Tom and Amanda, both 60, are transitioning from full-time careers to a semi-retired lifestyle. With aspirations of retiring fully in three years, they aim to maintain an annual spending of $115,000 to $120,000 post-tax. Their current expenditure is approximately $109,000 annually, with travel being their most significant expense. The couple seeks advice on optimizing their financial strategies to ensure a sustainable retirement income and leave a legacy for their children.

Empower Your Future: Strategic Financial Planning for Long-Term Security

Current Financial Landscape and Income Sources

Tom and Amanda have successfully shifted from traditional employment to consulting roles in small business and health and wellness. They earn around $1,000 monthly each before tax. However, the bulk of their income comes from their substantial investment portfolio valued at nearly $2.1 million. This diversified portfolio, focused on equities, generates about $80,000 annually in dividends. They withdraw $70,000 from RRSPs and non-registered accounts while reinvesting $10,000 into TFSAs. Additionally, they hold assets in various accounts including TFSAs, RRSPs, GICs, LIRAs, and non-registered accounts.Their home in Southwestern Ontario, worth $1.9 million, represents a significant asset but does not directly contribute to their cash flow. They are debt-free and considering downsizing to free up equity, ensuring long-term financial stability. A critical goal is leaving an inheritance of at least $500,000 for their two adult children without becoming a financial burden.

Evaluating Pension Benefits and Drawdown Strategies

Tom and Amanda must decide when to start receiving Canada Pension Plan (CPP) and Old Age Security (OAS) benefits. Starting CPP at age 65 would provide Tom with $1,174 per month and Amanda with $604 per month. Deferring these benefits could increase their monthly payouts significantly. For instance, deferring until age 70 would boost Tom’s benefit to $1,667 and Amanda’s to $858 per month.The expert recommends starting CPP and OAS at age 65, yielding an implied return of 10.4% annually compared to 6.8% if deferred to age 70. This strategy maximizes immediate benefits while reducing potential tax liabilities later. Furthermore, optimizing their drawdown strategy involves withdrawing from non-registered investments first until age 71, then transitioning to TFSAs and minimum RRIF withdrawals starting at age 72. This approach minimizes current tax burdens and allows investments to compound over time.

Maximizing Investment Returns and Legacy Planning

To meet their lifestyle goals and inflationary challenges, Tom and Amanda should target a long-term return of about 7.2% pre-retirement and 6.2% post-retirement. Assuming a 3% annual inflation rate and 4% real estate appreciation, their current investment mix of 85% equities and 15% cash/GICs aligns well with these targets. Shifting to a 100% equity portfolio could potentially yield higher returns, around 8% pre-retirement and 7% post-retirement, enhancing their financial cushion.Downsizing their home within the next decade could release substantial equity, estimated around $500,000, which can be invested in tax-efficient vehicles. This move would bolster their liquidity and ensure they meet their long-term financial objectives. Moreover, it positions them to leave a meaningful inheritance for their children, either through liquid investments or proceeds from selling their home.

Navigating Financial Independence and Estate Planning

Tom and Amanda are currently $1 million short of their $3.15 million target needed to retire comfortably on $150,000 annually before tax. Adjusting their expectations to a more achievable $120,000 pre-tax ($100,000 post-tax) can bridge this gap. Downsizing and implementing a strategic drawdown plan will help mitigate this shortfall.Estate planning remains a priority, ensuring their financial legacy benefits their children without imposing undue burdens. By carefully managing their investments, pensions, and home equity, Tom and Amanda can secure a stable future for themselves and their heirs. Their proactive approach underscores the importance of comprehensive financial planning in achieving long-term security and fulfilling retirement dreams.