They have $1.2 million and no pensions, can they retire?
They say a million bucks or so ain’t what it used to be…but I still think that’s a pile of money.
This couple has $1.2 million and no pensions at all, can they retire?
Read on to find out!
They have $1.2 million can they retire?
Before we get into this latest case study however (thanks to a reader question by the way, I’ve changed the names of the readers for privacy reasons), this is a great time to remind you I’ve done other case studies like this on my site before – there are a few on this Retirement page in particular.
Mike and Julie want to spend $50,000 per year. Did they save enough?
This couple believes they could fulfill their early retirement dreams at age 52. What does the financial math say?
This single senior hopes he can retire at age 60 on a lower income. Is it possible?
What is enough for some is not enough for others
Passionate readers of this site will know I believe personal finance is personal. What works well for some investors or families will not work at all for others.
You need to carve your own financial path.
The 4% rule says that you should be able to ‘safely’ withdraw 4% of your original portfolio each year, adjusted for inflation, for at least 30 years and have a reasonably high chance of having money left over.
This means, in more practical terms based on this rule, that a $1.2 M portfolio should be able to last ~ 30 years (or more) by withdrawing $48,000 in year 1 of retirement ($1.2 M x 0.04), and then increasing that amount over time with inflation.
That said, while having a core spending plan is all fine and good, it’s also having flexibility designed into your plan that is essential for success. You need to consider your spend on travel, hobbies, home renovations but also the ability to cover emergencies and more during retirement.
Rates of return also matter
The potential sequence of many bad years in the stock market could crush a retirement plan if you’re not careful. Also, while less risky portfolios (i.e., more fixed income portfolios) might fluctuate less in the short term, over the long term this will have a big impact on your returns. This means a more conservative portfolio can actually increase the risk of running out of money…
Karla and Toby case study
To help us figure out if this couple, who has a seemingly healthy $1.2 M in the bank, have “enough money” I’ve once again enlisted the help of Owen Winkelmolen, an advice-only financial planner (FPSC Level 1) and founder of PlanEasy.ca.
Owen let’s get into it!
Case study overview
First off, I want to say that Karla and Toby are in a very good financial position for retirement with over $1M in financial assets in their 50s. That is excellent.
That said, they face some risk in the future. Let’s look at the information and numbers they sent you:
- Karla, was and remains stay at home mom, Age 54.
- Toby, marketing manager, makes $110,000 per year now. Age 56. Toby wants to retire early next year in January when he turns 57. You told me they would love to start their winter renting from a Florida condo – sounds great!
- They have lived in Canada their entire life. (re: they expect CPP and OAS benefits to come). Karla has had minimal work based on stay at home mom work.
- They live in Calgary, Alberta and own their home.
- They have no debt other than $19,000 Line of Credit (LOC) balance used for a recent vacation and monies borrowed to fund their adult daughter’s wedding earlier this year.
- Karla has no workplace pension whatsoever although Toby has a small LIRA from a former employer to draw down.
- They have $700,000 in combined assets within their RRSPs; invested in a mix of costly mutual funds.
- Toby has $50,000 in his Locked-In Retirement Account (LIRA). Invested in similar mutual funds above.
- They have $150,000 (combined) invested within their TFSAs. They hold a mix of Canadian REITs and a few Canadian bank stocks.
- They’ve got about $50,000 cash in an interest savings account.
- Toby has $250,000 invested in a taxable/non-registered account that includes a mix of cash, U.S. stocks and some Canadian dividend paying stocks.
All told, they have about $1.2 million in investable assets and their home value is estimated at $550,000. They are considering selling their home as they get older and renting, including renting property in Florida each winter.
You also told me they have one car, now paid for, a 2014 Range Rover SUV and no plans to get a new one until at least five years from now.
Mark those are great details to start some analysis with…
Based on what details you shared with me Mark, because a large portion of their desired retirement spending will come from their investment portfolio, this creates a high risk of running out of money if they were to experience a period of poor investment returns in the future. We’ll get into that in a bit.
