They worked hard to build up millions in wealth. Is it time for Aaron and Jasmine, both 60, to stop working?

At age 60, Aaron and Jasmine are getting ready for Aaron’s retirement and preparing to “transition to a different lifestyle,” he writes in an e-mail. Aaron, an executive, will leave behind a $340,000 annual salary. Jasmine, a retired professional, works occasionally for their jointly-held professional corporation.

They are splitting Aaron’s $110,000 pension income from a previous employer.

Aaron plans to retire at age 65 with a target after-tax income of $150,000 a year, but he’d like to retire earlier if possible. He would continue doing some consulting work for the foreseeable future.

Their Greater Toronto Area house is valued at $1.8-million.

Short term, their goals are to support their daughter through university, upgrade their house and winter in a warmer climate until they are 75 years old. Longer term, they want to help their daughter buy her first home.

Can Aaron retire earlier than 65 and still meet their targets “in the most tax-advantaged manner?” he asks. He has two other, smaller pensions from previous employers that will pay a combined $30,000 a year.

“To age in place in our home, what type of insurance and extended health care benefits need to be in place?” he asks. How much can the couple afford to give their daughter to buy a first home?

We asked Warren MacKenzie, an independent financial planner in Toronto, to look at Aaron and Jasmine’s situation. Mr. MacKenzie is a chartered professional accountant (CPA).

What the Expert Says

Through hard work and good financial decisions, Aaron and Jasmine have built up a net worth of about $3.5-million, or more than $6-million when the commuted value of Aaron’s pensions is considered, Mr. MacKenzie says.

“Not knowing when to shift gears is a common mistake of successful individuals who have been highly focused and who worked hard to build up significant net worth,” the planner says. “Even though they have more than enough, they risk making the mistake of continuing to focus on increasing their wealth,” he says.

“Instead, they should be focused on enjoying their retirement and using their wealth wisely.”

The couple want to help their daughter with university costs and, later, with a down payment on her first home. “Given that she will eventually inherit a large estate, they should also help her learn to invest successfully,” Mr. MacKenzie says. They can do this by giving her “inheritance advances,” some of which she can use to maximize her tax-free savings account (TFSA) and first home savings account.

“We all learn from our mistakes, and it is always best to make our investing mistakes with relatively small amounts,” the planner says.

In his projection, the planner has Aaron and Jasmine giving their daughter $100,000 for a down payment plus making mortgage payments of $36,000 a year for six years, after which the daughter would be working and could pay her own mortgage.

Aaron has a financial adviser and the couple’s $1.6-million investment portfolio is largely invested in four funds. “He is happy with his adviser and he believes he has performed well – even though he does not receive a quarterly statement that shows how his overall return compares to the appropriate benchmark,” the planner says. “It is not possible to manage money wisely without this information.”

Their asset mix is about 23 per cent interest-bearing investments, 63 per cent stock funds and 14 per cent real estate. “Given Aaron’s high income, and his large indexed pension, the asset mix is reasonable,” Mr. MacKenzie says.

“One problem, however, is that about $380,000 of interest-bearing investments are held in their non-registered investment account, while the RRSPs are invested 100 per cent in stock funds,” the planner notes. “They should hold their stock funds in their non-registered account so that they can take advantage of the lower rate of tax on capital gains.”

Capital-gains-producing investments held in RRSPs lose the tax benefit because all withdrawals from the plans are 100-per-cent taxable, he says.

The couple also wonder about when to start Canada Pension Plan and Old Age Security benefits. “Given that upon retirement, they will have significant indexed pensions and more than $600,000 in a non-registered joint portfolio, they can easily afford to delay OAS and CPP until age 70,” Mr. MacKenzie says.

They are both in good health and expect to live at least until their mid-80s, the planner says. By deferring benefits to age 70, their CPP monthly benefits will be 42 per cent higher and their OAS benefits 36 per cent higher.

“Based on reasonable assumptions – inflation at 2 per cent and a 5 per cent return on investments – if Aaron continues to work until age 65, they spend $150,000 per year and make it to age 100, they’ll be leaving an estate of about $10-million, or about $5-million in dollars with today’s purchasing power,” Mr. MacKenzie says.

“If they retire now and continue to spend at the same rate, their estate will be about $8-million at age 100, or $4-million in dollars with today’s purchasing power.”

In 2026, if Aaron retires, their cash flow in round numbers will consist of pension income of $110,000 a year, consulting income of $40,000, and cash withdrawals from RRSPs and their non-registered account of $30,000. Cash outflow will be $30,000 a year for income tax and $150,000 for lifestyle spending.

If Aaron is still working in 2026, their combined cash flow will consist of his salary of $350,000, pension income of $110,000 and consulting fees of $40,000, for a total cash inflow of $500,000. The cash outflows would be lifestyle spending of $150,000, income tax of $190,000, contributions to their TFSAs $15,000, and source deductions and other expenses of $10,000, for a total of about $365,000 a year, leaving an annual cash flow surplus of $135,000.

Aaron will have a much higher pension income than Jasmine. When their RRSPs are converted to registered retirement income funds (RRIFs), he will also have much higher RRIF income, the planner says. “The main income tax consideration is therefore to split pension and RRIF incomes,” Mr. MacKenzie says.

If Aaron retires in 2025, he should convert his RRSP to a RRIF and begin withdrawing with a view to depleting much of his RRIF before age 70. That’s when they will begin to collect CPP and OAS.

“By doing this, he will be able to split his RRIF income, reduce the clawback of OAS and allow most of the income to be taxed at a lower rate than would apply later, when Aaron gets his two smaller pensions at age 65 and they begin collecting government benefits at 70,” the planner says.

Aaron and Jasmine wonder if they should purchase health and long-term care insurance. Given that they have pensions and surplus funds, they do not need insurance to cover the possibility that they will incur long-term health care costs, Mr. MacKenzie says.

Client situation

The People: Aaron and Jasmine, 60, and their daughter, 21.

The Problem: Can Aaron retire before age 65 and still achieve all their goals?

The Plan: Go ahead and retire. They have more savings than they need based on their spending target. Split income with Jasmine and give their daughter an advance inheritance.

The Payoff: Realizing that they have no need to work any longer.

Monthly net income: $25,000.

Assets: Fixed income $370,855; stocks $295,670; cash $120,000; his TFSA $91,560; her TFSA $87,480; his RRSP $605,995; her RRSP $43,115; residence $1,800,000. Total: $3.4-million.

Monthly outlays: Property tax $780; water, sewer, garbage $80; home insurance $100; electricity $175; heating $200; security, maintenance $1,010; transportation $440; groceries $800; daughter’s living cost and tuition $1,730; clothing, dry cleaning $300; gifts $200; charity $1,000; vacation, travel $1,000; dining, drinks, entertainment $500; personal care $10; club memberships $580; pets $50; subscriptions $20; health care $235; health, dental insurance $100; phones, TV, internet $425. Total $9,735. Surplus goes to saving and one-time expenses.

Estimated present value of Aaron’s three pension plans: $2.5-million. This is what someone with no pension would have to save to generate the same income

Liabilities: None

Want a free financial facelift? E-mail [email protected].

Some details may be changed to protect the privacy of the persons profiled.