Less than 5 years to go for retirement - Strategy for critique
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Thread: Less than 5 years to go for retirement - Strategy for critique

  1. #1
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    Less than 5 years to go for retirement - Strategy for critique

    Just over a year ago, my wife and I were seriously contemplating retirement once the nest was finally free of the last child (we had supposed it would be 2015). But, fast forward to now, and both my wife and I are really enjoying our jobs - probably the best fits for us in our lifetimes. Above average income, below average stress, geographic benefits (incredibly short drive time for my wife, international travel for me) have all combined to a complete rethink.

    If 2 companies are willing to pay us well for jobs we actually enjoy, it seems counterproductive to retire just because we can.

    So, our new plan is to retire in 2019 (give or take a year) at which time the nest should definitely be long vacated. The strategy and assumptions would be:

    • for the next 4 years, max our RRSP contributions by contributing $33k / year
    • we have $27k of TFSA contribution limit which should grow to $71k assuming it stays at $5,500/yr per person. I.E. we will not be putting any money into the TFSA until we retire.
    • project that non-registered and RRSPs will grow to $1M (in 2015 dollars) in total by the time we retire (3.8% return after inflation/costs).
    • downsize the house and buy in a much more affordable neighborhood that we still anticipate will be close to at least some of our children, but also close to US border and major airports. This makes it easier and cheaper to travel whether it is to go to Florida for a month in winter or elsewhere.
    • take the difference in the net gain for housing switch and put at least $200k aside for the first 3 year's of retirement expenses. As much as our TFSA contribution limit would allow, we would shelter this. 1/3 of $200k would be put in high interest savings, and 1/3 in a 1 year GIC and the remaining 1/3 in a 2 year GIC.
    • now we would begin drawing down the RRSP first so as to minimize the impact of mandatory RRIF withdrawals. However, to rebuild the "cash wedge", we would need to convert some of the gains into cash-like instruments while siphoning off any non-registered dividends to this cash wedge.
    • the first 3 years are taken care of; the 5th year would be when my wife could begin receiving CPP early. The 6th year would be when I could begin receiving CPP early. Six years after that, my wife would begin receiving OAS and the subsequent year I would begin receiving OAS. About 3/7ths of our expenses would be covered by CPP/OAS at this point.
    • we assume we will get full OAS as it is today (adjusted for inflation) at 67, while CPP will be reduced by 36% for taking it early, and another 15-20% because even with the dropout provision, we would still have a few low earning years between 18 and 60.
    • we would retire with no debt, our current vehicles are 10 and 13 years old so we would retire with one vehicle fully paid for not newer than 3 years, and the kids' university loans would be paid up. We have also assumed expenses 25% more than we anticipate in case there is something major we have overlooked or we end up living finer than we do now.


    Is there something obvious I haven't considered or a different strategy to consider in how to drawdown our savings?


  2. #2
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    "$200k aside for the first 3 year's of retirement expenses. As much as our TFSA contribution limit would allow, we would shelter this. 1/3 of $200k would be put in high interest savings, and 1/3 in a 1 year GIC and the remaining 1/3 in a 2 year GIC."
    - At first glance I would take a closer look at that assumption. If you are keeping that great of an allocation to short term funds, it looks as though you are you are missing out on the possible greater returns, while not putting your goals at risk.
    - Also very tough to comment until you do a detailed cash multi-year cash flow report. A detailed financial plan would give you a clearer picture of your whole sitiuation.

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    Just trying to figure out how you are going to sustain the after tax income you plan to have the first three years of retirement once that initial $200k is gone and you are left with RSP's and non-reg worth just over a million plus CPP/OAS. First three years you will have about $67,000/year with no tax liability. What do you project the breakdown of income will be after that?
    XIC, VTI, XEF, XSB/VAB/GIC LADDER (+ HISA for cash)

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    ^ I was thinking the same thing on the amount of net income after year 3 comparitively. Also unless I missed it year 4 doesn't seem to be mentioned.

    OAS may not be there for the long term.
    Expected returns in next 5 years may be ambitious if/when we have a downturn for a couple of them
    Carefully consider housing costs when downsizing. Most people over estimate value of current house and under estimate cost of future home that you would be happy with. We spent a lot more on our "downsized" house. Fortunately we planned for this.

  6. #5
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    Thanks everyone for their input.

    HereToHelp - the idea of sheltering the first few years of expenses in laddered GICs is the Cash Wedge concept which seems to be gaining in popularity, especially after the most recent financial crisis in 2007/2008 which delayed retirement, or greatly reduced the standard of living, for so many people. This would represent about 1/6 of our investments.

