Can Matt, 53, and Mary, 50, retire early and buy a cottage?

At 53 years old, Matt has achieved his goal of retiring early with a comfortable lifestyle. His wife Mary, who is 50, would like to join him before year end. She’ll be leaving behind a technical consulting job paying $148,000 a year.

The couple have a mortgage-free house valued at $2.7-million in the Greater Toronto Area and three children aged 19, 16 and 15.

They have about $1.4-million in personal investments, all held in registered accounts, and Matt has another $289,000 in his corporation. In addition, Matt owns several properties in Florida worth $3.5-million gross, with $885,000 of associated debt. The properties generate positive cash flow.

He also gets $57,600 a year in investment income.

Their goals include paying for their children’s higher education, giving the children $100,000 each toward a home purchase, travelling and maybe buying a cottage.

They ask if they can maintain their standard of living if Mary retires now.

We asked Matthew Ardrey, a portfolio manager and senior financial planner at TriDelta Private Wealth in Toronto, to look at Matt and Mary’s situation.

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What the expert says

Most of their registered investments are in Mary’s name, Mr. Ardrey says. Matt’s investments are mainly in a portfolio of rental properties that he has owned for quite some time. This has led to large, embedded capital gains.

“Matt noted he would be willing to sell these if needed,” the planner says. Matt’s properties net $120,000 a year after expenses and debt repayment.

Mary contributes 4 per cent of her income to a registered retirement savings plan each year, with a matching contribution from her employer. This is their only savings. The contributions stop when Mary retires.

They are spending about $18,000 a month, an amount that will drop to $12,550 in 2029 when several kids’ expenses such as hockey are finished, Mr. Ardrey says. They also want to have a travel budget of $20,000 per year for the next 10 years and to help each child with $100,000 toward a home purchase. “This is assumed to happen at the child’s age 25.”

Both Mary and Matt plan to defer Canada Pension Plan and Old Age Security benefits to age 70. “Because they both have limited CPP contributions due to early retirement, we assume their CPP will be less than the maximum,” the planner says. “Based on the numbers provided by Matt, we assume both will be entitled to 53 per cent of the maximum.”

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Matt’s corporation will be able to provide a continuing income stream of $1,500 a month until he is 84; the final payout will come the next year, Mr. Ardrey says.

Their investment portfolio is highly concentrated. It is almost 100 per cent in Canadian bank stocks, with 76.6 per cent in a single bank stock. “This is a material risk to their plan,” he notes. “They need to diversify by asset class, sector and geographic region. We have assumed that they move to a balanced portfolio after Mary retires.”

For this plan to succeed, Matt will have to sell a rental property in 2032, 2040, 2045 and 2067, Mr. Ardrey says. This will be to cover shortfalls. “If he does so, they will be able to meet their primary retirement goal,” the planner says.

“To truly understand the risk in this plan, we need to move beyond the straight-line projection because life and investments rarely ever move in a straight line,” he says. “To ensure the viability of this plan, we stress test it by using a Monte Carlo simulation.” A Monte Carlo simulation introduces randomness to a number of factors including returns to stress test the success of a retirement plan.

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“In this plan, we have run 1,000 iterations with the financial planning software to get the results. We look at the 75 per cent and 50 per cent levels to determine where risk due to return rate variance may affect the success of the plan.”

In the couple’s volatility stress test, the lowest probability of success is in 2066 at 54 per cent. “This is very close the failure level of 50 per cent.” Though this is different from most plans where the shortfall is right at the end, it shows the continuing need to convert real estate into liquid investment assets to fund lifestyle, Mr. Ardrey says. “This is why the property sales are central to the plan and not a fallback.”

Matt and Mary also wanted to look at a scenario in which they bought a cottage for $1.4-million. “This will not work.” The shortfalls would start when Matt is 60. “The high taxes due to capital gains and the debt repayment make this scenario unworkable.”

If they focus on their primary retirement goal, work on fixing the risks in their investment plan and engage in continuing planning through retirement, they will be able to make the dream of early retirement work for them both, Mr. Ardrey says.

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They should also look into diversifying the types of accounts they are using to invest. Registered retirement accounts are good for immediate tax savings, but lack the flexibility of a tax-free savings account for withdrawals in retirement. Any retirement surpluses should be saved first into their TFSAs.

“Although outside the scope of this engagement, we note they do not have Wills or Powers of Attorney,” the planner says. “This is a huge risk given the size of their net worth and it needs to be addressed immediately.” Because Matt owns property in Florida, the cross-border ownership and estate structure should be reviewed as well.

Even though the outlook shows that they can meet their primary goals – provided the properties are sold as planned – this plan should not be treated as finished, Mr. Ardrey says. “It rests on today’s markets, tax rules and priorities, and all of those will change.”

Reviewing it at least once a year lets them compare it with what has actually happened and adjust for changes in income, spending or family needs. “The plan will only stay useful if it is kept up as their lives change.”

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Client situation

The people: Matt, 53, Mary, 50, and their three children, 15, 16 and 19.

The problem: Can Mary retire now without jeopardizing their other goals? Can they buy a cottage?

The plan: Be prepared to sell properties to cover shortfalls. Diversify investments. Take advantage of TFSAs. Forget about the cottage.

The payoff: A realistic look at how to meet their spending goals over time.

(Income, expenses, assets and liabilities provided by the applicants.)

Monthly after-tax income: $20,665.

Assets: Bank $5,000; his corporate account $289,000; his spousal RRSP $237,000; her RRSP $1,250,000; her locked-in retirement account $157,000; registered education savings plan $390,000; residence $2,700,000; his investment properties $3,500,000. Total: $8.5-million.

Monthly outlays: Property tax $835; water, sewer, garbage $200; home insurance $300; electricity and heating $500; security $35; maintenance $665; garden $170; car lease $600; car insurance $405; fuel $1,200; oil, maintenance $585; groceries $3,000; clothing $960; gifts, charity $515; vacation, travel $1,165; dining, drinks, entertainment $700; personal care $200; club memberships $500; sports, hobbies, including kids’ hockey $4,250; subscriptions $100; doctors, dentists $165; prescriptions $85; drugstore $85; health, dental insurance $100; life insurance $110; phones $300; TV $240; her pension plan contributions $495. Total: $18,465.

Liabilities: Mortgages on investment properties $895,000.

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