Can Ennis and Kara Retire Soon with $1.3 Million Inheritance?

As individuals approach retirement, the financial landscape becomes increasingly complex, especially with the added dynamics of inheritances, pensions, and personal investments. For many, the question isn’t just about when to retire, but whether they have the financial stability to support their desired lifestyle. Ennis and Kara are navigating this pivotal moment in their lives, contemplating how their financial assets will support their retirement dreams.

At 61 years old, Ennis holds a senior management position, earning an impressive $220,000 annually. His partner, Kara, 54, contributes significantly with her annual salary of $120,000 from her research career. Together, they enjoy a joint family income exceeding $340,000 each year, but they are eager to transition into retirement. Both parties possess defined-benefit pensions, with Ennis receiving $27,960 a year and Kara $9,000 per year. Notably, their pensions are partially indexed to inflation, with Ennis's pension at 50% and Kara's at 60%.

Assessing Retirement Feasibility

The couple is keen on understanding whether they can retire as planned, especially in light of potential inheritances. Aside from their pensions, they anticipate receiving additional financial support from their family, which could significantly alter their retirement strategy. Their children, young adults still residing at home, also factor into their financial planning, as they aim to assist them in purchasing their first homes.

The couple's home in Ontario is valued at $1.1 million, with an existing mortgage of $300,000. They aspire to spend approximately $135,000 annually after taxes in retirement. To evaluate their situation, we consulted Ian Calvert, a certified financial planner and head of wealth planning at HighView Financial based in Oakville, Ontario.

Expert Assessment of Financial Health

According to Mr. Calvert, Ennis and Kara have an estimated net worth of about $2.18 million. He notes that “they have a healthy asset base, and their pensions are a strong component of their retirement plan.” However, he also points out a critical issue: without any non-registered assets or tax-free savings accounts (TFSAs), most of their retirement withdrawals will be taxed as income.

To meet their cash flow needs, they will need to withdraw approximately $129,000 annually from their combined Registered Retirement Savings Plans (RRSPs) and Locked-In Retirement Accounts (LIRAs). Mr. Calvert advises that before initiating withdrawals, they should consider converting their RRSPs into Registered Retirement Income Funds (RRIFs) and unlocking 50% of their LIRAs. This conversion would grant them greater flexibility with their funds.

Strategic Withdrawals and Income Management

The planned $129,000 withdrawal, combined with their pension income of $37,000 annually, would yield a total income of $166,000 before taxes, resulting in about $135,000 after tax. However, Mr. Calvert warns that withdrawing 10% of their portfolio annually could lead to capital decline over time.

Fortunately, Ennis and Kara expect an inheritance of about $1.3 million in the coming years, which can significantly impact their financial strategy. This windfall could be used to maximize their TFSAs—each has a lifetime contribution limit of $109,000—and invest the remaining funds in a non-registered portfolio aimed at generating reliable income.

• Potential to withdraw $35,000 annually from their non-registered portfolio.
• Reduced RRSP and LIRA withdrawals to approximately $89,000 annually.
• Increased total income to about $162,000 annually while lowering their tax burden to $27,000.

Exploring Government Benefits and Timing

Mr. Calvert emphasizes that the timing of their Canada Pension Plan (CPP) and Old Age Security (OAS) benefits will depend largely on when they receive their inheritance. If they decide to delay taking these benefits until age 65, it could lower their annual withdrawals and preserve their capital better.

Given the seven-year age gap between Ennis and Kara, they have some flexibility in deciding when to take their benefits. A hybrid approach could be advantageous; for example, if the inheritance does not arrive by the time Ennis turns 65, he could start receiving his CPP and OAS benefits to minimize withdrawals from their savings.

Supporting Their Children’s Home Purchases

Ennis and Kara express a strong desire to assist their children in purchasing homes, but Mr. Calvert highlights the challenge: they currently lack the after-tax capital to do so. Major withdrawals from their RRSPs could be tax-inefficient and accelerate their capital depletion, while extracting equity from their home would introduce additional debt servicing obligations.

The couple may consider the following options to support their children:

• Direct financial gifts once they have enough after-tax funds.
• Utilizing part of the inheritance to assist with down payments.
• Exploring home equity loans to bridge financial gaps, but assessing the risks involved.

Understanding Assets and Liabilities

To further clarify their financial landscape, here are details of their current assets, liabilities, and monthly expenditures:

Regarding their monthly financial commitments, their total expenses amount to approximately $13,235, which includes a range of costs from mortgage payments to discretionary spending. This leaves them with a surplus that can go towards savings or paying down their mortgage.

Understanding their financial situation is crucial for Ennis and Kara as they consider the next steps in their retirement planning. By strategically managing their assets, anticipating their inheritance, and making informed decisions about their pensions and government benefits, they can work towards a secure and fulfilling retirement.