Overview

Nick, aged 65, is enjoying his retirement, while his wife Heather, at 64, continues her self-employed work, earning approximately $40,000 annually. Despite owning three investment properties, they are currently renting and have set their sights on purchasing a scenic waterfront property in British Columbia, with a price tag of around $1.2 million.

Financial Plans for Their Children

In a recent email, Nick mentioned their renewed status as first-time home buyers this year and expressed their desire to open First Home Savings Accounts (FHSAs) for each of their three children, aiming to assist them in earning down payments for their first homes.

Retirement and Financial Planning Queries

Their financial queries include whether Heather can consider fully retiring and determining the best time to start drawing benefits from the Canada Pension Plan (CPP). While Nick is already receiving Old Age Security (OAS), they are contemplating the potential benefits of investing in a whole life insurance policy to enhance their investment diversifications—currently, they boast a mix of stock-and-bond ETFs, private mortgages, and Real Estate Investment Trusts (REITs).

Annual Spending Goals

They aim for an annual post-tax spending of $148,000, seeking guidance from Warren MacKenzie, an independent financial planner in Toronto. He elaborated on their shared ambition to enjoy a secure retirement without the stress of financial instability while also assisting their children with home ownership.

Contributions to Children's FHSAs

Nick and Heather plan to contribute $40,000 each to their children's FHSAs, which Mr. MacKenzie views as a wise strategy to give the youngsters a financial foothold. Furthermore, to ensure their estate is managed smoothly without familial disputes, they have opted to appoint a lawyer rather than one of their children to serve as executor of their estate.

Financial Projections

Assuming a 5 percent average investment return alongside a 2 percent inflation rate, Mr. MacKenzie confirmed that their financial projections indicate they can reach their designated spending goals. They intend to sell all rental properties over a three-year span to mitigate capital gains tax.

Projected Lifestyle Expenses

Post-purchase of the new home, their baseline lifestyle expenses will amount to about $70,000 annually. This figure will be complemented by roughly $60,000 for mortgage payments and $20,000 annually for a whole life insurance policy. Notably, it is projected that by the time they reach 85, they may sell their sailboat, potentially reducing yearly expenses by $10,000.

Regular Reviews on Retirement Strategy

As a proactive couple, Nick and Heather are aware of potential financial pitfalls and understand the importance of conducting regular reviews on their retirement strategy. Mr. MacKenzie highlights that even slight reductions in spending over a decade could significantly offset unforeseen financial setbacks.

Investment Portfolio Diversification

With a calculated asset mix comprising of approximately 23 percent interest-earning investments, 45 percent stocks, and 32 percent real estate, they have reasonable diversification; however, Mr. MacKenzie stresses the need to restructure their portfolios to avoid excessive stock holdings in their RRSPs, suggesting they transfer these stocks to a taxable account to capitalize on the lower tax rate for capital gains.

Managing Investments Independently

Nick has successfully navigated investments independently, with an average return of 7.5 percent. Still, the planner recommends establishing a comprehensive management strategy in case anything were to occur, ensuring financial stability for Heather.

Cash Reserves and Debt

Currently, they have substantial cash reserves amounting to $100,000, but Mr. MacKenzie points out the illogic of holding cash with almost zero interest while being $90,000 in debt at non-deductible interest rates.

Timing CPP Benefits

Nick and Heather are considering when to commence taking CPP benefits. Given their healthy lifestyle, the planner suggests delaying the start of CPP until age 70 for a 42 percent increase in benefits compared to starting at 65. They will begin their OAS at 65, as their income remains below the clawback threshold.

Projected Net Worth

By age 70, after starting CPP, their net worth is projected to reach approximately $2 million. If they live to 100, this figure may decrease to around $1 million, adjusted for today’s purchasing power.

Cash Flow Projections for 2031

When projecting cash flow for 2031, they can expect CPP benefits of $35,000, OAS benefits of $19,800, and defined benefit pensions totaling $9,700, amassing $64,500 yearly. Their investment portfolio is anticipated to grow beyond $1 million at a rate of $50,000 annually.

Whole Life Insurance Policy Values

Furthermore, should they purchase the whole life insurance policy, the cash surrender value is expected to increase by about $15,000 annually. Their home value, after accounting for inflation, could appreciate by about $25,000 yearly while chipping away at the mortgage by $30,000 annually—culminating in a net worth increase of around $185,000.

Combined Expenses and Tax Strategy

However, combined expenses will total approximately $201,000, with essential spending and obligations such as mortgage payments, life insurance, and taxes. They won’t fully leverage the lowest tax bracket until CPP starts at age 70, suggesting that withdrawals from RRSPs and RRIFs should increase taxable income to approximately $58,000 to optimize tax efficiency.

Taxable Income Management

Nick and Heather should aim for equal taxable income to ensure that one does not end up in a higher tax bracket. By moving money from non-registered accounts to TFSAs and FHSAs, they will position themselves better for future financial planning.

Whole Life Insurance Policy Consideration

Aiming to allocate over $20,000 yearly towards a whole life insurance policy, Nick and Heather need to weigh the benefits against their other lifestyle objectives, especially if maximizing their estate isn’t their primary goal.

Conclusion

In summary, this couple—Nick and Heather, along with their three children—must navigate the complexity of retirement planning while aspiring to provide support for their children and fulfill their desire for a waterfront property. By carefully implementing financial strategies and constantly reviewing their plans, they are on the right path toward achieving a comfortable, secure retirement.