What does retirement look like when your kids are still in high school? Ottawa-based couple Frank* and Marie are living this scenario as one of them, Frank, 64, is already retired after a 39-career in the military and government, and Marie, 56, works full time at a non profit, but would like to retire in two years, when their 15-year-old twins graduate and head off to college or university.

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Frank and Marie have contributed to a registered retirement savings plan (RESP), which is worth $65,000, but stopped making contributions because the boys plan to live at home while attending college or university.

Frank has a defined-benefit pension indexed to inflation and together with Canada Pension Plan (CPP) payments, he brings in about $70,000 a year before tax. Marie earns $102,000 before tax. She does not have a company pension plan. At age 60, she will be eligible for an estimated monthly CPP payment of $835.

The couple own a home valued at $750,000, and have $54,000 in cash savings, $53,000 in tax-free savings accounts (TFSAs) and $604,000 in registered retirement savings plans (RRSPs). They recently started contributing $500 a month to Marie’s spousal RRSP (this includes a matching contribution from her employer).

These investments are in low- to moderate-risk segregated funds with historical three- and five-year returns of 3.05 per cent and 5.49 per cent, respectively. The funds feature deferred sales charges (DSCs), which would cost the couple four per cent if they were to sell the funds today, though the DSCs decrease to zero per cent after seven years of owning the investments.

Four years ago, Frank and Marie took out a $200,000 loan at six per cent to further beef up their portfolio. Again, they invested in segregated mutual funds, this time in a non-registered account. To date, that account has only generated $3,000 in returns and they are paying $1,250 in interest payments each month on the loan.

“We didn’t know much about segregated funds, but we were advised it was a good way to go and we liked the fact the principal was guaranteed,” Frank said.

But he is concerned about the high management fees, low returns and the penalties to shift the money into other higher-yield investments. He’s also trying to determine how and when they should pay off the loan.

Frank wonders if they are over-insured, too. He and Marie each have term and whole life insurance policies worth about $1.1 million. Some of these policies are private, others are through their employers. They also have a whole life policy for one of their sons (the other did not qualify) worth $60,000.

“I wanted to make sure if something happened to me, my kids are protected,” Frank said.

Their adviser presented investing in life insurance as an estate-planning tool (for example, to cover any tax owed on the RRSPs and funeral expenses when Frank and Marie die) and as means to fund expenses such as a nice trip later in life. That said, Frank is concerned whether the expense is justified. The premiums account for $850 of the family’s $5,600 in monthly expenses.

As for their vision for joint retirement, if Marie does retire in two years, she plans to work at least part time outside her field. Once the boys go to university, the couple would like to start travelling more and continue to rent a cottage for a week or so each summer. Frank would like to have an additional $1,500 a month after tax for spending beyond RRSP income.

For now, they’d like to know if it’s feasible for Marie to retire at 58 and if they’ll be financially secure once the kids leave home. What should they do about the segregated funds and the $200,000 loan? Are they too invested in life insurance?

What the experts say

Both Graeme Egan, a financial planner and portfolio manager who heads CastleBay Wealth Management Inc. in Vancouver, and Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management Inc., said the couple are on sound financial footing for long-term retirement income thanks to Frank’s indexed pension and their current savings.

Egan said it is feasible for Marie to retire in two years, although they will likely have to draw down additional capital until she turns 60 and starts receiving CPP to meet Frank’s goal of an extra $1,500 in spending money each month.

But both experts are concerned about the advice the couple was given to invest in segregated funds and life insurance.

“Segregated funds have been sold based on the fear of losing capital, but markets have always come back …. that is what history has shown us,” Egan said. “Frank and Marie are investing for the next 40 years, which will involve several investment cycles of ups and downs.”

As well, segregated funds’ “guarantee” typically means higher-than-average management expense ratios (MERs) and the DSCs could “handcuff” them for a few years.

He recommends Frank and Marie consider shifting their investments to regular retail mutual or exchange-traded funds that have much lower fees, but not until the DSCs are less prohibitive and the stock markets recover from 2022.

The same approach applies to the investment loan. They could also consider using between $20,000 and $30,000 of their cash savings to pay it down.

“This will reduce their monthly loan-servicing cost and overall expenses,” Egan said.

Einarson said the couple should seek out quality guidance from a certified financial planner or other well-qualified and experienced financial professional, not an adviser selling products.

“The professional should be able to explain in simple terms what they have, how much it costs, the cost to change, and the pros and cons,” he said.

For example, the cost to move out of segregated funds sooner rather than later may be offset by the additional savings of a better-performing and more appropriate investing option.

Einarson also strongly recommends they create a comprehensive retirement plan.

“They will see an overview graphically of all their future income streams and asset values year by year for the next 30-plus years,” he said.

The experts also agree the couple are overinsured given their overall net worth. They say it’s important to keep investing and insurance separate and not purchase insurance products with investing elements.

To this end, Einarson believes it is reasonable to have some term life policies — which are strictly insurance products — until any liabilities are paid and the kids are independent.

“There is no need to fund insurance for their kids, who would be better served to buy term insurance when they are adults and have dependents of their own.” he said.

*Names have been changed to protect privacy

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