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Here are some trade-offs to considerLast updated 56 minutes ago You can save this article by registering for free here. Or sign-in if you have an account.“Is investing so heavily in equities too risky?" ask couple Terry and Jasmine, who hope to retire early to spend more time with their children. Photo by jayk7/Getty ImagesWe independently select everything we recommend. Buying through us may earn us a commission, which supports our work.Jasmine,* 47, and Terry, 53, want 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. They want to spend as much time together as a family as they can.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountorIdeally, they’d like to retire at the same time, but Jasmine is prepared to work a few more years than Terry if that means they can achieve their target monthly income of $7,500 after tax for the first 10 to 15 years of retirement. They expect their cash flow needs to decrease to $6,500 a month when they shift from their “go-go years” to their “slow-go years.” Their current monthly expenses are about $4,000.Jasmine earns $90,000 a year before tax and Terry earns $65,000. They also receive the Canada Child Benefit ($10,020 annually), and the Child Disability Tax Credit ($7,660 annually). They have not invested in a registered disability savings plan (RDSP) because of the uncertainty of their child’s life expectancy, but they wonder if this is a missed opportunity.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againThe couple have built an all-equity portfolio worth $740,000. This includes $375,000 in tax-free savings accounts (TFSAs), $282,000 in registered retirement savings plans (RRSPs), and $83,000 in locked-in retirement accounts (LIRAs). They also have about $12,000 in a registered education savings plan (RESP) invested in a dividend growth mutual fund for their oldest child and $20,000 in cash for emergencies.Terry and Jasmine plan to apply for the Quebec Pension Plan (QPP) and Old Age Security (OAS) at age 65. “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?” asked Terry.Jasmine and Terry own a home valued at $650,000. They have no mortgage and no plans to sell, at least for the next 10 years or so. They each have $100,000 term life insurance policies.When both Jasmine and Terry are retired, they plan to create what they are calling a “three-year cash bucket.” This would be invested in guaranteed investment certificates (GICs) or other “safe” investments to cover a three-year cycle of cash flow needs, with the rest of their portfolio fully invested in an equity index fund.The idea is that they would draw from the “cash bucket” when markets are down, which would allow them to stay invested and avoid losses. “Is this a good strategy?” asked Terry. “Is investing so heavily in equities too risky?”He would also like to know if he and Jasmine should continue to maximize annual contributions to their RRSPs until they retire. Jasmine contributes $30,000 a year and Terry contributes $20,000 a year. “We’re not high earners. Are we over-invested in RRSPs? Would it make more sense to open a spousal RRSP? Or a non-registered account instead?” they ask.The couple plan to continue to maximize TFSA contributions each year throughout their lives. They don’t want to withdraw any money from the TFSAs, viewing them as an inheritance for their children. Is this possible, they wonder.“Jasmine and Terry are on track to retire in eight years, although with no margin of safety,” said Ed Rempel, a fee-for-service financial planner, tax accountant and blogger.“To achieve their target income in retirement ($90,000 a year after tax), they would need $2.15 million. With their existing investments plus adding $50,000 a year to their RRSPs and $14,000 a year to their TFSAs, they should have $2.05 million when Terry is 61 and Jasmine is 55. This is four per cent short of their goal. To have a 10 per cent to 15 per cent margin of safety, Jasmine could work an additional three years.”Rempel agreed with the couple’s plan to apply for QPP and OAS at age 65. “Deferring QPP from age 60 to 65 gives them an implied return of 10.4 per cent a year. Deferring to age 70 gives them an implied return of 6.8 per cent per year, which will likely be less than their 100 per cent equity investments.”To assess the couple’s “three-year cash bucket” strategy, Rempel looked at holding various amounts of cash over a 30-year retirement during the past 150 years. His finding: Nobody has benefitted from any amount of cash over this time frame and for this amount of time. “My study showed that having between 70 per cent and 100 per cent equities and applying the four per cent rule (a guide for how much you can safely withdraw from your investments each year in retirement) provided a 97 per cent reliable cash flow for a 30-year retirement without managing withdrawals and 100 per cent managing the withdrawal rate.”Rather than a cash bucket, Rempel suggested the couple could use a credit line for any large, unexpected expenses or just sell some investments when necessary.He also recommended Jasmine continue to contribute at least $35,000 and Terry $10,000 to their RRSPs each year, or just enough to reduce their taxable income to $54,000 each year. This would put them in the lowest tax bracket in Quebec (26 per cent).“Contributing to their RRSPs will also increase the Canada Child Benefit by 5.7 per cent of the amount they contribute,” he said.One of the most effective ways to minimize tax in retirement is to ensure their taxable incomes are the same. “If Jasmine has a larger RRSP than Terry now, she should invest her RRSP contributions to a spousal RRSP in Terry’s name until their RRSPs are about the same size.”Rempel liked the couple’s plan to continue to maximize TFSA contributions throughout their lives, but suggested they consider dipping into their TFSAs any time they have larger expenses that would increase their taxable income above the lowest tax bracket.He also said an RDSP should be considered if the life expectancy of their child is at least 10 years. This will allow them to benefit from significant grants and bonds. “When the child passes away, they will lose the grants and bonds in the last 10 years, but all the contributions, grants and the growth in the RDSP would be part of the estate and could go to the family.”To protect their incomes, Rempel suggested they could get a $500,000 joint-first-to die 10-year term life insurance policy. “They can probably cancel any life insurance once they retire, since their investments would provide enough for the survivor to maintain their lifestyle.”*Names have been changed to protect privacy.Do you have a wealth building question for Family Finance? Email wealth@postmedia.com. Join the Conversation This website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.