Can Greg, 61, with adopted younger kids, afford to retire on $4.2 million

Q. We are thinking of retiring within one or two years and are curious what tips you have for us. I’m 61 years old and my wife is 58. We adopted two children late in life who are only 13 and 12½ years old, and we have net assets totaling $4.2 million and zero debt.

My issues are: 1. we have our investments at multiple institutions; 2. we are looking for overall forward investment advice ; 3. we are seeking an overall retirement withdrawal strategy that will minimize taxes and 4. we are seeking estate advice for our kids’ inheritance. —Thank you, Greg

FP Answers: When approaching a pre-retirement analysis, identifying income sources and associated tax payable is a good place to start, Greg. For instance, someone with $1 million in tax-free savings accounts (TFSAs) versus $1 million in registered retirement savings plans (RRSPs) could spend much more in retirement due to how each account is taxed. Rules of thumb can be helpful to understand what best practices are for most situations but are not enough to assess retirement readiness.

You may also be curious about how much you can sustainably spend during your retirement. As an advice-only financial planner, my main area of focus for retirement planning is getting a good idea of a client’s historical and expected future spending. There is limited use in designing an efficient decumulation plan if your budget is unrealistic.

Many families that I have worked with over the years tell me that they don’t budget because their income from employment meets all their needs, including some long-term savings. Stepping into retirement with no concept of spending and how long your savings could last can be dangerous. In fact, some savers with high spending may have to save for even longer to maintain their lifestyle during retirement. Others overestimate how much they need and oversave, and this can be a problem too.

Consolidating investments may help you have better visibility to plan your investment strategy and for retirement withdrawals in a tax efficient manner, Greg. You may also benefit from lower fees if you’re working with a portfolio manager since higher account balances tend to have lower management fees, as they are almost always based on assets under management (AUM) with lower priced tiers when you invest higher balances.

Investment strategy should be based in part on projected withdrawals but also risk tolerance and tax strategy. There may or may not be advantages to withdrawing early from RRSPs, for example, or converting an RRSP to a r egistered retirement income fund (RRIF) before those withdrawals start. Scenario planning with a professional financial planner may help. You can plan how much to take from each of your accounts and when to start private and public pensions. Whether you manage your own investments or work with a portfolio manager, cash flow planning can be beneficial to enhance financial outcomes and peace of mind.

• With $7 million, does Andrew still need to work part time to afford to retire at 50?
• Should Caroline, 62, defer CPP and OAS until age 70, or even delay retirement entirely?

Tax minimization is tricky because you need to balance this year’s tax with your lifetime tax. You may be able to defer RRSP withdrawals until age 72 but could benefit from using low tax brackets and taking some withdrawals in your 60s. Using these lower tax brackets in early retirement to withdraw taxable income could be strategic for many reasons, whether spending on yourself or gifting to your kids. For many retirees, once they get into their 70s, most of their income has started and it could get expensive to take more from RRSPs, RRIFs or taxable non-registered accounts as time goes on.

Estate planning is important given your children’s ages, Greg. If you died today, ignoring any life insurance, they could have up to $2 million each, depending on the deferred tax on your assets. If your will is a standard one with money going to children at the age of majority, that could be too much money at too young an age in the case of your early death. You also have a risky period over the next 10 years when your kids are too young to act as your powers of attorney or executors.

Andrew Dobson is a fee-only, advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc. in London, Ont. He does not sell any financial products whatsoever. He can be reached at [email protected].