Can couple retire before 60?

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Married couple Gerard* (56) and Penelope (54) want to leave the grind of corporate Canada sooner rather than later — but only if their investments are able to generate the $90,000 a year they believe will allow them to live the retirement they want. Is retiring in four years, or even better in two to three years, possible?

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Their vision for retirement is to make more time for their active lifestyle and travel. They anticipate a travel budget of about $15,000 to $18,000 a year once they stop working. “We’re not extravagant, but we want to enjoy ourselves,” said Gerard. At this point, they have no plans to take on part-time work once they retire, however they realize that may change later on.

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Gerard’s annual income before tax is $106,000 and Penelope’s is $220,000. Their monthly expenses are currently about $4,700, a number Gerard expects to decrease once they retire and their children — both in their early 20s — move out.

Self-directed investors, they have built an investment portfolio worth $2,109,000, largely invested in growth-oriented mutual funds. This includes: $116,000 in cash and cash equivalents; $291,000 in tax-free savings accounts (TFSAs); $980,000 in registered retirement savings plans (RRSPs); $102,000 in guaranteed investment certificates (GICs); and $33,000 in technology and energy stocks. Gerard also has $67,000 in a locked-in retirement account (LIRA), $137,000 in a registered pension plan (RPP) and $15,000 in a deferred profit sharing plan (DPSP). And Penelope has $368,000 in a defined contribution (DC) pension plan. “When can I tap into the LIRA? And what happens to the RPP and DC (plan) if we retire early?” He also wondered if he should start drawing from the Quebec Pension Plan (QPP) at 60, versus waiting until age 65 when he can receive full benefits.

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The couple own, live in and have a rental unit in a duplex in Quebec conservatively valued at $950,000. They are mortgage-free and earn $10,000 a year net in rental income, which they split equally for income tax purposes. Gerard is concerned about the tax implications of the rental income once they retire. “The extra income is nice, but if it puts us in a higher tax bracket, is it worth it?” The couple are also open to downsizing once their children leave home over the next few years. “A condo in our area costs about $400,000 in today’s dollars. Does it make sense to sell the house when the children leave?”

“We have no shortage of questions,” said Gerard. “Is retirement feasible in four years or earlier and if so, how early? Which investments would we draw down first? Do we defer our Quebec pensions? If so, until when? Do we sell our duplex and move to a condo? If so, when is the best time to make the move?”

What the expert says

Good news for Gerard and Penelope. “With their goal of retiring with $90,000 a year before tax, they can retire now. They don’t have to wait four years. They need about $1.35 million for this retirement and they have $2.1 million, so they are 58 per cent ahead of their goal,” said Ed Rempel, a fee-for-service financial planner, tax accountant and blogger.

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If they retire now, they will be able to generate $110,000 a year, including their QPP and rent. This jumps to $130,000 annually if they work another four years. “They have many options in how they choose to live. A financial plan is really a life plan. It would help them think through exactly what lifestyle they want and what to do with their extra money.”

Rempel said they can tap into their LIRA starting at age 55 and recommends they both start QPP and OAS at age 65. “Deferring QPP from age 60 to 65 gives them an implied return of 10.4 per cent a year on investments they would have to withdraw to provide the same income. This is likely more than their investments would make in that period. Deferring to age 70 gives them an implied return of 6.8 per cent a year, which is likely less than their investment returns.”

When it comes to which investments to draw down first, Rempel said their best strategy is to withdraw what they need entirely from their taxable investments (RRSPs and pensions), as long as they can stay in the lowest tax bracket, which in Quebec is 26.5 per cent on incomes up to $53,000. “It is probably best to try to hold onto their TFSAs, cash and GICs to draw on when their lifestyle would push them into the next tax bracket or for lump sum expenses like a large trip or a car.”

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Rempel said the tax on the rental income is not an issue as long as they are comfortable with only $90,000 a year income before tax, including the rent and their QPP. It should all still be at the lowest tax bracket.

“However, they are missing out on a large opportunity to live more comfortably. If they sell their home for $950,000 and buy a condo for $400,000, after closing costs they should clear $500,000. With only a conservative four per cent withdrawal on $500,000 they could get $20,000 a year of income instead of only $10,000 in net rent they get now. The $20,000 invested in growth mutual funds, like they are doing, should trigger hardly any capital gains by selling only four per cent of it every year. Selling a bit of an equity investment every month is known as ‘self-made dividends.’ With this method, they would pay less tax on $20,000 a year cash flow from their $500,000 investments than they do on their $10,000 a year net rent. Their investments in equities are likely to grow significantly faster in value than their home, as well.”

*Names have been changed to protect privacy.

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