At 69 and 73 respectively, Marie* and Jonathan are just about to start withdrawing from their investment nest egg to fund their lifestyle. Up until this summer, Marie worked part time, earning about $3,000 a month. She wants to replace that earned income with investment income, but is concerned they may not

have enough savings

to meet their needs long-term.

Marie and Jonathan live in British Columbia and own a home valued at $1.4 million with a $192,000 mortgage at 3.89 per cent that costs them $752 biweekly. They plan to stay for at least the next five years, at which point the mortgage will be up for renewal. The couple’s total monthly expenses are about $7,600 but their combined monthly income, now that Marie has fully retired, is about $5,000, largely from Canada Pension Plan and Old Age Security payments. Jonathan also continues to work and earns about $1,800 a month. He has no plans to fully retire.

The couple have $490,000 in an unregistered investment account managed by an insurance and financial services company. The funds are invested in a mix of cash, money market funds, Canadian and foreign equities and segregated funds generating returns of 6.7 per cent annualized.

They have $30,000 in a

tax-free savings account

(TFSA), managed by the same firm, generating 10 per cent returns. They also have $10,000 in cash in another TFSA with a different financial institution. “Our TFSAs have about $160,000 in contribution room. Should we be moving funds from the unregistered account into our TFSAs to take advantage of tax-free-growth and withdrawals?” asked Marie.

Marie and Jonathan also wonder if they should use some of the money from their investments to pay off the mortgage. “Would we be better off eliminating the mortgage or leaving the investments to grow?”

The couple each have a

registered retirement savings plan

(RRSP) with a combined value of about $12,000. Neither RRSP has been converted to a

registered retirement income fund

(RRIF), even though Jonathan is 73.

The couple would also like to know how to start drawing down funds from their investments. “I am very concerned about the longevity of our funds going forward.”

What the expert says

Marie and Jonathan’s existing portfolio is generating adequate returns (6.7 per cent) to meet their current needs, but to really understand whether their retirement savings will last, Graeme Egan, a financial planner and portfolio manager who heads CastleBay Wealth Management Inc. in Vancouver, recommended they ask their adviser or a fee-only certified financial planner to run detailed long-term cash flow projections that include their pension incomes and investment assets.

In order to address their current shortfall, Egan suggested Marie and Jonathan talk to their investment adviser about setting up a monthly or quarterly automatic withdrawal plan to extract $2,600 per month from their non-registered account.

“This withdrawal will not be taxable but the current annual return of 6.7 per cent is what they pay any tax on (interest and dividends). Given this is a joint account, they should be reporting the investment income jointly which helps to lower their overall taxes,” said Egan. “Assuming they continue to earn 6.7 per cent per year, this return is essentially the amount they need to meet their expenses, which includes their mortgage. If their return dips below this, then they will start eating into capital.”

Egan did not recommend purchasing an annuity, which pays out a guaranteed income for life, as interest rates appear to be going lower and Marie and Jonathan need to retain control of their capital. He also did not think they should pay off the mortgage right now since they are going through a period of transition. Instead, he suggests they continue to live in their house for the next five years and assess downsizing options along with paying off their mortgage at that time.

When it comes to whether or not they should shift money from their non-registered account to their TFSAs, Egan said doing so likely won’t be beneficial from a tax perspective. “Assuming they can split the investment income from their non-registered account and part of that income will be dividend income which is taxed at a lower rate than interest, they are going to be in low tax brackets going forward. They can always consider contributing to TFSAs down the road with their accumulated contribution room.”

Egan said they should transfer the $10,000 TFSA and consolidate it with the $30,000 TFSA for ease of management and administration, and consider that money “emergency funds” for any financial surprises over the next five years.

“It is surprising that Jonathan’s RRSP is not in a RRIF since it is legislated that RRSPs move into RRIFs at the end of the year in which one turns 71. It is important they ask their adviser about this. Since Marie is not 71 yet, let her RRSP grow until that point in time. Jonathan’s RRIF will not pay out much and he can base the minimum payment on Marie’s age to lower it even more,” said Egan.

When it comes to

portfolio planning

, he recommended they follow a 50/50 asset mix strategy of stocks and bonds for the next five years, if they haven’t already. “Then, they should reassess the strategy. Likely a reduction in equity exposure will occur.” Egan said Marie and Jonathan should also understand the cost of the segregated funds they are invested in, which guarantee the principal and typically have higher-than-average Management Expense Ratios (MERs) as a result.

As a less-expensive option, Egan suggested the couple consider

exchange-traded funds

(ETFs).

“ETFs typically have lower MERs than mutual funds and segregated funds; some are active and others follow an underlying index (passive). All-in-one asset allocation ETFs are available, too, but if they still want to use advisers to help manage their accounts, there are several hundred ETFs to choose from, including equity and fixed-income/bond ETFs to build diversified and balanced portfolios.”

*Names have been changed to protect privacy

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we’ll find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).

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