How to spend $1 million

If you visit Ralph and Melissa Copperfield in their three-bedroom home just outside Lethbridge, Alta., you’ll find the couple digging in their half-acre English country garden. It’s where they lovingly plant their tulip bulbs, water their organic garlic and prune their hardy roses. “It’s our passion,” says Ralph, a self-employed freelance writer who earns $20,000 a year. “Melissa and I have traveled the world teaching English but nothing makes us happier then puttering around our garden and watching it bloom.”

The Copperfields’ other hobby is growing their money, and they now have assets that most couples would envy: a lovely three-bedroom bungalow home with a basement apartment, three rental condos, and more than $130,000 in RRSPs, cash, stocks and bonds. Their annual income is a respectable $78,000. “We live frugally, pay down our mortgages and contribute to our RRSPs and tax-free savings accounts,” says Melissa, who earns $45,000 a year as a speech therapist. “We manage the three condo apartments ourselves and we’re counting on our real estate to be the backbone of our retirement plan.”

The Copperfields (whose names we’ve changed for this story) are both 40 years old, have no children and they want to retire at age 55. At that time, they will have all three condos—worth about $380,000 today—and their $320,000 home all paid off. They also figure they will have about $300,000 in their RRSPs, TFSAs and their non-registered investment account. The total? $1 million. “We’ve been very fortunate,” says Melissa. “We received generous cash gifts from our family when we married in 2002. We invested in real estate in 2003 and it’s been a very good investment for us.”

An interesting twist in the Copperfields’ plan is that they don’t want to leave an estate. They want to live life to the fullest in retirement, and in the process, burn through every last penny. “The last cheque we write should be to the undertaker, and it should bounce,” laughs Ralph. “But we’re troubled by the fact that most books on retirement don’t con­sider our situation.”

One thing is certain—the couple’s own assets will have to generate most of the money they live on in their golden years. That’s because Ralph is originally from Australia, and he hasn’t contributed much into the Can­ada Pension Plan (CPP), so his payouts will be small. Melissa, too, isn’t expecting much from CPP—she says she’ll receive only $3,000 a year. (However, both will receive payments from Old Age Security, or OAS.)

Melissa Copperfield is the daughter of a bank teller and a factory worker, and she grew up near Lethbridge. “My folks came from nothing,” she says. “They were not fancy folk but they were happy with their jobs and retired happily at 55.” When she was 25, after graduating from the University of Calgary with a degree in English, Melissa and a friend went to Japan to teach English. “It was awesome,” she says of her six years there. “I even managed to save $10,000.”

Ralph grew up in Sydney, Australia with two younger brothers. His parents divorced when he was 15 and his mother supported the family after that. “She has a great eye for buying rundown houses, renovating them and selling them for buckets of money,” says Ralph. “She’s done well.”

After graduating from the University of Sydney at 23 with a degree in history, Ralph traveled to Switzerland, Hong Kong and Japan. “My attitude towards money was ‘travel, run out of money, stop where you are, make some money, then travel again,’?” he says. “But I never borrowed. I was never in debt.”

In 1998 he met Melissa while they were both teaching English in Japan, and they hit it off right away. In 2002, the couple married and settled down just outside of Lethbridge. “Melissa’s folks paid for the wedding and my mother sent us a gift of $50,000,” says Ralph. “I think she was happy to see me settle down.”

The couple took the $50,000 gift from Ralph’s mom, along with $25,000 they had saved on their own, and put a small down payment on their bungalow. The following year, they remortgaged their home and bought three small condos, putting 10% down on each. “The timing was perfect,” says Melissa. “The real estate market was just starting to take off.”

In the early years of their marriage, Ralph worked in construction. Melissa tutored students in English while going back to school to train as a speech therapist. “I worked six days a week and made buckets of money,” says Ralph. “It was good, honest work and I enjoyed it.”

Since then, the couple has been paying down their mortgage and putting money into their RRSPs and TFSAs. In their self-directed account—worth about $65,000—they hold index funds and use the MoneySense Couch Potato strategy, with 60% of their income in equity funds and 40% in bonds. “We don’t pull in a lot of money but we save in 50 different ways every month,” says Ralph. “We’re kind of like born-again Christians now. When we see people wasting money it frustrates us.”

The couple’s annual income is now $78,000 a year (including their real estate earnings), and they are saving about $8,500 a year in RRSPs. They also have $28,500 in a savings account and $65,000 in an investment account. They plan to move that money into TFSAs over the next few years. They figure their condos and home will be fully paid off by age 55, when they plan to retire.

