs in retirement using just her employer pension and registered assets until age 65. Once the bridge benefit ends, CPP and OAS can more than replace that income without increasing her marginal tax rate and putting future OAS benefits at risk, he said. If she needs extra income or faces unexpected expenses, she can draw from her non-registered cash without pushing too much taxable income into any one year, he said.

“If Valeria retires at 55 and targets an income of $4,000 a month after tax, indexed to inflation, her pension and registered assets can sustain that income to age 93, with government benefits beginning at 65,” he said.

“If she retires at 60, Valeria could raise her after-tax income by 25 per cent to $5,000 a month, indexed to inflation through age 96, still using only her pension, government benefits and registered assets.”

This approach would allow her non-registered savings, TFSA investments and home equity to remain available for growth, discretionary spending or emergencies.

“Her estate may end up being larger than she expects, especially if she continues maximizing her TFSA, does not need to draw on her home equity and leaves other non-RRSP assets untouched,” he said. “She should make sure her will and estate plan are up to date and her wishes are clear, understanding the potential future value of those assets.”

Einarson agreed that Valeria should put the taxable long service award into her RRSP, and when it comes to her non-registered investments and her TFSA, he said there are better ways to invest, especially since her RRSPs and future government benefits can meet her income needs.

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“For example, she could hold her longer-term growth investments in her TFSA to maximize tax-free compounding, while keeping the rest of her funds in cash and some GICs for a more conservative overall allocation. That mix should be reviewed annually based on her income plan, comfort level and how her retirement needs evolve over time,” said Einarson.

“A clear retirement plan, supported by simple illustrations, could give her more confidence and help align her asset mix across accounts,” he said.

“Many people delay retirement unnecessarily because they do not receive the quality planning support they should from the institutions where they invest and pay fees. The result is often a lack of confidence. An independent firm with a co-ordinated approach may be worth considering — one that offers both ongoing retirement planning and integrated portfolio management based on your needs and comfort level.”

*Her name has been changed to protect her privacy.

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