With $2.4 Million In Assets, Does George Need To Double That To Retire At 50?

At 38, and with approximately $2.4 million in net assets, George* is focused on his next goal: increasing his young family’s net worth to $5 million over the next 10 years. It’s a target he hopes will create a level of financial stability that will pave the way for retirement at 50, if he and his wife, Eileen,* 35, so choose.

The couple have two pre-school aged children and, while they are on the same page when it comes to living within their means, Eileen is more confident in their ability to enjoy an expanded lifestyle today than her husband.

“I don’t have a good sense of whether our net worth is enough,” said George. “I’m sensitive to costs and always looking to save more versus spend more. What is the financial benchmark for people our age?”

George earns $275,000 a year before tax and Eileen’s annual pre-tax income is $140,000. Their annual expenses are approximately $170,000. This includes about $62,000 in mortgage payments on the family home and between $10,000 and $20,000 on travel, the one area where the couple are happy to splurge.

They live in Ontario and their primary residence is valued at approximately $1.3 million with an outstanding mortgage of about $1 million. They converted the basement into a rental unit, which brings in about $22,000 a year. They also own two rental properties in Toronto with a combined value of $900,000 and are 50 per cent owners in two additional rental properties with a combined value of $850,000. The rental properties are self-sustaining, with rents covering mortgage payments and maintenance.

George and Eileen are considering a move to a larger home in the next year to 18 months, a purchase they anticipate will cost between $2 million to $2.5 million. As with their current home, they plan to create a rental unit that will help address expenses.

A self-directed investor, George has built an investment portfolio valued at approximately $1.25 million. This includes nearly $300,000 in tax-free savings accounts (TFSAs), approximately $530,000 in self-directed registered retirement savings plans (RRSPs), about $40,000 in a registered education savings plan (RESP), all invested largely in technology stocks with some blue-chip banks and utilities. He also has $17,000 in an unregistered account and approximately $60,000 in unvested company stocks. George and Eileen also have employer-sponsored RRSPs worth a combined $285,000. These are invested in growth mutual funds.

George views the rental properties, which he purchased over a span of 10 years, as long-term investments, so long as they remain self-sustaining. He wonders, however, if this is the right approach, particularly when it comes to managing income in the most tax efficient way. “Is real estate the way to go, or should we sell some of the rental properties and invest the proceeds into the stock market? What is the right balance between real estate and stocks?”

He has set his target net worth at $5 million, but wonders whether it is necessary? “Is $2.4 million for a couple in their 30s with two kids okay? Are we in a good position? At the same time, I want to continue to see our net worth grow.”

What the expert says

With the median net worth for couples with children under the age of 18 being $645,900 in 2023, according to Statistics Canada’s latest figures, “George and Eileen are in an exceptional financial position for a couple their age,” said Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management. “They need a comprehensive retirement plan to see it,” he added.

George’s goal of reaching $5 million by age 48 is not necessary in order to retire early and fund the couple’s current estimated $170,000 lifestyle, he said, adding it is highly achievable, and with a much more conservative and diversified approach.

“To get their net worth to grow by $2.6 million over the next 10 years, if they invest $100,000 of their surplus income each year, they only need a modest 4.5 to five per cent annualized return across their total net assets to cross the $5 million line. At a safe 3.5 per cent withdrawal rate, $5 million generates $175,000 in inflation-adjusted annual income, making retirement at 50 completely viable,” said Einarson.

“That said, there are significant risks to address between now and then, and they all need to be discussed through the planning process.”

George and Eileen’s wealth appears roughly balanced between real estate and equities, Einarson said. However, the underlying exposure is highly concentrated. Their real estate is largely tied to one geographic area and their stock portfolio is heavily weighted toward one sector.

“As a general rule, holding more than 30 per cent of a portfolio in any one economic sector should raise concerns,” said Einarson. “This is particularly true when it comes to real estate, which is widely viewed as a stable investment. But, as George has seen, publicly traded stocks can offer stronger growth potential, greater liquidity, dividend income and fewer unexpected costs than owning rental properties.”

Einarson recommended George and Eileen review how their rental properties are owned and financed, as the current structure may expose them to legal, tax, liquidity and partnership risks. Mortgages should be structured in a way that protects their broader investment portfolio, he added. “They may have to bring an accounting professional. They should also try to allocate debt to the rental properties rather than their principal residence since rental-property interest may be deductible while principal-residence mortgage interest generally is not.”

Einarson said upgrading to a $2.5 million home will dramatically shift their asset allocation, absorbing an extra $1.2 million in capital. “Even with a secondary basement suite, a $1.5 million-plus mortgage will drastically choke their monthly cash flow surplus, reducing the funds available to feed their stock portfolios and slowing progress towards their goals,” he said.

“All of this points to the need for a comprehensive retirement plan, which will allow them to run different scenarios to assess the impact of their decisions and demonstrate their ability to enjoy an expanded lifestyle with their family today.” Einarson said. “It will serve them far better than relying on an arbitrary asset target. The right next step is to invest in retirement income planning now and potentially professional portfolio management as well.”

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*Names have been changed to protect privacy.

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