Laid off with $2.5-million in savings, should Jake and Wanda retire permanently?
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Laid off with $2.5-million in savings, should Jake and Wanda retire permanently?
Jake and Wanda, both in their mid-40s, have two children, a mortgage-free house, a rental condominium and $2.5-million in savings and investments. The condo generates $16,715 a year in net rental income. Jake had been earning $250,000 a year as an executive; Wanda $90,000 as a manager. They were both laid off within months of each other. Now the B.C. couple are wondering if they have to find new jobs or if they can put their feet up and retire permanently. If they go back to work now, “our incomes would be about the same as before,” Wanda writes in an e-mail. “Personally, I would rather work for higher income now and retire earlier versus working for more years at lower pay,’ she adds. The planner says they could live off their savings without having to return to the employment world, but they will need more money moving forward.
Jake and Wanda, both in their mid-40s, have two children, a mortgage-free house, a rental condominium and $2.5-million in savings and investments. The condo generates $16,715 a year in net rental income.
Wanda had been earning $250,000 a year as an executive; Jake $90,000 a year as a manager. They were both laid off within months of each other. Now the B.C. couple are wondering if they have to find new jobs or if they can put their feet up and retire permanently.
If they go back to work now, “our incomes would be about the same as before,” Wanda writes in an e-mail. “Personally, I would rather work for higher income now and retire earlier versus working for more years at lower pay.”
They will get about $446,000 in severance over two years to tide them over.
“Can we both retire now?” Wanda asks. “Or do we both need to find a job to support our expenses until age 95: kids, sports, and extracurricular activities now; and golf, country club and higher vacation expenses later?”
Wanda has the option of getting a $34,788-a-year pension at age 65 or taking a lump sum of $270,000 in a locked-in retirement account (LIRA). Which would be best?
“If we choose not to work at all, at what age will our liquid assets run out?” she asks. Their retirement spending goal is $85,000 a year after tax.
We asked Ross McShane, an advice-only certified financial planner in Ottawa, to look at Jake and Wanda’s situation. Mr. McShane also holds the chartered professional accountant (CPA) designation.
What the Expert Says
“I congratulate this couple for having accumulated a significant amount of wealth at this stage of their lives,” Mr. McShane says. “They have been very diligent savers and have lived very frugally,” he adds.
Jake and Wanda wonder if they are financially independent to the point where they do not have to return to work, the planner says. If they do need to work, their preference is to “run hard” for another five to 10 years to accumulate the wealth needed to see them through their retirement years.
The couple say they require $85,000 a year after tax for basic and discretionary living expenses. They are also planning for non-recurring expenditures such as roof and vehicle replacements within the next three to seven years.
Based on their indicated level of spending, they could live off their savings without having to return to the employment world, Mr. McShane says. “However, I question the accuracy of some of the expenses listed and would expect they will need more money moving forward.”
Can Romesh, 54, and Gayle, 52, retire in a decade if they spend $125,000 on a basement renovation?
In his projection, the planner has increased their recurring expenses to $100,000 per year, indexed to inflation. He has also built in an annual amount for non-recurring expenditures because there are always costs to maintain a home.
“My first scenario, where they do not return to work and instead live off their savings, would see them depleting their investment assets in their late-80s, at which time they would still have the equity in their house and the rental property,” Mr. McShane says.
“Given their young ages, they have considerable runway ahead. I would hesitate to rely solely on their savings considering that at least one of them could live into their early- to mid-90s.” Costs associated with assisted care should always be top of mind, the planner says. Health care expenses previously covered by their employers will now be paid out of pocket.
Scenario 2 assumes they both return to work in 2026 for five years, earning the same incomes they were earning before they were laid off. With five additional years of saving, they should not have to worry about outliving their assets.
