The current situation
Hugh and Cheryl Burton, both 61 and living in Canmore, Alta., have worked hard to build their net worth. Hugh is a retired salesman and Cheryl still works part-time earning $30,000 a year as a nurse. “I’d really like to retire permanently this year, too, but I don’t know if I can,” she says. “Neither of us has a company pension.” The couple’s investments were worth $1.2 million in 2007, but they lost $200,000 in the financial downturn. “That set us back,” says Hugh. The Burtons love to travel, golf and canoe and want $72,000 before taxes annually to live their retirement dream. Right now they have $948,000 in investments ($726,000 in RRSPs, $222,000 in non-registered accounts, split 35% fixed income and 65% equities). Their 2011 return was 5.5% but they are up only 3% so far this year, so they’re worried.
Right now, the couple’s annual income includes Cheryl’s $30,000 salary and a $42,000 withdrawal from their portfolio. In four years, they will both receive full Canada Pension Plan and Old Age Security benefits totalling $28,000. The remaining $44,000 will have to come from the portfolio. “We’re happy to spend our last dime before we die, but even if we do that, will our money last to 90?”
If Cheryl retires now, the Burtons would have a 50-50 chance of running out of money by the time they turn 90 and a 70% chance of draining their portfolio by age 95, says Jim Otar, an adviser specializing in retirement planning in Thornhill, Ont. Hugh is already drawing from his portfolio, and to grant Cheryl her early retirement wish they would have to withdraw an extra $30,000 annually for the next four years. Even though $1 million sounds like a lot, it really isn’t in these circumstances.
If Cheryl works until 65, when both can collect OAS and full CPP—and if they eventually sell their house—Otar’s model suggests they still have a 38% chance of running out. To make their money last longer they could reduce annual pre-tax expenses to $60,000. Or they could rent part of their home to bring in an extra $12,000. Finally, Otar estimates that adopting a more conservative 60% fixed income asset mix (including dividend stocks and REITs to create an income stream) would give them an extra four years of withdrawals. “If they do this, they can still be within their budget and have lifelong income at least until 90,” he says.
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