For the most part, they’re choosing to retire early, at ages 55 and 57. Based on the spending information Toby and Karla shared they will have a spending target of about ~$70,000 per year after-tax. This is about 80% (give or take) of their pre-retirement income. In using this assumed spend in year 1 of retirement, this represents a 6.1% withdrawal rate in early retirement, which is rather high.
While a high withdrawal rate in early retirement isn’t necessarily a concern, especially if government benefits like Canada Pension Plan (CPP) kick in a few years later, a withdrawal rate of 6% could pose a risk for Karla and Toby in the future.
With this high withdrawal rate, again, based on my assumptions of their spending ~ $70,000 per year, this will likely mean they should consider taking CPP and OAS as early as possible.
I know Mark has written about when to take CPP here – a solid analysis.
Delaying CPP can sometimes be an advantage for retirees. Delaying CPP has several benefits but also a few risks. One of the largest risks is that personal investment assets must sustain a higher withdrawal rate for an additional 10-years before CPP begins at age 70.
For Karla and Toby, delaying CPP might not be possible.
Waiting until age 70 to start CPP would mean sustaining a high withdrawal rate of 6%+ for almost 15-years. This is likely not possible, especially if we experience a series of poor investment returns over the next decade. Instead we’ll plan for Karla and Toby to start CPP at age 60 and OAS at age 65. If investment returns are above average they might be able to delay a few years, but we’ll plan more conservatively to hedge any sequence of return risk.
Starting CPP at age 60 and OAS at age 65 would give Karla and Toby $28,823* in government pensions after they both begin. *Future estimates. This drops their withdrawal rate slightly but not by a very large amount. The reason the drop isn’t larger is because by the time their CPP and OAS benefits begin, Karla and Toby have already drawn down a large part of their investment portfolio at a higher withdrawal rate based on their target spending.
Karla and Toby have already decided that they will sell their home in the future and move into a rental to free up extra capital, as they vacation more in Florida. The exact timing will depend on actual investment returns, but for the purposes of this case study I’ve planned for the sale of their home at age 75. Although the principal residence exemption (PRE) means there is no tax on the sale, we still need to plan for selling fees of around 5%.
Aside from their initial high withdrawal rate, future home sale costs, and subsequent rental expenses, the other thing working against Karla and Toby is that the average investment fee on their investment portfolio is 1.5% (based on their mix of costly mutual funds predominately in their RRSPs).
At 1.5% their portfolio fee is not even above average for Canada, but it still represents a large drag on their registered assets. To see how investment fees and withdrawal rate impact their plan we’ll first look at their projections using their current 1.5% fee.
Scenario 1 – MER 1.5% – Net Worth Projection
Scenario 1 – MER 1.5% – Spending
As we can see, the projections don’t look that great. Karla and Toby run out of assets in their early 90s and we haven’t even taken variable investment returns into account yet. These projections could look much worse if they were to experience a series of poor investment returns early in retirement.
To close the gap, we’ll look at a second scenario where Karla and Toby move to a self-directed portfolio using an all-in-one ETF with a MER of 0.25%.
We’ll also add an annual fee of $750 for a check-in with an advice-only planner (Mark: no affiliation).
You’ll notice in both projections that we’re moving the non-registered assets into the TFSA as new contribution room becomes available each year. I would encourage all investors consider this, since for Karla and Toby, it will minimize the tax on their portfolio, even if there is some capital gains tax triggered on the sale.
I know Mark wrote a comprehensive post about investing in taxable accounts and what to hold where.
We are not however moving RRSP registered assets into the TFSA, which can sometimes be a good strategy. This is because in Karla and Toby’s case we want to slowly draw down RRSP assets throughout their retirement.
This is something many clients may consider then:
- Move any non-registered assets to TFSA over time, while,
- Slowly drawing down RRSP assets.
This is something that Mark recently wrote about in his own financial independence journey.
The main benefit of slowly drawing down RRSP assets is we get to fully use any non-refundable tax credits each year. If we were to draw down their registered assets faster, then some of these non-refundable tax credits would be “left on the table” in the future.
