All posts by Financial Independence Hub

Lessons from Tuchman

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Image courtesy BMO ETFs/Getty Images

Second Quarter 2026 BMO Macro Regime Model – Strategy Report

By Bipan Rai, BMO ETF & Structured Solutions

(Sponsor Blog)

Upon reflecting on the current state of markets, we’re reminded of the lessons from Barbara Tuchman’s The Guns of August, which illustrates how hubris and rigid systems can override rational decision-making.

While we are not drawing direct parallels to the current situation in the Middle East, the book offers important lessons for investors as they navigate portfolio construction in the months ahead.

As an example, periods of higher inflation generally increase the co-movement between U.S. stocks and interest rates, requiring a more pragmatic approach to diversification. This often leads to greater interest in real assets like gold, as we’ve seen in recent years.

But what happens when even gold fails to provide adequate diversification during a geopolitical shock? Tuchman’s work reminds us of the importance of stress-testing assumptions before a crisis unfolds. When correlation structures break down and traditional hedges falter, investors who have considered tail risks in advance are better positioned.

With that in mind, let’s consider the present environment. Even if the Middle East conflict is resolved quickly, the economic and market consequences will likely persist. Inflation risks are no longer symmetrically distributed, and price pressures appear likely to rise. Damage to energy-related infrastructure points to a prolonged period of crude oil and LNG supply disruption, pushing prices higher for longer. This affects refined products (such as gasoline, jet fuel, and kerosene), fertilizer production, and the supply of helium: complicating central bank messaging. Markets have responded by pricing out expected Federal Reserve rate cuts and pricing in aggressive hikes for other developed-market central banks (Chart 1).

Chart 1 – Markets Have Priced in Tighter Central Bank Policy by End-2026

Source: BMO Global Asset Management, as of March 27, 2026.

At the same time, growth risks are shifting in the opposite direction. Higher input costs act as a tax on consumers and weigh on corporate margins. The speed at which rising energy prices feed into slower growth depends largely on a country’s economic slack, which explains why some central banks have recently acknowledged growth risks more explicitly than they did in early 2022.

Indeed, our own proprietary macro regime model is signaling that we are transitioning from a ‘reflation’ backdrop to a more stagflation-like regime (Chart 2).1 This emerging stagflation regime need not mirror the 1970s, but we are still positioning our portfolios to be more robust and resilient. We’re broadening our commodity exposure to provide a more direct hedge against supply shocks. In an environment where inflation surprises are more likely to be positive, this type of convexity is valuable.2

We are also allocating to front-end TIPS (Treasury Inflation-Protected Securities) as a hedge against inflation pressures. While breakevens3 have moderated with recent disinflation progress, they do not fully reflect a sustained energy shock. TIPS offer a cleaner way to express inflation risk without requiring a strong view on nominal growth.

Within equities, we are tilting toward quality and low volatility. If growth slows while cost pressures persist, companies with strong balance sheets, durable margins, and stable cash flows should outperform more cyclical or highly leveraged peers. Low-volatility exposures can also help reduce drawdowns during headline-driven market swings.

History teaches us that conflict does not guarantee crisis. But periods of stress often reveal underlying fragilities. Our role as stewards of capital is not to forecast every geopolitical development, but to recognize that the distribution of macro outcomes is tilting toward a stagflation-like environment: and to position portfolios accordingly.

Chart 2 – Broad Commodity Exposure is Now a Better Diversification Strategy than Just Relying on Metals

Source: BMO Global Asset Management, Bloomberg. Daily returns from February 27 to March 27.

Asset Allocation

  • Relative to the Q1 edition, we’re making some modest changes to our asset allocation splits. The most notable shifts are that we are paring our positions in the equity and alternative sleeves and reallocating them towards fixed income. Of course, these aren’t big changes: as we still remain underweight fixed income and overweight both equities (slightly) and alts.
  • Our macro regime model suggests that we are in the midst of a transition from reflation to stagflation: characterized by low growth and high inflation. This is still consistent with the late cycle feel of the macroeconomic backdrop.
  • Despite the challenging backdrop, the underlying fundamentals remain sound enough to maintain a neutral/slightly overweight broad equity position for now. Ahead of the conflict, we did see earnings growth across several sectors in the U.S. and Canada. At the same time, the situation in the Middle East remains fluid, which requires us to be nimbler and more flexible.
  • In the fixed-income sleeve, the increase in weight reflects our view that the Canadian yield curve4 provides better value and that we feel U.S. TIPS should outperform in the months ahead. For the alts sleeve, the reduction in weight reflects our shift away from gold and towards a broader set of diversifiers in the commodity and infrastructure spaces.
  • Importantly, we are bullish on the U.S. dollar (USD) for the coming months. This means that our preference is to keep our U.S. exposure unhedged on a tactical basis. The main reasons for this view are the following:
    • We expect the CAD swaps market to price out rate hikes for the Bank of Canada in 2026.
    • We expect USD upside as net long positioning remains relatively light.