    Ihatetaxes - I reviewed our expenditures that we tracked, compared to others' breakdowns (for comparison and to identify any areas I may have missed or underestimated) and confirmed that the $60k was quite high. Instead, $52k before taxes is more inline with how we expect to live when retired, with a significant amount of discretionary income. My wife and I had some experience being out of work simultaneously for 9 months, so we also know what it is like to tighten our belts and what are truly needs vs. wants. I've also realized that if I retire by end of March of 2019, that should give me my 2019 YMPE (because the bulk of my bonus is paid out in February) and an extra year of RRSP max contributions (I forgot that 2018 earnings will give me 2019 room - D'oh!). Thus, the $200k will now cover the first 4 years of retirement - plus, early in 2023 my wife will start collecting CPP. Based on the new figures, and assuming a 3% nominal return rather than 3.8%, the 1st year of retirement will require an investment drawdown rate of 3.75%, going down the next year because I start receiving CPP, too.

    RBull - we currently live in the GTA and have already investigated several communities in areas that we would like to live in. We've gone to several open houses to see what we would need to budget for a really nice, downsized house. It is anywhere from 1/3 to 45% of what our house is worth. I am not projecting our home to have additional value growth beyond inflation for the next 4 years. I've taken the highest amount we would spend for the new house, and the lowest amount for the value of our existing home (minus commission, closing costs, moving costs, expectation that you get less than listing price, etc.).

    I haven't plugged the extra year of CPP contributions into my calculations, but it should be negligible all things considered.
    Last edited by janus10; 2015-02-14 at 10:21 PM.

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    Seems like a carefully thought out plan to me. The only question I would ask is why have any non-registered savings if your TFSA's have contribution room? I would (with the additional cash flow from the ongoing jobs) keep the RRSP and TFSA maxed out to benefit from the tax free compounding. This will/should more than offset the tax liability from sheltering the $200k cash wedge from tax on interest. Better to keep the higher growth equities in TFSA where you will not pay tax on withdrawal than the RRSP .

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    It sounds like you have a tight plan. Good luck working and continuing on track for your retirement.

    We are really enjoying our recent retirement.

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    Livewell - great question. We have a sizeable non registered portfolio that was setup in 2008. It's only in the last 2 years we haven't contributed to our TFSAS. And that is because we just felt more comfortable having an emergency fund sitting in our bank account rather than in our TFSAS.

    This is due to an unanticipated development where we both lost our jobs within two months of each other and out of work for 9 months. We weren't sure that our new jobs would work out - it took us until 2014 to feel very happy where we ended up.

    And, I've always treated TFSAS as places to hold equity rather than safe investments. That is a behaviour I will be changing going forward and may in fact decide to contribute to our TFSAS again this year once the tax refunds come in.

    Maxing RRSPS has been our focus since we met - I have no contribution room left but my wife does. So, I looked again and determined we will be contributing $40k/yr for the next 4 years and a final amount somewhere north of that.

    On another note, my wife's main RRSP is a spousal RRSP. Thus, another reason why we wanted to sock away the first four years of retirement expenses into fixed income is to also ensure that when she withdraws from her RRSP it will be taxed in her hands. I'll stop contributing to her RRSP in two years as that should put her ahead of mine and give me time to catch up before we stop working.

  10. #9
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    Quote Originally Posted by RBull View Post
    It sounds like you have a tight plan.
    My parents in law never had anything close to a million dollars saved and still they had a wonderful retirement. I said "had" because my MIL now has cancer and they don't travel any more. They used to go on at least 2 big trips a year.

    I say plan for 2019.

  11. #10
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    2019 retirement sounds lovely!

    As for your plan...
    1. max our RRSP contributions by contributing $33k / year - wow....great stuff if you can do this.

    2. What are you using the TFSA room for? RRSP withdrawals to TFSA?

    3. A $1 M non-registered and RRSP portfolio in 2019 would likely be "enough money". If you have more in non-reg. assets, the better I think. How are you investing the non-reg. money? CDN stocks? ETFs? Income-generating assets? $600,000 non-reg. yielding 4% stocks would be $24,000 per year and you wouldn't need to touch the capital.

    4. I think having $200k set aside (in addition to the $1 M) above? is outstanding.

    If you still have CPP and OAS to draw from in the coming years, it seems you are set...especially if CPP and OAS can almost cover 1/2 of your expenses. This is excellent.

    Overall, a great plan, I hope to get there someday

    Hidden Content - Working on a $1 million portfolio and $30k per year from it.

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