Scenario 2 – MER 0.25% – Net Worth Projection
Scenario 2 – MER 0.25% – Spending
Sequence of returns risk
With a lower investment fee this couple’s projections look much better, but we haven’t yet taken into account variable investment returns.
The projections above were built assuming a healthy retirement spend with a constant rate of return. The latter is not realistic. In reality, this couple like every couple will face some sequence of returns risk, especially in early retirement when their withdrawal rate is higher.
To evaluate this sequence of returns risk we’ll take Karla and Toby’s plan through a number of historical periods of stock, bonds and inflation rates. This will give us a sense of how successful their plan might be. Past returns are a good test of a retirement plan, but they may not fully capture the range of returns we could expect in the future.
Scenario 2 – MER 0.25% – Success Rate
Unfortunately, even with $1.2 M in financial assets, Karla and Toby’s plan is only successful in 4 out of 5 historical periods, and even the successful periods are highly dependent on the sale of their home in the future.
If they were to experience a period of good investment returns early in retirement, they may not have any issues reaching their spending goal, however if they experience average or below average returns then they may need to make changes to their spending to ensure success.
Again, we have assumed a fairly generous $70,000 per year after-tax spend in retirement for them – keep that in mind!
Therefore, by making a permanent reduction to their average spending target by ~ $10,000 per year (or an equal increase in their net income for some years), I certainly feel having a $1.2 million-dollar nest egg and no debt is outstanding for retirement success for a couple that wants to spend $60,000 year year.
Scenario 2 – MER 0.25% – Success Rate With $10,000/Year Less Spending ~ $60,000 per year
They have $1.2 million and no pensions, can they retire summary
Karla and Toby have significant assets to spend in retirement, but they would need to analyze how much they will spend on a year-over-year basis to confirm if $1.2 million saved is enough. But here is the punchline for everyone:
For any couple in their mid-50s that just intends to spend $40k-$50k per year on average from their portfolio, we can see from above this $1.2 million nest egg is enough to retire on – almost regardless of the stock market returns they might face.
For a couple like Karla and Toby that might aspire to spend about $70,000 per year from this amount, they will face some retirement risk depending on actual investment returns.
To make any retirement plan a great plan, including yours, I suggest you really get into the details about what you intend to spend per year, be adaptable with that spending plan if faced with below average investment returns, and try to reduce your investment costs as much as possible. If you do those three things plus build-in some contingency money for emergencies, I think you’ll be well on your way to retirement success.
Again, you can find more retirement essays from folks that have successfully “been there, done that” on Mark’s Retirement page here.
I hope to come back to Mark’s again for more case studies!
Owen Winkelmolen (no affiliation) is a fee-for-service financial planner (FPSC Level 1) and founder of PlanEasy.ca. He specializes in budgeting, cashflow, taxes & benefits, and retirement planning. He works with individuals and young families in their 30’s, 40’s and 50’s to create comprehensive financial plans from today to age 100.
Disclosure: My Own Advisor, and Owen, have provided this information for illustrative purposes. This is not direct investing advice nor should it be taken as such. Assumptions above are for general case study purposes only. If you have specific needs, please consider consulting a fee-only financial planner to discuss any major financial decisions.
Thanks for the encouraging feedback, appreciated. I will read on. Mark
No problem Mark! Rest assured, if your general expenses are low, you’re in great shape 🙂
Happy New Year!
Great article and comments. Its a year after the original post but here goes, posting for interest and comments:
Age 49 and 3/4, wife 44, no kids. Looking at stopping full-time work mid 2021 and try consulting for additional income.
We are currently living in Amsterdam, but looking at returing to Canada after 10 years away and moving to Vancouver Island in a yr or 2.
RRSP (combined) – $450k (mostly TD e-series low MER funds)
TFSA (combined) – $92K (mostly Can blue chip div equities) – had to stop contributing in 2012 when we left Canada
LIRA – $130k (sunlife – damn MER!)