Equities

  • We are increasing our allocation to ZCN (BMO S&P/TSX Capped Composite Index ETF) as Canada remains well positioned as a commodity and energy producer. With energy prices supported by ongoing geopolitical uncertainty, the Canadian equity market should continue to benefit, though outcomes will remain sensitive to the duration of the conflict in the Middle East.
  • For our U.S. position, we are adding ZLU (BMO Low Volatility US Equity ETF) to complement our existing exposure through ZUQ (BMO MSCI USA High Quality Index ETF) . This combination reflects a preference for defensive characteristics and earnings resilience during a period whereby investors remain selective on valuation and fundamentals.

Fixed Income

Alts/Hybrids

  • The most notable change we’ve made in Alts/Hybrids is adding a tactical allocation to ZCOM (BMO Broad Commodity ETF) to broaden our inflation and geopolitical hedge. Energy has led performance on a year‑to‑date basis, but a persistent risk premium can support a wider set of commodities, which improves diversification if equity volatility picks up.
  • We’ve also upgraded the weight for BGIF (BMO Global Infrastructure Fund ETF) as we continue to constructive on infrastructure, including electric grids, and engineering/construction projects.

Chart 3 – Q2 2026 Regional Exposure

Source: BMO Global Asset Management, as of March 31, 2026.

Chart 4 – Global Equity Sector Breakdown

Source: BMO Global Asset Management, as of March 31, 2026.

Standard Performance Data

 

Continue Reading…

There are no Guarantees in Retirement

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By Billy and Akaisha Kaderli

Special to Financial Independence Hub

Akaisha and Billy playing tennis in Arizona: RetireEarlyLifestyle.com

People often tell us they are going to wait a few more years to retire.

They point out that by waiting, they will have health care provided for life and a pension that will let them afford the same lifestyle to which they’ve become accustomed. They won’t have to scale back on spending or make awkward choices concerning their budgets. Not only will they not need to relocate to a city or state that is more affordable, they will be able to own two houses: one at home with their country club membership, and another on a lake, near a beach, or in a foreign country.

Sounds great

These people have worked their entire lives for this remarkable retirement plan.

They have made personal sacrifices throughout the years such as spending time away from the family, not pursuing their hobbies, and not taking long sabbaticals. They have made these choices because in doing so, their retirement plan will be fully guaranteed.

After investing 35 or 40 years of their working lives, saving their money, raising children, and putting their own personal wants on the back burner, they now look forward to that day when they can relax and finally enjoy the life they deserve.

No tough decision making, no cutting back on their consumer habits.

Or at least, that’s how they think it’ll be.

There are no guarantees

What we have learned in our three decades of financial independence is that the perfect time for retirement simply doesn’t exist. Things change, and sometimes radically.

Perhaps your personal plan for retirement was to take big amounts of equity out of your home. But then the housing market takes a dive or your home or is affected by something out of your control. Oops.

Natural disasters can come up, affecting your lifestyle and investments. Forest fires, floods, hurricanes, earthquakes, drought can all threaten your home whether you have insurance or not. What an upheaval! It’s a financial and emotional storm no one wants to go through.

Financial markets have their earthquakes too. While the market over the years has performed at about a 10% annual return including dividends since we retired in 1991, those of us who are older now and receiving Social Security might not have the time to recover from something drastic.

Health challenges

We have a myriad of friends who, as they worked and aged, have had health problems affect either them or their spouses. One man wanted to travel through Europe, but now has developed claustrophobia (due to an earlier trauma he suffered) and can no longer fly, or take a cruise in a tiny cabin, far from shore.

What if you or your spouse find yourselves with a medical condition that doesn’t allow you the freedom you fought so hard to achieve? What if your grandchild has special needs and requires assistance, time, or your financial help?

Where can you look for comfort in circumstances such as these?

