Planning for retirement in a second marriage

Q: My fiancé and I are both in our mid-50s and own a new home in Vancouver with no mortgage. We are planning for retirement. I have a defined government pension plan currently at $100,000 and an RRSP with a $150,000 market value.

My fiancé does not have a pension plan, but has $450,000 in an RRSP.

We both owned a home separately before and the net proceeds from the sale of both homes is $750,000.

Should I retire now or wait until I qualify for full pension in 2021 when my fiancé retires?

What is your investment strategy recommendation for the $750,000?

—Tina

A: It sounds like you and your fiancé are in a good position as a potential early retirement approaches, Tina. A red-hot Vancouver housing market has no doubt helped.

One thing I will question is the value of your government pension plan. Is it a $100,000 per year pension? That seems like a high pension for someone in their mid-50s to have earned, especially given that you have a decent RRSP next-egg so likely weren’t in the pension your whole career.

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Is the $100,000 what it is estimated to be at some point in the future based on you continuing to work? Or is that the current amount of your contributions, with interest? Or the commuted value if you chose a lump-sum payout upon leaving the pension?

Pension statements can be confusing and I’ve frequently encountered very intelligent people who grossly under or overestimated their pension values by misinterpreting the information, Tina.

If your pension is in fact a $100,000 per year pension, that’s a very healthy retirement pension without factoring in CPP, OAS, RRSPs and the house proceeds. Whether or not you’re ready to retire would be based on factors like your anticipated basic and extraordinary retirement expenses, your expected rate of return on your investments and your life expectancy. A retirement plan model could help you and your fiancé examine scenarios and determine your retirement readiness.

I hate to be a pessimist, Tina, but one thing to consider as you go into retirement and a late or second marriage is the potential cost of a grey divorce. While the hope is obviously that you guys combine your finances and your lives for the long run, you should be particularly mindful of the risks that you face individually if it doesn’t work out. After all, if your fiancé retires in five years and is counting on some of your $100,000 pension to fund his retirement, you would hate for him to retire too early and not understand the repercussions of a divorce.

The same applies for you if the $750,000 house proceeds are largely his and you’re counting on these funds to help pay your bills if you retire early.

A consultation with a family lawyer could be worthwhile just to make sure everyone understands how things work.

As far as how to invest your money, you have about $1.35 million including your RRSPs. That’s a lot of money and should get the attention of most investment firms and advisers, as some may have $500,000 or $1 million minimums. You will have a lot of choices.

But how you should invest the money depends on a number of factors:

Are you going to need some of your investments to top-up cash flow in the coming years if you retire early?
What is your risk tolerance? If your risk tolerance is low, it may change who you invest with and how you invest.
What is your required rate of return to fund your retirement? A retirement plan could help determine a target. This may impact your investment strategy and asset allocation.
Do you want to be involved in the management of your investments? This could mean do-it-yourself (DIY) at one end of the extreme and a discretionary portfolio manager at the other, with many options in between.
If you go DIY, I’d opt for a simple exchange-traded fund (ETF) approach. I find this is the best way for the majority of independent investors to keep out of trouble and match the markets. The problem is, there are so many ETF options these days, you almost need an adviser to help you pick them. A robo-advisor may play a role here.

If you want to pick stocks and be involved in the decision-making, consider a transactional stock broker at one of the big banks with a good research department. They can help you develop and monitor your portfolio, but brokers like this are becoming harder to find as their business models move more towards managed money and less portfolio personalization.

If you want discretionary, consider a private investment firm. The banks tend to offer expensive closet index funds in their discretionary programs in many cases, where you’re pretty much guaranteed to lag the indices by 2%. The private, independent managers may have a leg-up.

Whether you retire now, Tina, should be based in part on your financial ability to do so, but also on lifestyle considerations. Starting your marriage with one of you retired and one of you working could be a good or a bad thing. And being retired in your 50s can be great for some, but awfully boring for others. Consider all factors and make your decision in part with outside input from professionals like me, but primarily based on mutual agreement with your new life partner.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.