Wife’s commuted teacher pension – $150k
Non-Registered investments – $1.54M (90% equity mostly index funds) including proceeds of Calgary house sale
House equity in Amsterdam – $250k ($724K value – $470k mortgate – very low interest rate!)
The plan is to buy a house on the Island for $700-800K with a small suite. That would give us ~$2.0MM of assets (plus reduced CPP in the future – we may have inheritance we havent included).
Not living in Canada since 2012, I’m not sure what our expenses would be. But we are pretty frugal, drive used cars and have no dependants. We are hoping that the rental suite would cover running costs for the house (tax, insurance, utilities), then we only need the other assets to cover the rest. What I see from the above is to be aware of seqence of return risks and managing expenses. I think there is an opportunity for part-time work to keep engaged and keep our withdrawl rate <3% (plus inflation).
Anyway, thought I'd share my plan as part of the onversation. Thanks for the article, Mark.
Wow. Outstanding Mark.
Sounds like you’ve been VERY good with your money over the years and you can certainly “retire” on $2 MM without any government benefits (although you’ll have some in your financial future). My experience in running various numbers
and projections over the years is…if you can live off 3-4% of your portfolio in any “early years” of retirement (the first 5 years for sure), then you have “enough”. Creating a buffer for any negative sequence of returns risk is key in early retirement. Once you get over that hump, you really have no other major obstacles to overcome.
Since we are about the same age (I’m just a bit younger) then you might be interested in this, my own plan:
From the article: “By age 55 they’ll have saved $994,329 in retirement assets, in today’s dollars, plus an emergency fund equal to 12-months expenses.” Having a one-year cash wedge is key…so did they have enough to spend ~ $50,000 per year starting at age 55? Read on 🙂
I, too, enjoy these real life stories and profiles. Always something to learn, helping to refine/adjust my own plan. I also very much appreciate the comments’ very cordial tone. For whatever it is worth and perhaps to get some pointers back, here in point format is my situation:
Status: single again (twice now 🙂 ) with two grown children, one of whom in university, the other independent
Planning to retire: in 2 years
Investments: 1.85 mil
Residence: paid and valued at 670k
Investments Mix: 50% dividend payers (80% can, 20% usa), 40% real estate (two rental properties), 10% five year gic ladder
Investment being decarbonized (dropped one oil, gas producer as well as pipelines per year. Down to 1 from 6)
Passive income 69k (divvies, gic interest, rents), growing at 3.5k/year so long that i work and 2.5k in retirement.
Having this thing from the old country (italy) to not touch the capital, if possible (i.e. Without compromising own lifestyle) and leave it for the children. Also plan to regularly increase donations to charities and good causes (e.g to decrese co2 and protect the environment).
Working two more years to pay off car and clear a small debt i incurred on behalf of family members. Aside from that, zero debts.
Best wishes to all.
I really enjoy the case studies and especially the comments. For my wife and I (T minus 3 years and 3 months) we focused not so much on the dollar (or Euro in our case) amount but instead what our fixed costs would be in retirement. if everything goes as planned the mortgage car and few other misc debts will be gone. This will leave us in a position where her pension will cover the basics with room to spare. Meaning our investments and savings can be spent.
For this couple a part time job and perhaps tightening the belt a bit should be enough to cover any unexpected expenses.
Thanks Rob. Absolutely smart thinking (I believe) in that you need to focus on how secure your income sources are in retirement.
I believe it’s very prudent to fund all basic expenses and needs via very secure income. Other risks with the portfolio can be taken with any discretionary spending. Focus mostly on equities. Then keep 1-2 years worth of cash in the bank, GICs or related in Germany and you’re good me thinks.
Thanks for the explanation. Definitely very good timing into GICs and then pretty good timing on getting back in to the markets.
We got beat up to the tune of around 35% in 2008 – Mar 9, 2009. If that had happened to you with your retirement timing, it would certainly have been a different story especially with having to sell something to fund expenses.
All in all, a very interesting story.
Thanks DG. All the best.
If we had $1.2 million dollars when we retired 13 years ago we would have thought we died and gone to heaven! ((: Life is too short; retire and have fun you two.