Reap reward from your self-reliance

If you have learned to live below your means, have kept your monthly expenses reasonably low, and have not loaded up with huge amounts of consumer debt, the above scenarios could be an uncomfortable bump in the road, but not a life-defining event.

If you find yourself awash in a financial storm and the days down the road seem dark and menacing or if your retirement dreams seem to be permanently shelved, try some of the following steps to regroup:

Stay calm.

People retire every day, in good times and bad. Like deciding to have a child, it’s never the perfect time. Realize that it’s normal in life for unforeseen events to rattle your confidence level, so try not to let it faze you. Above all, do not make a reflexive emotional decision about the rest of your life by making a bad trade, or an impulsive decision about your home.

Be independent.

Make your own retirement investments independent of your employer’s plan. Don’t rely solely on your employer for your retirement, whether it’s through a traditional pension or with company stock in a 401(k). This way, if your company goes under for reasons you cannot see today, you’ll still be in control of your future.

Know where you stand.

Get support from your past good behaviour. If you have been tracking your spending and living below your means, you know exactly where you are financially. The confidence and discipline of controlling spending should give you great self-assurance that you can weather any storm. And you will know exactly where to make spending changes if need be. Look for buying opportunities.

It’s always a good time to review your portfolio to see whether you have been over-concentrated in one stock or in one particular sector. We recommend no more than 4% in any one particular stock, and that includes the companies you worked for. A balanced portfolio with roughly 60% equities to 40% cash/bonds and equivalents for those in or nearing retirement is a good approach.

Invest in no-load ETFs (Exchange Traded Index Funds) such as VTI, Vanguard Total Market Fund or SPY, S&P 500 Index, that you can buy or sell in real time, instead of the market price at the day’s end and use weakness in the market to add to your positions.

Consider other work possibilities.

If the idea of fully retiring frightens you, consider working part time, cutting back the hours at your current job, doing consulting work, or starting a second career. You’ll still earn income, but you may not have the same work demands that your current job makes of you.

Get creative.

Consider other alternatives for the expression of your retirement life. Perhaps you now have the incentive to think about relocating to a smaller home, a more affordable city, or to own one vehicle instead of two. You don’t need to shelve your future plans entirely. Find other ways of scaling down pressure and moving toward fun, relaxation, and new ways of self-expression.

Join a free forum.

You are not alone. If you find yourself in a financial or health challenge, there are others who are facing something similar. They may have an answer for you, share some tips or point you in the right direction to receive the help you are looking for.

No matter what your circumstances, there are always opportunities, there are always options. Be open to them and make the most of where you are!

Billy and Akaisha Kaderli are recognized retirement experts and internationally published authors on topics of finance, medical tourism and world travel. With the wealth of information they share on their award winning website RetireEarlyLifestyle.com, they have been helping people achieve their own retirement dreams since 1991. They wrote the popular books, The Adventurer’s Guide to Early Retirement and Your Retirement Dream IS Possible available on their website bookstore or on Amazon.com. This blog first appeared at RetireEarlyLifestyle.com and is republished on Findependence Hub with their permission. 

How to Shield your Nest Egg from a Single Point of Failure

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Image by unsplash

By Devin Partida

Special to Financial Independence Hub

Building a nest egg is a respectable goal for financial enthusiasts at all levels, but many focus entirely on accumulating capital, losing sight of key structural considerations.

As fulfilling as it is to watch your balances grow through long-term discipline and determination, ensuring that Wealth is supported by sufficient pillars is imperative for success. When the entire fate of your security relies on a single stock or industry, it’s more of a gamble than a solid foundation.

What is a Financial Single Point of Failure?

In Engineering, a single point of failure is a component that brings down the entire system if it malfunctions. The world of Finance is no different. A financial single point of failure occurs when a specific asset or condition in your portfolio accounts for a disproportionate share of your net worth.

For many professionals, this often manifests as concentrated stocks. If your primary income or retirement savings are tied to the success of your employer, a scandal or industry downturn could wipe out both your career and savings at once.

Another common problem is not having an appropriate amount of liquid reserves. While having home equity is a key aspect of a wealth strategy, having little liquidity is a risk. A sudden shock like a medical emergency could force you into a high-interest loan or a badly-timed panic sell.

