Couple Falls Short of Retirement Dreams with $2.1 Million Nest Egg

January 2, 2025

0 3 minutes read

Couple Falls Short of Retirement Dreams with .1 Million Nest Egg

Meet Tom and Amanda, who traded in their 9-to-5 grind in 2022 to pursue their passions as consultants. (Credit: Getty Images/iStockphoto)

Tom and Amanda, both in their sixties, are on a mission to enjoy life to the fullest with a budget of $115,000 to $120,000 annually after taxes for their golden years. But here’s the big question: Are they set to achieve this financial goal? Currently, their spending hovers around $109,000 a year, with travel topping the list of their joys—something they refuse to skimp on!

Having left traditional jobs, Tom and Amanda now thrive as a small business consultant and a health and wellness coach, raking in about $1,000 a month each after expenses. They’re committed to this part-time hustle until the end of 2027, ensuring they stay engaged while planning for the future.

The real powerhouse of their income? A self-directed, equity-focused investment portfolio worth nearly $2.1 million! “We don’t panic; we invest for the long haul and make adjustments when necessary,” Tom shares. Their savvy investing strategy yields them around $80,000 in dividends thanks to a clever mix of dividend stocks and high-interest ETFs.

From their investments, they withdraw $70,000 from their registered retirement savings plan (RRSP) and non-registered accounts, reinvesting an additional $10,000 into their tax-free savings accounts (TFSAs) for a brighter financial future.

Their impressive portfolio breaks down as follows: $264,000 in TFSAs, $1,206,000 in RRSPs, $110,000 in guaranteed investment certificates (GICs), $63,000 in a locked-in retirement account (LIRA), and another $411,000 in non-registered accounts, alongside a small $34,000 in registered education savings plans (RESPs) that they’re considering consolidating soon.

Debt-free and proud homeowners, Tom and Amanda have their residence in Southwestern Ontario valued at $1.9 million. They dream of staying put but are open to downsizing if it means securing better long-term cash flow. They’re weighing the crucial questions: Should they downsize? If so, when’s the right time, and how much equity should they free up?

With ambitions to leave behind a $500,000 inheritance for their two adult children, their primary concern is ensuring their estate remains solid. “We refuse to be a financial burden to our kids,” Tom emphasizes.

As for pension plans, Tom anticipates receiving $1,174 monthly from the Canada Pension Plan (CPP) at 65, with potential for higher payouts if he waits. Amanda’s expected $604 monthly would also increase with deferral. They’re eager to nail down the best time to tap into CPP and Old Age Security (OAS).

Other pressing inquiries for financial experts: What’s the ideal strategy for withdrawing from their investments? What return should they aim for to keep pace with inflation and support their long-term retirement dreams?

According to a financial planner, Tom and Amanda are on track to retire in three years on a $100,000 annual income before tax. However, this falls short of their original $150,000 target, leaving them $1 million behind their goal.

A more attainable goal might be retiring on $120,000 before tax, which could be achieved through strategic downsizing in a decade and smart investing of the proceeds.

“Much of their wealth is trapped in their house, which limits their cash flow for retirement. To generate their desired $150,000 annually, they might consider accessing their home equity, whether through downsizing, renting, or leveraging their home’s value,” the planner advises.

Regardless of their approach to equity, they’re likely to achieve their goal of leaving a $500,000 inheritance for their children, either by investing wisely or through the sale of their home.

Invested primarily in equities (85%), with the remainder in cash and GICs, they can expect reasonable long-term returns of 7.2% before retirement and around 6.2% afterward. If they lean heavily into equities, those numbers could rise even higher. With inflation at 3% and real estate appreciating at 4%, planning smart is key.

For optimizing their withdrawal strategy, experts recommend two main approaches:

Withdraw funds while remaining in a lower tax bracket.
Defer tax payments for as long as possible.

The second strategy is particularly vital. By tapping into non-registered investments first and preserving their TFSAs for later, they can significantly reduce their current tax burden and allow their investments to grow.

While facing a potentially hefty tax bill later in life, the strategy of minimizing taxes now will prove beneficial in the long run.

Ideally, they should commence CPP and OAS at age 65 for maximum returns, rather than deferring, thus allowing their money to work for them right away.

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