Well put 🙂
Sure thing Gary!
But back in 2006 something between 900k and 1M would probably have the same value – (estimate without searching for data/calculator).
Ya, that’s still a big chunk of change to manage!
Nope! Closer to $650,000. But the markets have been good to us for most of that time. We follow the great paths shown to us by Mark and Henry.
Good stuff Gary.
I developed my own path before finding Henry or Mark. I continue to follow my own and things are good 5.5 years into retirement. Yes, markets have been good.
I enjoy your comments RBull; they are always very well thought out. Boomer and Echo was the first site I followed. Robb, Marie and Mark have helped a lot of people over the years.
Thanks Gary. We’ve enjoyed your comments on here. Your story is a great one. I remember you posting that about your move to GICSs and missing the big market swoon. Amazing. That is very good fortune.
I agree on Robb, Marie and Mark helping a lot of people.
Hope you’re soon enjoying the weather in Virginia?? in your RV.
The RV was sold two years ago due my wife’s MS. We rent a condo in Myrtle Beach for Feb and March now. Things change as we age.
A treat to enjoy Myrtle, been there many times, versus colder Ottawa. Enjoy Broadway at the Beach! All the best to you and your wife Gary.
Thanks for that Gary. Indeed they do change. Nice that you’re able to have some winter reprieve in SC. We know several people with MS and just got back from a 25 day trip with one of them. Good luck to you and your wife.
That’s really amazing, only $650k in investments in 2006 and pulling the pin. What’s more amazing is living through 2008-2009 just 2-3 years into retirement. How did you do it? What were you invested in?
I definitely wouldn’t have felt comfortable with only $650k. Even with our low expenses, I would have wanted at least $1M.
You are a most interesting example for others to consider.
It’s a long story but the short story is we sold all our big bank mutual funds in2006 and bought GIC’s. stayed there until 2010 when we started buying back into the market as our GIC’s came due. It was shear dumb luck. We have had a few health issues as well but life is good.
Luck but genius!!
Sheer dumb luck is usually accounts for a good half of investment returns LOL!!!!
I don’t think it’s shear dumb luck. It took lots of courage to do what you did. Well done.
Gary, that’s great that it worked out so well for you getting out of the market in 2006 and back in in 2010. Very lucky, though. I wouldn’t try that at home!
Very lucky indeed. I couldn’t do that and didn’t!
You did all the work though but more importantly, continued health and happiness Gary. That’s worth more than any portfolio value as you well know.
Hi, Gary, it’s amazing that you can retire on $650K and also not so many years before the financial crisis. It would be really appreciated if you could share with us more details about how you managed so well.
As we are planning our retirement maybe three years from now, successful examples like yours are always helpful and inspiring.
From what I’ve read of your situation May you are in terrific shape. All the best to you and your family.
Thanks Gary. You definitely had great timing with GIC and getting back into the market. Hope you have continuous success in your retirement.
Definitely an interesting case and lots of good comments. I agree that $1.2M with a $70k spend per year with what they are invested in would be too tight for me.
My wife and I were quite similar in that she was stay at home so single salary for us. I fully retired in June, 2013 at 60 with just under $1.5M in investments. Main difference is our expenses were under $50k/yr and by the middle of 2014, we were almost totally invested in dividend income/growth stocks with an average yield of just over 5% with virtually no investment fees.
Since then, our portfolio has increased very significantly but our spending has stayed about the same so we’re good to go.
Given your modest spending Don (you cited ~ < $50k/yr.) with $1.5 M invested that a withdrawal of 3.5% or less. Even without the huge bull run, there would be a historical expectation that you should have been more than fine. Now, with the bull run, that's been confirmed 🙂 Kudos!! Mark
Love these case studies. If they can split their income and depending how they organize where they withdraw from, they can likely get their personal tax rate to below 10%. I would be more inclined to draw from the RRSP to feed the TFSA. They should have lots of RRSP left at age 65 to create the non-refundable tax credit. The trick is to find the most efficient way to get to OAS and CPP with the most assets still intact. The biggest challenge is finding ways to keep the tax low. Having to large an RRSP can create tax challenges when CPP and OAS factor in. Part time work to create even 5K leaves them in great shape.