Core Strategies for Financial Protection

Effectively shielding your nest egg requires understanding and implementing a few fundamental concepts:

Diversify your Investments

Many financial enthusiasts believe that portfolio diversification simply entails owning multiple stocks. While this holds some truth, it’s a small part of the equation. Optimal diversification requires an understanding of correlation.

If you own 10 different companies, but they all belong to the software industry, it is still considered a single point of failure. A shift could cause all your assets to depreciate simultaneously. If your portfolio looks like this, consider branching out to other asset categories, such as bonds or real estate.

How you allocate assets should be determined by personal risk tolerance, financial targets and current situation. Many people prefer sticking with longer-established investments such as government bonds or Exchange-Traded Funds (ETFs.) Others lean toward newer and more  “adventurous” investments such as cryptocurrency and blockchain technology, which have shown considerable innovation in recent years.

Protect your Major Assets

If you own a home, that is likely your largest asset. It can also be a significant liability if not managed with vigilance. Proper diligence involves paying for insurance and managing the risks associated with maintenance.

For example, it’s essential to ensure hired contractors carry adequate insurance to shield you from liability during renovations. Taking the time to verify coverage prevents sudden workplace accidents on your property from turning into expensive lawsuits that drain your investment accounts.

Build an Emergency Fund

A liquid emergency fund is the most effective insurance for your long-term investment strategy. Continue Reading…

Early Retirement Planning Q&A with Tawcan

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By Bob Lai, Tawcan

Special to Financial Independence Hub

Early Retirement Planning - Q&A with Reader P
Image courtesy Unsplash/Tawcan

As you can imagine, a lot of planning is required to reach early retirement. Despite all the planning, projections, and running different scenarios, there will always be some level of uncertainty when it comes to early retirement. However, because the financial independence retire early (FIRE) community is a very supportive and tight-knit one, it is not difficult to find help and support.

A few months ago, I wrote about some of the steps we are taking and plan to take in our early retirement planning. After the post was published, a long time reader called Reader P reached out and shared his and his wife’s early retirement plans and some of their thoughts. After some back and forth, I thought it would be interesting to share their story and their early retirement plans in the form of a Q&A.

Q1. Welcome to this blog, Reader P. We have exchanged emails over the years (8 or more years, I think). Very happy to hear that you have enjoyed reading this blog. Can you tell us a little bit about yourself and your wife? 

A1. First of all, thank you, Bob for giving me this opportunity! Your blog is one of the very few blogs I frequent and I admire what you have accomplished. Moreover, you are an inspiration to anyone who wants to achieve Financial Independence.

As for us, we are in our mid-40s with 3 kids aged 14, 11, and 9. I am a Professional Engineer earning $130K (before any bonuses) and my wife is a Registered Nurse who now works 0.6 FTE (full time equivalent, starting 2022) and picks up additional shifts; her total salary hovers around $80K. She was full-time before but with our current situation, it is time we lead a little more balanced life.

We try to live off of her income and my income is used for investing, mortgage pre-payments, and for anything that is “fun” which includes travel, kids recreational activities, and cars.

We didn’t start saving/investing until we turned 30, and in our 20s, a lot of $ was spent on things that ultimately added no value to us.

Q2. That’s interesting you try to live off Mrs. P’s income and use your salary for mortgage payments and investing purposes. What was the reason for such an arrangement?

A2. Because my job isn’t always secure, it made sense for us to live off of her income, as she is a nurse and her job is quite secure.

Thankfully, I was only laid off once early in my career and found another job within a month. However, being laid off early in your career can significantly alter your perspective on the world.

Q3. Are both you and your wife maxing out TFSAs and RRSPs every year? Why do you think that so many Canadians don’t max out their TFSAs and RRSPs? 

A3. Yes, we max out both TFSAs and RRSPs each and every year, after we turned 30. TFSAs were introduced when we were in our late 20s so it was rather easy to use up the contribution room once we got serious about investments.

As a nurse, Mrs. P’s actual RRSP contribution room is reduced because she has a defined benefit pension plan. So it is “easier” to max out her RRSP room as it’s under $4K per year. Mine is a little more, but we are still able to save each month, which we then put towards a non-registered account(s).

Most folks don’t put in as much in their registered accounts, probably because of a lack of knowledge, information, and understanding. Compounding works amazingly, and its full power can only be felt if you start early. That is what I’m teaching my eldest.

Q4. Do you have pensions through work? Has having pensions through work made your early retirement planning a little bit easier? If not, please explain. 

