Jodi, 74, is about to embark on a new chapter of her life: retirement. After a lifetime of diligent saving and investing, she is now facing the question of how much she should withdraw from her savings without leaving a large estate. With a tentative retirement spending goal of $90,000 a year after tax, and assets including a $2-million house in the Toronto area and a stock portfolio valued at $2.4-million, Jodi is in a strong financial position. Yet, this shift from saving to spending brings its own set of challenges and considerations.
Jodi’s Financial Situation
Jodi’s financial journey has been characterized by consistent saving and smart investing. Her portfolio is primarily comprised of stock mutual funds, and she has benefited significantly from rising real estate and stock prices. She does not have a husband or a defined-benefit pension, and her income up to this point has been modest. However, her financial assets, including her home and stock portfolio, total over $4.8 million. Despite her considerable wealth, she does not wish to leave a significant estate.
One of Jodi’s main concerns is the tax implications of her financial decisions. She wonders if a 40-per-cent portfolio withdrawal rate would be advisable given her age and financial goals, and how much she would pay in capital gains tax if she decided to cash in her non-registered portfolio at some point. However, she currently has no intention of selling her investments, noting that she has weathered the ups and downs of the stock market for over 36 years.
Expert Financial Advice
To help Jodi navigate her financial future, we consulted Warren MacKenzie, an independent Toronto-based financial planner and chartered professional accountant. According to Mr. MacKenzie, Jodi has more than enough assets to meet her retirement spending goals. However, he notes that she seems to be more focused on minimizing income tax and maximizing her investment portfolio rather than enjoying the fruits of her labor.
Mr. MacKenzie advises Jodi to consider preserving her capital now that she is retiring, rather than aiming for high returns. This could involve shifting to a balanced portfolio of cash equivalents, bonds, and stocks from various markets, potentially averaging close to a 5% return per year. He also suggests that Jodi could set aside three years’ worth of portfolio withdrawals in short term, readily cashable investments to lower her risk of being forced to sell stocks during a bear market.
Planning for the Future
To ensure her financial security even in the event of a market crash, Jodi could consider creating a plan to systematically draw from her savings and investments. Mr. MacKenzie’s forecast, assuming a 5% average annual rate of return and a 2% inflation rate, suggests that Jodi could spend substantially more than her goal of $90,000 a year without running out of money. In fact, she could even increase her spending to $120,000 a year at age 85 if she decides to move to a high-end retirement home, and still leave an estate of around $3 million if she were to live to 100.
In conclusion, Jodi’s years of diligent saving and investing have put her in a strong financial position for retirement. With careful planning and the right advice, she can navigate her financial future with confidence and enjoy the fruits of her labor. Ultimately, the key question for Jodi is not how much she should spend in retirement, but how she can best manage her finances to provide for a comfortable and secure retirement without leaving a large estate.