And they still have a $500K + home to work with! They are in fantastic shape. Incredible you did this on a single salary! Enjoy the well deserved retirement.
Same, that’s our plan too Gruff = use RRSP withdrawals to live from + feed annual TFSA contribution room with any money leftover.
I could foresee those RRSP withdrawals happening in our 50s actually. If we kill RRSP assets before CPP and OAS benefits, or basically use CPP and OAS benefits as income to replace RRSP income now depleted, that seems like an ideal approach since you transfer risk away from you to government and it’s inflation protected. Thoughts?
Appreciate your comment.
I figure our goal will be withdrawn enough from RRSP so that we will not be hit by OAS clawback with mandatory RRIF minimums. It will be pretty difficult to kill all RRSP for us before CPP and OAS benefits. Well, it will be a nice problem to have, so I decide not to worry about it.
I think that’s very smart May….withdraw as much from RRSPs in your 60s to avoid OAS clawback. Conversely, you can withdraw more from your RRSPs in your 50s and 60s such that you defer inflation-protected OAS. Although the government can always change the rules on us…
Good estimate Gruff! Their effective tax rate will fluctuate between 6% and 8% for much of retirement. It changes a bit before and after the sale of the home.
Great case study. Not actually that far off our status. Very similar circumstances. We have a tiny bit more saved and we’re 4 years older (planning to retire next year at 60.5), but it gives us a good feeling to know we’re in a relatively good spot. Thanks Mark!
Thanks DaveG. I was hoping this post would help many investors aspiring to retire soon or thinking if they have “enough” based on their own recent retirement plans/projections.
Owen’s analysis certainly supports my thesis that:
-IF a couple or single person was willing to be flexible with expenses, and
-IF they have a modest to lower withdrawal rate in the early years of retirement (to mitigate sequence of return risk), and
-IF they ensure they try and keep their portfolio both diversified and low-cost….then….
such investors are doing many things right to fund a reasonable 30-year retirement.
Good to know you’re in a good spot as well!
Great analysis and beautiful charts! Ugh, running out of money at age 90- that is worrisome! I’m not a fan of withdrawing anything if I can help it.
I also hope I could live off the dividends. But I guess I will just settle down with investment income will cover my core expenses, and supplement it with touching the capital. I don’t plan to leave a big pile of money for my kids and I also want to retire a little bit early if I could manage.
Yeah May. Like Mark suggested for himself, I’m probably wired similarly and we’re living that now sans capital part. And yes I like large buffers too. Not “insecure” whatsoever but after living that way all our lives its natural to us. We see little need to aim for maximum spending or even stretching beyond that. However I can confess there is a rewiring that needs to take place with some of us in decumulation mode to enjoy the disciplines of our savings phase. I suspect both you and Mark will be part of that club.
Ha, we are wired the same way me thinks!
Thanks GYM! Glad you liked it!
There’s nothing wrong with using capital gains to fund part of your retirement spending. A capital gain is still income, just ask the CRA ; )
Owen, I really enjoyed your analysis and logic applied.
I always read those financial advice columns that are in the major newspapers on the weekend and often cannot make a lot of sense out of what they advised. Maybe just edited too much?
I myself would be too worried to retire that young, with that amount of savings.
We just got a surprise $5000 estimate to treat termites in our home. We are okay with that amount, but 12 years ago that would have been something for me to cry over, I cried when the washing machine broke right before Christmas 14 years ago. Unexpected costs can be unwelcome.
I completely agree with you here. I need to have a big buffer when I retire otherwise I won’t be able to sleep tight. We never know what life will throw on us. Especially this year when we expected our expenses will go much lower after we settled down with the moving, then things happened one after another. We already spent much more than last year although the shopping season not even begins yet.
Right now with a relatively high saving rate, we just feel it’s quite troublesome, but no stress financially. E.g. we have to open the garage door manually before the garage opener fixed. In retirement though, if we have a tight budget with a small buffer, I imagine it will be very stressful.
