Market research pays off for savvy couple with 12% gains and ‘bulletproof retirement strategy’

But there are risks in optimistic projections

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In Ontario, a couple we’ll call Leo, 63, and Rose, 55, are retiring. Leo quit his bank job a few years ago while Rose continues to work. They take home $8,400 a month. They have three children, two in their early twenties and one in his 30s. Their net worth is $4.45 million, including a $250,000 mortgage with a modest interest rate of 1.9%.

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Leo and Rose have spent many years studying the financial markets and have achieved an astonishing average growth rate of 12.4% with investments, almost entirely in North American stocks which they have studied and follow closely. near. They study the markets and practice the saving grace of all investing – diversification. Their investment horizon is multi-generational. He is fundamentally conservative.

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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, BC to work with Leo and Rose.

Despite their strong finances, they are worried about the effect of rising interest rates, they could increase the $1,200 they are paying each month on their mortgage, which has 20 years to run. These fears are misplaced: even if their mortgage payments double, they could meet the cost by making some savings, extending the amortization, or simply using some of their invested money to pay it off completely.

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“Do we have enough for a long and comfortable retirement? asks Leo. This is the fundamental question for all retirees.

The mortgage

Leo and Rose have the option of keeping the mortgage or paying it off, Moran says. If they repay it, they could then re-borrow the money and invest it, deducting any interest on the loan. But is it worth it?

They could tap into RRSPs of $1,760,000 for the prepayment of the $250,000 mortgage. It would be taxable, so it’s not interesting. They could cash out all of their $195,000 in TFSAs without tax consequences, but if they borrow to replace tax-free investments, the cost of borrowing would not be deductible. It’s not attractive. Finally, they could collect $250,000 of taxable securities. However, their adjusted cost base on this account is $170,000, which means they would have to pay tax on the $80,000 gain. The tax would be 30 to 40%, canceling out the benefit of the maneuver. It’s not worth it, Moran concludes. Better to bite the bullet and pay a little more interest, if necessary.

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Building retirement income

In retirement, Leo and Rose want to have $8,400 a month to spend, just like they have now. To achieve this, they would need $61,000 each or $122,000 of fully taxable income. At this level of income, they would pay an average tax of 18%, assuming the income is perfectly split.

Upon full retirement, the couple will have two defined-benefit, non-indexed pensions: $6,540 per year for Leo and $10,200 for Rose. At age 65, Leo will receive an annual CPP of $12,000, Rose $9,800 a year. Each will receive full Old Age Security, $7,707 a year, and the proceeds of their investments.

Their RRSPs have a current value of $1,760,000. If the accounts grow by 4% per year after 3% inflation, which easily matches its average returns over several decades, they can generate $90,700 per year during the 35 years until the age of 90 years of Pink.

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Their taxable investments, $305,000, growing with the same average annual returns of 4% for 35 years would generate $15,713 per year.

Their $195,000 TFSA with the same assumptions would yield $10,046 per year.

Assuming Rose leaves her job as soon as possible, they would have RRIF income of $90,700, TFSA cash flow of $10,046 and taxable income of $15,713. That’s $116,459. Assuming eligible income splitting, they would pay an average tax of 15% on all income except the TFSA and would have $100,500 to spend per year. That’s $8,374 per month, a few dollars short of their monthly retirement income goal of $8,400.

Once Leo turns 65, his pension, CPP and OAS will begin. Their income would be their pension of $6,540, their CPP $12,000 and OAS $7,707, their combined RRIF income of $90,700, TFSA cash flow of $10,046 and taxable income of 15 $713. This represents $142,706. Excluding the cash flow from the TFSA, they would pay tax at an average rate of 18% and would have $118,830 to spend per year. That’s $9,900 a month.

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Once Rose turns 65, they would have Leo’s pension of $6,540, Rose’s pension of $10,200, her CPP of $12,000, her CPP of $9,800, two OAS pensions of 7,707 $, RRIF income of $90,700, TFSA cash flow of $10,046 and taxable income of $15,713. That’s a total of $170,413. After an average tax of 20%, they would have $138,340 a year to spend. That’s $11,530 per month.

Risk management

There are risks in these optimistic projections. First, the risk: the 4% return we assumed has no bonds to cushion the shocks when stock markets fall. However, the couple’s monthly budget allocates $1,000 for travel and entertainment, expenses that could surely be reduced if dividend streams shrink – an unlikely but possible event.

On the positive side, the couple has no contingent liabilities. Their children are almost gone, the last, a student, will soon find his own home. The mortgage payment, now $1,200 per month, would increase to $1,489 if renewed at double the current rate of 1.9% and would be $1,650 per month at 5%. It is easily affordable given their increased income.

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Given the couple’s growing cash surplus and their interest in financial security, they might investigate the cost of additional medical and hospitalization coverage. They could come up with a plan to donate money to good causes, and they could consider setting up endowment accounts for the education of their future grandchildren. The legal plan and structure would require advice from an attorney experienced in trusts and estates.

“This couple has a rock-solid retirement strategy,” Moran says. “Their combination of defined benefit pension plans, deep savings, a track record of expert portfolio management and a clear comfort with capital markets suggests a secure retirement income. Their vision is multigenerational. They are wise to accept market volatility and stick to their allocations primarily to large-cap stocks in markets they know.

Retirement Stars: Five ***** out of five

Financial position

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