When they stop working, Ralph wants to sell the condos, rent out his home and buy an RV so he and Melissa can take some long road trips through the U.S. and Canada. They’ve calculated that they will need $35,000 a year to do it. Part of the money will come from renting out their home while they travel, and once they hit 65, they’ll get about $8,000 a year from CPP and OAS. The rest of the funds will have to come out of their investment portfolio. “We want to spend it all,” says Melissa. “But we want to be smart about it. We don’t want to live lavishly—we know that retiring at 55 is a gift in itself.”

Ralph says the key to his dream is to draw up a plan that doesn’t leave any money left over. That should allow them to retire earlier and get the biggest bang possible for each dollar in their nest egg. “If you want to retire with $40,000 a year in income,” he explains, “then at a 4% draw-down rate you need $1 million. But at a 5% draw-down rate, you would only need $800,000.” He figures that is a significant enough figure to shave a few years off their projected retirement date. But he still wonders: “Will $1 million in assets at 55 be enough to generate this income for us until we die?”

What the experts say
Ralph and Melissa Copperfield have done a great job of building up their assets. But they have some misconceptions about retirement planning. For instance, it’s not true that they’ll gain a big advantage by burning through all their cash before they die. The truth is, most Canadians don’t plan on leaving a substantial estate. “Less than 10% of my clients think leaving an estate is their biggest goal,” says David Martin, a fee-for-service adviser at the Halifax office of Toronto-based Weigh House Investor Services (formerly Second Opinion Investor Services). “Most want to spend it all, and be as comfortable as possible without running out of money.”

Where they stand

Given that all our experts agree that Ralph and Melissa should easily have $1 million or more in assets when they retire at 55, here’s what the Copperfields should do to get the most out of their money:

Bulk up their investments
Between now and age 55, the couple should contribute $8,500 a year to Melissa’s RRSP. They should also transfer $5,000 a year from their savings and investments to tax-free savings accounts (TFSAs) for each of them. “If this money is invested in the Couch Potato, it should provide them with a healthy 4% annual after-tax return,” says Marc Lamontagne, a fee-only planner with Ryan Lamontagne Inc. in Ottawa. “That’s a good return.”

Keep the condos
All of the couple’s real estate will be mortgage-free when they reach 55. But if they sell, there will be taxes to pay. Instead, the experts suggest the couple keep the condos until age 70. “Cash-flow is king in retirement and those condos will provide them with plenty of that,” says Jim Otar, a financial planner, author and founder of Retirementoptimizer.com.

Do the numbers
The couple says they will need $35,000 a year to retire comfortably. If they keep their condos from ages 55 to 70 and continue to rent out their basement apartment, they will receive $25,000 in net rental income—more than half of what they need to live on.

At 55, they will also have accumulated $350,000 in RRSPs, TFSAs and other investments (excluding their home). Assuming a 4% withdrawal rate, they can withdraw $14,000 or so in income a year from those investments. Using this strategy, the $350,000 will be gone by age 85. “Their withdrawal rate should stay at 4% and only go up to 5% in the years they feel they really need to,” says Martin. “Remember, they will retire 10 years before most people do, and that’s expensive.”

Modify the plan at 65
At 65, Ralph and Melissa will receive a total of $8,000 or so annually in payments from CPP and OAS. They will still have the $25,000 in income from their condos and the $14,000 in withdrawals from their investments. “This will give them $47,000 in gross income from age 65 to 70, which is more than enough,” says Weigh House’s Martin.

Buy an annuity
At age 70, the couple can start selling their condos. They should sell the first one when they are 70, the second at 72 and the third at age 74. They can then use that money to buy three separate standard joint-life annuities.
An annuity is a contract with an insurance company or bank. You pay the company a lump sum and the company then guarantees to pay you a monthly income for a set period of time, much like a pension. The payments you receive are based on your age (the older you are when the payments start, the higher the payment) and interest rates at the time of purchase (the higher the better).

Assuming they have $380,000 from their condo sales, that would be enough to provide them with an annual income of $20,000 for life. By buying three separate annuities—at ages 70, 72 and 74—they’ll minimize the risk that they will buy when interest rates are exceptionally low. Along with the $14,000 in withdrawals from their investment portfolio and the $8,000 in government benefits, the annuities should provide them with all the money they’ll need to be comfortable.

Hold on to their home
Though it’s true that the Copperfields don’t have children they have to provide for, they also won’t have the support system that kids can provide in old age. Because no one knows when they’re going to die, and they don’t know what their costs will be near the end of their lives, they should hold on to their house until they need long-term care or have to go into an assisted living facility. “The house is their ace in the hole,” says Otar. “Even if something goes wrong and they mess up their finances somehow, or if they both need long-term care well into their 90s, they can sell their home and the proceeds can cover all those costs.”

As for dying without an estate, the experts are unanimous. “The only way they can die broke while still making sure they have the money to cover their needs at the end of life is to give whatever money is left over at that time to charity,” says Otar. “If they put that in their will, they will get their wish: they’ll die without a penny remaining.”

How the money is spent