May, our garage door opener stopped working properly a few years after we moved into a brand new house. We have never gotten it fixed! Originally I was peeved about any costs, but then we just got used to it and then stopped putting our cars into the garage. I thought about getting it fixed last year, and then found I could not locate the two remotes. Then my husband messed up the garage so much again with stuff that all areas were not accessible.
I do not want to have to worry about large unforeseen costs in retirement and like to have a very large buffer saved. I have a lot of cash at the moment. It gives me peace of mind, as the last huge downturn depressed me so much I was worried about retirement and how we would manage. Now I have no worries, because we don’t spend like crazy, no desire to do so.
Savings definitely provide some peace of mind – this is yet another example where I feel adequate cash savings + secure stream of passive income = a sleep easy recipe for retirement success.
Thanks for the kind words.
Yes, great reminder to all Barbara to keep some cash on the sidelines when some crazy things we never expect, happen.
Thanks for your comments Barbara. I do the Financial Facelift columns in the Financial Post from time to time and you’re right that they’re edited quite a bit and they are very limited by the format. An online format like this provide much more flexibility to show charts/tables etc. so thanks again to Mark for allowing me to share!
When it comes to retirement planning I like to recommend two best practices. One is to have an emergency fund in retirement. Access to liquid cash is important to avoid withdrawing at a higher marginal tax rate. And the second is to plan for infrequent expenses like home repairs, vehicle repairs, vehicle upgrades and a few more. These expenses are somewhat predictable over the long-term and can easily represent 10% to 20%+ of a retirement budget. Not including these expenses in the initial plan will definitely lead to some tough decisions down the line.
A very interesting case study and expertly discussed. As an adviser myself (retired) I can agree with the concepts you’ve set out for your clients.
“Aside from their initial high withdrawal rate, future home sale costs, and subsequent rental expenses, the other thing working against Karla and Toby is that the average investment fee on their investment portfolio is 1.5% (based on their mix of costly mutual funds predominately in their RRSPs).”
One would imagine that compared to the other items mentioned in the above quote the1.5% is a rather secondary aspect and when compared should barely rate a mention on the expense front! But it comes to around $18,000. pa. which is a whopping amount, year in year out. Although I am not totally convinced an ETF provides the sole solution, preferring a mix of direct dividend shares, direct bonds and a few ETF’s.
Strangely, the client wants to relinquish homeownership in favour of renting. Not only that, renting in a new country! This can be fraught with problems, particularly as a person ages. Moving away from your local area could remove family and friends support. It also introduces a new system of medical and hospital protocols into the equation which would also be peculiar to a new country. These are issues that only become apparent when required rather than when they are not needed and should be carefully considered.
Money is important, but the lifestyle and quality of life are major factors when retiring. Why not rent out their current home instead of selling it. This provides additional income and provides a foot in the door should circumstances require them to return to live.
Anyway, a very interesting client profile and I hope they can create a wonderful retirement with your help.
PS That sequence of risk graph is an absolute ‘doozy’ to look at!
Great to hear from you Adrian and thanks for your comment.
For my own portfolio, I don’t use just ETFs since I like my dividend raises every year but I do believe they are an excellent way to invest.
I wouldn’t be against renting as I get older. You don’t want the home maintenance, you have the freedom to live and move elsewhere to reduce your cost of living – I don’t think it’s a bad move at all.
Moving permanently out of Canada I would never do but I can appreciate the draw of a warmer climate from our Canadian winters!
A good consideration, re: why not rent out their current home instead of selling it. At least with some money in the bank, they have options and that’s always good.
All the best for your own retirement,
Hi Adrian, thanks for your comments. You’re right, that sequence of returns graph is essentially spaghetti, but it does provide a great chance to discuss sequence of returns risk with clients.
We have no idea what will happen in the future, but I think its important to “inoculate” ourselves against rate of return surprises.
I agree. the sequence of returns graph is great, and very important when making projections. Straight line projections using average historical returns, or even current expected returns are not very helpful, I think.