Wanda and Jake have several accounts at different providers and there does not appear to be a clear asset allocation strategy, Mr. McShane says. Their portfolio includes mutual funds, exchange-traded funds, common stocks and guaranteed investment certificates. His projections assume an average annual return of 5 per cent net of investment fees, based on a balanced growth portfolio.
To achieve this net rate of return, their fees need to be carefully reviewed and controlled, he says. In some accounts they pay an advisory fee along with the embedded management expense ratio on the mutual fund. As a high-net-worth couple with $2.5-million of investments, they should consider the services of a discretionary portfolio manager with an all-inclusive annual fee of less than 1 per cent of assets, the planner says.
Given their time horizon, they should lean heavily toward equities with adequate diversification across management style, sectors and geography, he adds. They should hold the bond and GIC component inside their RRSPs and LIRAs. Canadian stocks that generate dividends and capital gains are taxed at a lower rate than interest income and so should be held in a non-registered account. “Avoid holding excessive liquidity in their bank accounts by putting the surplus to work in their non-registered investment accounts.”
They are receiving severance pay over a couple of years in 2025 and 2026. There will be a tax liability in the spring of 2026 when they file their personal tax returns to cover tax owing beyond the amount withheld when paid. “To avoid generating additional taxable income in 2025, they should draw on their bank savings for living expenses.”
They both have unused tax-free savings account (TFSA) contribution room and should transfer funds from their bank savings immediately to top up the TFSAs. They should continue to contribute to their TFSAs and do so at the very beginning of the year. “There is a missed opportunity here in that investment income earned in their non-registered accounts is subject to tax instead of being sheltered within the TFSAs.”
Is Preston, 39 and single, saving too much or too little to retire at age 58?
Wanda has a decision to make with respect to her company pension, Mr. McShane says. She can choose to receive a monthly pension at 65 or she can elect to commute the value and transfer it to a locked-in retirement account (LIRA). Wanda’s pension plan is not fully indexed.
“Transferring the pension to a LIRA allows the spouse to receive the balance of the LIRA upon the pension owner’s death,” the planner notes. Based on the circumstances here, Wanda should commute the value to a LIRA, he says. These funds should then be integrated into their overall investment strategy.
Their non-registered investment accounts and bank accounts are held in sole ownership. Reregistering these to joint ownership has a couple of advantages, Mr. McShane says. On first death, accounts transfer directly to the surviving spouse as opposed to going through the estate and probate. Also, the surviving spouse has immediate access to the accounts. “This reregistration for estate planning purposes does not change who is responsible for reporting the investment income for tax purposes,” the planner says.
Client Situation
The People: Wanda, 44, Jake, 45, and their two children, 10 and 12.
The Problem: Do they have to find new jobs? How long will their savings last if they don’t? Should Wanda take a monthly pension or the commuted value?
The Plan: They both return to work for another five years or so. Review their investments and consider hiring a portfolio manager who charges a reasonable fee. Wanda takes the commuted value of the pension.
The Payoff: More money than they are likely to need during their lifetime.
Monthly net income: Drawing on their severance for the time being.
Assets: Her non-registered portfolio, including $120,000 cash, $832,000; his non-registered portfolio, including $157,000 cash, $285,000; her TFSA $120,000; his TFSA $73,000; her RRSP $330,000; his RRSP $342,000; her LIRA from previous employer plus commuted value of her defined benefit pension transferred to a LIRA $312,000; his LIRA $192,000; rental condo $400,000; residence $1,400,000; registered education savings plan $77,350. Total: $4.64-million.
Monthly outlays: Property tax $650; home insurance $115; electricity, heating $210; maintenance, security $180; transportation $700; groceries $1,100; clothing $40; gifts, charity $40; vacation, travel $900; dining, drinks, entertainment $515; personal care $25; yoga $160; subscriptions $30; kids sports, camps $2,080; health care $160; phones, TV, internet $140; savings (RRSP, TFSA, registered education savings plan $1,665). Total: $8,710.
Liabilities: None.
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