Couple Ask If They Can Hit Their Retirement Goal Of $4 Million By 2030

Alberta-based couple, Greg* (50) and Giselle (46) are parents to three teenage children and have hit a pivotal point on their road to retirement in five years.

They plan to sell one of their two rental properties this year, and want advice on the right asset mix that will allow them to build up their current investment portfolio to their target of $4 million in 2024 dollars by 2030. This will allow them to generate $6,000 a month in 2024 dollars after tax and net of inflation – the amount of their current monthly expenses. When Greg does retire, he and Giselle would like to make a more conservative shift in their investment portfolio to enable them to meet their expenses without drawing down principal savings.

Greg works at a growing software startup and earns about $210,000 a year before tax with scheduled annual increases of about $22,000 for the next five years, so that by 2030 his annual income will be about $320,000. Giselle is a musician and earns about $10,000 a year. The couple equally own both rental properties, which, combined, generate about $96,000 a year net of expenses.

They continue to save and their current investments are worth about $2.87 million. This includes the two rental properties. The first is valued at $1.2 million and has a $300,000 mortgage, and they are in the process of selling it. The second is valued at about $1.1 million and does not have a mortgage. Their investment portfolio also includes $380,000 in a registered retirement savings plan (RRSP) for Greg and $493,000 in Giselle’s registered retirement income fund (RRIF).

Additionally, the couple has set aside $240,000 in registered education savings plans (RESPs) for their children. Their primary home, which they own outright, is valued at $600,000. And each have $400,000 in permanent life insurance.

The $4 million target includes $450,000 earmarked for their three children ($150,000 each to help them purchase their own homes); a $200,000 emergency fund; and $50,000 for charitable giving. The rest should fund the couple’s retirement. Ideally, Greg would like to stop work entirely in 2030, but he is open to working part-time if necessary. Giselle will likely continue to work as a musician and they will still have one of their rental properties, which generates about $5,000 a month after expenses.

Here’s what the couple would like to know: How can they best allocate funds from the sale of the first rental property this year? How can they invest Greg’s additional income from raises? What balance of real estate, equities, bonds, and alternative investments should they aim for? How can they maximize tax-efficient growth?

After 2030 when Greg retires, how should they structure withdrawals to sustain $6,000 per month (in 2024 dollars) without drawing down the principal? When should they start drawing from their Canada Pension Plan (CPP), Old Age Security (OAS), RRSPs, and RRIFs? And how can they minimize taxes during retirement?

What the expert says

A comprehensive retirement income plan and complete portfolio review by a portfolio manager with a Chartered Financial Analyst designation is the best investment Greg and Giselle can make, said Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management. The right adviser will help them provide certainty about the future, and may net them tax savings. Even a relatively small percentage of tax savings compounded over the next 30 or 40 years will pay off significantly, he said.

“The retirement income plan will provide deeper insights into the effects of each decision on competing goals. That’s part one. An analysis of their investment portfolio by an experienced portfolio manager, (who) should disclose their management style bias and outline the pros and cons of each recommendation, will provide a review of risk management and asset allocation, and help the couple craft practical guiding principles for future investing in good and bad markets.”

If they invest the $900,000 from the sale of the first rental property, on top of current investments, and continue to invest much of Greg’s salary and the annual increases, assuming a three per cent net return after inflation, they should have close to $4 million in five years and be able to reach future income needs, Einarson said. Their life insurance, in addition to their other assets, allows them to meet their estate planning goals.

“Preliminary planning shows they can meet their income targets from ages 55 to 85 using only registered accounts and government benefits. They will need to draw registered assets sooner than later in early retirement to set the estate up for tax efficiency. Too many wealthy people defer too much registered money for too long in Canada. This can have tax consequences for a survivor and estate,” Einarson said.

While a retirement plan will spell out the best time to do so, “They should wait until age 65 to access CPP and OAS to avoid any tax hits,” he said. As for asset allocation, “They are currently overweight in real estate. Diversification is critical.”

Einarson recommended investing the money from the sale of the first rental property into tax-free savings accounts (TFSAs) and a joint non-registered investment account. “A focus on an income-generating portfolio through constant and consistent dividend-paying stocks and some fixed income could more than meet their future income targets with passive income alone, eliminating concerns about market volatility without the need for a more conservative shift in the investment portfolio at retirement,” he said.

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“Greg can still take advantage of new RRSP room while earning a high taxable income over the next five years, use new TFSA room for both each year, and do extra investing in the joint non-registered investment account with the additional savings.

“Greg and Giselle have established a foundation for financial stability by adopting a strategy of aggressive savings and maintaining a lifestyle that is well within their financial means.”

*Names have been changed to protect privacy

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