Well said, nothing in life is a perfectly straight line!
Thanks, Owen and Mark. It’s really helpful to see an analysis like this. As my AA target is also 60/40, I went to taxtips to use 5.37% return and 2.1% inflation to try if we have enough money to retire.
I am pretty insecure financially I guess. If I was in the same situation, I would choose to either work a couple more years or reduce the expenses. At least be flexible with the expenses would help a lot, I assume.
Glad you liked the post. I think the key is…to be flexible with spending. Ensure your basic needs are met with a 3-4% “rule” and then consider spending more in good times 🙂 A 60/40 portfolio is overall, based on my own understanding, an outstanding place to start with/from in early retirement.
You can always increase equities as you get older and keep a small cash cushion as well.
Hi May, you’re right that a bit of extra income or some flexibility with spending is usually all it takes to improve the overall success rate. Don’t forget that this is usually only necessary during periods of very poor investment returns or periods of high inflation.
In the case study Karla and Toby would be ok in the majority of historical periods. But past performance is no guarantee of future results, so its good to understand where there is flexibility in your plan just in case the worst should happen.
Thinking about it, another option is to have some side hustle after retirement. For example, having some home stay students?
That’s smart. Having a small side hustle or part-time gig in semi-retirement or whenever I think is ideal to help any financial plan. It’s part of the reason why I enjoy this blog – some minor income from it. We’ll see if that continues. If not, I’ll house sit or something!
Interesting case study and very good analysis Owen.
Yes, like most people they have lost some potential retirement lifestyle due to higher investment fees for years. Changing that now for upcoming retirement will at least make a decent improvement for many years.
I am curious about the assumptions used for asset allocation and investment returns in your modeling.
Hi RBull, for Karla and Toby we have a 60/40 portfolio of equities and fixed income.
As for return assumptions, with a 60/40 portfolio we’re using 5.37% after fees (for the low-cost portfolio) along with an inflation assumption of 2.1%. This is based on the projection assumption guidelines from FP Canada that gets updated annually.
Thanks for sharing this. 5.37% for 60/40.
Curious, would you recommend folks start with this Owen, in retirement and then increase their equity as this couple ages? re: equity glide path?
Hi Mark, because we’re usually working on long retirement periods of 30-40+ years its important that we’re not too conservative, typically asset allocation is based on the client’s risk profile and past investment experience and it stays the same for the full retirement projection.
The one change we do make quite often though, especially for very low-cost DIY investors, is that we build in a fee increase around age 80 in case they no longer want to be as involved in managing their own portfolio.
I think that makes sense. I will potentially go with some form an all-in-one fund in my latter years or just a couple of ETFs to simplify everything for my wife and I.
I can see that happening with us too Mark, although at some point there might need to be outside intervention even with a simple ETF portfolio.
Oh for sure. I wouldn’t rule out an annuity for us in a number of years down the road…
Hi Cannew, that’s great that you’ve been able to reach your retirement income goal! I agree. it would have been great to meet these clients even 5-years earlier. Its frustrating to imagine how much extra in fees they’ve paid on a $1.2M portfolio, even over just the last 5-years.
When I looked at the projection charts and scenarios it reminded me of what our bank prepared for us when we approached them to access our financial position. We were in our 50s and didn’t have as much investment as with this case study. Of course ETFs were not considered a viable option back then, but their advice for us was similar, cut back on projected expenses and save more.
Too bad they didn’t ask their questions earlier, rather than waiting till they are actually ready to retire (or with a year or so). They certainly saved enough money but as suggested invested it……, well not in a manner I’d have suggested. We chose a different path than recommended and thankfully reached our retirement income goal, which continues to grow much faster than our needs.
Well done cannew but I think for Karla and Toby, the key is, what you have already figured out of course…is with low-costs, dividend growth and/or the ability to be flexible with spending you can have a very good retirement if you have saved enough by your 50s.
I suspect the rise of low-cost all-in-one ETFs will help many prospective retirees like Karla and Toby.
All the best and thanks for your comment.