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Isaac, 52, and Mia, 46, want to retire by their mid-50s. Should they downsize now or wait?

Warren MacKenzie September 22, 2022

Now that they’ve paid off the mortgage on their Toronto house, Isaac and Mia are debt-free and  thinking about the next stage – retiring from work and moving to cottage country. 

He is age 52, she is 46. 

Isaac makes $78,000 a year working for a government agency, while Mia earns $80,900 a year in health care. In addition to the family home, they have a condo where elderly relatives live rent-free. 

“I am thinking about retiring in my mid-50s,” Isaac writes in an e-mail. “We would like to downsize and sell the house, along with one of the vehicles, and move into a condo or townhouse in the Kawartha Lakes area” of  Ontario. Mia plans to work another nine years until she turns 55. 

They would invest the surplus from the house sale “to help with longer-term goals,” Isaac adds. 

“We would like to travel when we have both retired,” he writes. They’d spend half the year in Europe, where Mia’s family owns some property, and the other half in Canada. 

“Do we have to downsize and have the proceeds from the sale of our home to achieve the goal of Isaac retiring in three years?” They have no children and are not concerned with leaving an estate. 

We asked Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto, to look at Isaac and Mia’s situation. Mr. Mackenzie holds the chartered professional accountant (CPA) and certified financial planner (CFP) designations.

 

What The Expert Says 

“Isaac and Mia offer an excellent example of how to become financially secure by spending less than you earn during your working years,” Mr. MacKenzie says. At a relatively young age, and with modest incomes, they’ve managed their finances in a way that puts them near the top of their age group in terms of their net worth, the planner says. Their net worth is more than $2.4-million. 

“With about $150,000 of additional savings over the next three years before Isaac retires, and the eventual sale of their home and condo, they will have enough to provide for health care in their old age if it is needed,” he says. “Now that they have enough savings, they’re going retire and get on with the next phase of their lives.” 

No financial plan will be accurate when projecting 40 years into the future. However, they appear to be on  the right track: They spend about $40,000 a year, and ignoring inflation adjustments, once they’re collecting Canada Pension Plan and Old Age Security benefits (at their respective ages 65 or 70, depending on when they start the benefits), that income – plus Isaac’s small defined benefit pension – will be about $43,000 a year, the planner notes. Although they deserve most of the credit for their current financial position, they are grateful that their parents gave them an inheritance advance, which they used for a down payment on their home, Mr. MacKenzie says. 

Next, the planner looks at the couple’s cash flow. Over the next three years while they are both still working, they expect to save $4,000 a month. When Isaac retires at age 55, Mia will continue to work, so her $80,900 salary will be more than enough to maintain their lifestyle. When she retires at age 55, Isaac will be 61. For about four years, until he begins to collect OAS and CPP (assuming he takes it at age  65), they will each draw $35,000 from their RRSPs. This will give them the cash flow to maintain their lifestyle until they are both collecting OAS and CPP.

While they are still working, to minimize income tax, they should take advantage of their unused RRSP contribution room, the planner says. Isaac has about $55,000 of unused room, while Mia has about $125,000. They could spread the contributions over their remaining work years. 

Rather than taking government benefits at age 65, they could defer them to age 70, Mr. MacKenzie says. “Given that they are in good health and expect to live well into their 80s, this would further enhance their financial security.” If they decide to do this, between the ages of 65 and 70, they should turn their RRSPs into registered retirement income funds and withdraw sufficient cash to meet their needs. 

When Mia retires, they plan to downsize and move to cottage country. It would then be necessary to sell their city home, purchase a smaller home and have cash to invest, the planner says. To minimize income tax, they should aim to have equal taxable incomes during their retirement, he adds. One way to do this is by having the person with the higher taxable income pay most of the expenses. Then the spouse with the lower income can save all their income and eventually build up their investment portfolio, which will generate additional taxable income. 

“Let’s assume that we continue to have inflation and in 10 years’ time, when they sell their house and buy a smaller one, they net $500,000 to invest. They earn 5 per cent on it, so they each have $12,500 of investment income,” Mr. MacKenzie says. Assume they are both retired, and they each collect a total of $20,000 from CPP and OAS. Since Isaac has a larger RRIF, his minimum withdrawals plus his small DB pension put him in a higher tax bracket. So the strategy is that if he pays all the expenses and Mia invests her OAS, CPP and investment income, then in eight to 10 years, she’ll have about $400,000 of investments yielding $20,000 a year. “Now they have about equal taxable incomes,” the planner says. The strategy works even better when there is a greater difference between their incomes. 

In terms of managing their money, Isaac and Mia have a total of 19 mutual funds. “They are overdiversified and therefore they are unlikely to do better than the broad markets after subtracting the investment management fee,” Mr. MacKenzie  says. They hold equity funds, balanced funds and commodity funds; they have no exposure to guaranteed investments, fixed-income funds, or alternative investments such as private debt or equity funds. 

“Given that many experts believe we are in a recession and markets are likely to go lower, Isaac and Mia are taking more risk than is necessary to achieve their goals,” the planner says. They don’t know how much they pay in investment management fees, and they don’t receive a performance report which would compare actual performance with the appropriate benchmark. This makes it difficult for them to evaluate their investment performance, he notes. 

They are currently investing $1,000 a month in their tax-free savings accounts. Since they are not earning much taxable investment income, moving money to the tax-free-savings accounts will save only a small amount of tax. While working, they are at relatively high tax rates, so it would be more tax efficient – and would trigger tax refunds – if they moved any surplus funds into their RRSPs, where they have substantial contribution room. After they sell their home, they should maximize their TSFA contributions. 

 

Client Situation 

The people: Isaac, 52, and Mia, 46 

The problem: Can Isaac retire in three years? Do they have to downsize when Isaac retires or can they wait until Mia retires? 

The plan: Isaac retires as planned while Mia continues to work for a few years. When Mia retires, they sell their city house and move to cottage country, spending half the year in Europe. Consider postponing government benefits to age 70. 

The payoff: Financial security and an opportunity to enjoy retirement while they are in good health. 

Monthly net income: $9,000 

Assets: Bank accounts $30,000; GICs $35,000; his locked-in retirement account $42,900; her locked-in  retirement account $47,200; his TFSA $92,300; her  TFSA $85,600; his RRSP $213,400; her RRSP $193,500; estimated present value of his DB pension  $100,000; residence $1.1-million; condo $500,000. Total: $2.4-million 

Monthly outlays: Condo fee $605; property tax $410; water, sewer, garbage $75; home insurance $100; electricity, heat $150; maintenance, garden $90; transportation $460; groceries $700; clothing $50; vacation, travel $300; personal care $80; other personal discretionary $60; health care $110; TFSAs  $1,000; pension plan contributions $600. Total:  $4,790 

Liabilities: None