How Luke and Nora Can Start Investing: A Financial Makeover
Luke and Nora are a couple in their golden years with two children in university and a mortgage-free home. They are presented with a golden opportunity: a hefty asset base totaling $4,475,000 with no liabilities. But with 64% of their assets in cash, they are contemplating how to wisely start investing. This article delves into their situation and offers expert advice for a financially secure future.
Current Financial Landscape
Nora, aged 52, is employed in the healthcare industry earning $49,000 annually and has a defined benefit pension plan. Luke, aged 58, aims to retire from his $190,000-a-year tech job, though he lacks a corporate pension plan. They’ve saved $200,000 in registered education savings plans (RESPs) for their children’s education.
Their spending goal is between $80,000 and $100,000 a year post-tax, with an extra $40,000 to $50,000 every four years for major expenses like travels or home renovations. Luke and Nora face the common dilemma of having substantial assets but hesitating to invest due to market uncertainties.
Expert Advice from Ian Calvert
Ian Calvert, a certified financial planner at HighView Financial Group, offers strategic financial advice for Luke and Nora. The path forward includes balancing their assets with a focus on minimizing risks while meeting their financial goals.
Retirement and Income Strategy
With diverse retirement timelines, Luke and Nora must strategize their income flow:
- Retirement Plan: Luke plans to retire soon, lowering his taxable income due to the absence of a corporate pension. Drawing $35,000 annually from his RRSP starting in 2025 will optimize his tax situation.
- Until Nora retires at 65, their income will include Luke’s RRSP withdrawals, Nora’s salary, and investment income from their non-registered portfolios.
- Their goal is to maintain $90,000 for annual spent after taxes, drawn from employment income and investments.
Investment Strategy
In terms of investment, the couple faces hesitation due to potential stock market highs. The advice from Mr. Calvert includes:
- Diversified Investments: Focus on a balanced portfolio with 60% to 70% in equities. Avoid placing too much weight on Canadian stocks by also investing in U.S. dividend-growing stocks.
- Tax Efficiency: Retain Canadian stocks in non-registered portfolios to leverage the dividend tax credit.
- Investment Phasing: Gradually allocate their cash in equal installments over the next 12-18 months to reduce the impact of market timing risks.
Future Projections
From 2036 onwards, financial enhancements are anticipated:
- Luke’s delayed CPP and OAS benefits commence in 2036.
- Nora will retire with a $47,750 non-indexed pension, alongside her CPP and OAS benefits starting in 2037.
- These government benefits will boost their income and lessen portfolio withdrawals, enabling a comfortable retirement lifestyle.
The Result
With these strategic actions, Luke and Nora can comfortably maintain their lifestyle, possibly growing their wealth due to a calculated 5% return per annum. Moreover, they have the opportunity to accumulate wealth modestly during their retirement, presuming inflation holds at a stable 2.5% annually.
Final Thoughts
While sitting on liquid cash feels secure, it can act as a drag over the long term. Luke and Nora can transform their strong financial position into a stable, fruitful retirement by diversifying investments, adopting a phased investment strategy, and generating income in tax-efficient ways. Ultimately, a well-loyed plan focusing on their risk tolerance can mitigate the fear of market fluctuations, ensuring financial growth and security for years to come.
Source: https://www.theglobeandmail.com/investing/personal-finance/financial-facelift/article-luke-58-and-nora-52-are-sitting-on-a-pile-of-cash-how-should-they/