Jasmine, 47, and Terry, 53, are aiming to retire early within the next eight years—or sooner if possible. They have two children, and their youngest has a disability with a shortened life expectancy, motivating them to maximize family time. However, a financial expert warns that their all-equity portfolio of $740,000 offers “no margin of safety” for their ambitious retirement plans.
Current Financial Picture
Jasmine earns $90,000 annually before tax, while Terry earns $65,000. They also receive $10,020 per year from the Canada Child Benefit and $7,660 annually from the Child Disability Tax Credit. Their monthly expenses are currently about $4,000, but they anticipate needing $7,500 after-tax per month during the first 10 to 15 years of retirement, dropping to $6,500 in later years.
The couple has built an all-equity portfolio worth $740,000, comprising $375,000 in Tax-Free Savings Accounts (TFSAs), $282,000 in Registered Retirement Savings Plans (RRSPs), $83,000 in Locked-In Retirement Accounts (LIRAs), $12,000 in a Registered Education Savings Plan (RESP) for their oldest child, and $20,000 in cash for emergencies. They own a home valued at $650,000 with no mortgage and no plans to sell for at least a decade. Each has $100,000 in term life insurance.
Retirement Strategy and Concerns
Terry and Jasmine plan to apply for the Quebec Pension Plan (QPP) and Old Age Security (OAS) at age 65. Terry asks, “Is this the right thing to do? Does it make more sense for one or both of us to start QPP at 60? Or should we defer either benefit until age 70?”
They also intend to create a “three-year cash bucket” in GICs or other safe investments to cover three years of cash flow needs, keeping the rest fully invested in an equity index fund. “Is this a good strategy?” Terry asks. “Is investing so heavily in equities too risky?”
The couple currently maximizes RRSP contributions: Jasmine puts in $30,000 a year, Terry $20,000. They wonder if they are over-invested in RRSPs given their moderate incomes, and whether a spousal RRSP or non-registered account would be better. They also plan to maximize TFSA contributions annually, viewing those accounts as an inheritance for their children and hoping never to withdraw from them.
Expert Analysis: No Margin of Safety
According to financial planner Eliott Einarson of Ottawa-based Exponent Investment Management, the couple’s plan lacks a safety margin. “Their all-equity portfolio and aggressive spending assumptions leave no room for error,” Einarson says. He notes that a 100% equity allocation is extremely volatile and could force them to sell at a loss during a market downturn, especially if they need to draw from the portfolio early.
Einarson recommends a more balanced portfolio with at least 20% to 30% in fixed income to reduce volatility and provide a cushion. He also suggests considering a spousal RRSP to equalize retirement income and potentially lower taxes. Regarding QPP and OAS, he advises deferring both to age 70 to guarantee higher lifetime income, which would improve the plan’s sustainability.
The couple’s goal of $7,500 monthly after-tax income requires a portfolio of at least $1.2 million to $1.5 million, depending on withdrawal rates and investment returns. With their current $740,000, they would need to save aggressively or adjust expectations. Einarson warns, “Without increasing savings or reducing spending, they risk running out of money in their late 70s or early 80s.”
Trade-Offs and Recommendations
To achieve early retirement, the couple may need to make trade-offs. These could include working a few more years, reducing their target income, or selling their home to free up equity. Einarson also suggests exploring the Registered Disability Savings Plan (RDSP) for their youngest child, which provides government grants and bonds that could significantly boost savings despite the uncertain life expectancy.
“The RDSP is often a missed opportunity,” Einarson says. “Even if the child’s life expectancy is short, the government contributions can be substantial, and the funds can be used for the child’s benefit or rolled over to a sibling in some cases.” He recommends consulting a disability tax specialist.
Ultimately, the couple must decide whether to prioritize early retirement or financial security. “They have a solid foundation, but their plan needs more conservative assumptions and a larger margin of safety,” Einarson concludes.