A4. Yes, I do have a pension through work via SunLife. Unfortunately, I don’t have much say except that I have selected or opted for index-based mutual funds. I only contribute enough to get the match from the employer, which is 5% (so I contribute 5% and the employer matches that). The rest of the RRSP contribution room is done by me directly, by investing in low-cost index funds.

I think having a defined benefit pension plan is like gold; they are hard to come by, but once you have it, you should never let it go (within reason). But having a pension through work that is mostly mutual funds with high fees isn’t that great. I sometimes wish my employer would just give me the 5% directly, and I would invest it myself. I have kept track of my performance for RRSP from work and RRSP that I self-manage, and as you expect it, my self-managed RRSP is easily outperforming the Sunlife options because of the fee difference.

As for early retirement planning, I would say that for most, having pensions through work is very beneficial, given the match from the employer. And having a defined benefit pension plan is like hitting a jackpot.

Q5. You shared a similar investing path as us: started out with mutual funds then went into DIY investing. Why did you make this switch?

A5. So we started investing in 2010 when we were expecting our child. In the 2000s, we didn’t invest anything other than a matching work pension. At that time, I had no idea how to invest, and everything felt so new. But with a kid on the way, it prompted me to do more work.

I started with reading several books (Millionaire Next Door, Stocks for the Long Run, etc.), and I found the Canadian Couch Potato blog and realized that investing is quite simple: just buy a low-cost index fund and stay the course. We were with TD bank, so buying TD e-series mutual funds, which were index-based funds with the lowest MER was the way to go. So we started DIY investing. We went with what was called an aggressive portfolio: 25% each of CAD, US, Int’l and Bonds (TD900, TD902, TD911, and TD909). I’d buy once a month each so that is 48 total transactions, and the best part about TD e-series mutual funds is that they are commission-free. So we were saving $480 per year in transaction fees. Another benefit of TD e-series mutual funds is that there is no bid-ask spread, so that is some savings there as well. Plus, your dividends are automatically reinvested which means that there is no drag of uninvested cash. TD e-series mutual funds were our go-to from 2010 until 2022.

Side note: I eventually got rid of my entire bonds position in 2022 because I realized that I don’t need bonds to help me stay the course. Volatility didn’t bother me one bit and I already had a mortgage so logically speaking, having bonds made no real sense. With that said, I would still consider buying bonds again about 5 years before full retirement.

Tawcan: Agree with you, the TD e-series mutual funds are pretty great,

Q6. When you went away from mutual funds, you went with index ETF investing, then switched to dividend growth investing, and recently moved back to index ETF investing. Can you explain the reasons behind these moves? 

A6. The more I read, the more Dividend-Growth-Investing spoke to me. I loved the idea of having free income coming in, and having lost a job in 2012, I really was intrigued by the idea of living off of dividends, so we started buying dividend-paying Canadian individual stocks. We did that from 2015 to the summer of 2022.

In the spring of 2022, my eldest, who was 11 at the time, was displaying some negative behavioural symptoms. We initially thought that she was just going through puberty, but it turned out to be far, far worse.

Because of school shutdowns and a lack of social interactions due to COVID, many, many kids got the short end of the stick. My girl was one of them. She also faced cyberbullying, and we had to take major interventions to ensure that she went back on track (and thankfully, she is now). Basically, a smart, hard-working girl who gets good grades started getting below-average grades, got bullied, started having suicidal thoughts, etc., really puts another perspective on what is important in life.

Tawcan: Sorry to hear that you went through that. That must have been rough for the family.

A bit more background. In spring 2020, when markets crashed, both Mrs. P and I agreed that this is a once a once-in-a-generation buying opportunity. In fact, many stocks in 2020 were as cheap as they were when we first started buying them in 2015!

As such, Mrs. P. picked up as many nursing shifts as she could. Because of shift-differentials (you get paid more if you work evenings, weekends, and a lot more if you work STAT or Overtime), Mrs. P worked extra long and we banked a lot of cash. In 2020 alone, we saved and invested six figures in non-reg accounts. We did that again in 2021, and we did around $40K in 2022. Then we had this behavioural problem that came upon us, and it dawned on us that money isn’t everything.

So we changed our strategy: she went to work part-time and we started paying a lot more attention to all three kids to ensure that they are on the right track. What good is having a 7-figure portfolio if your kids are on drugs and are under a bad influence?

At the same time, I had been reading Humble Dollar blog and came to the conclusion that volatility doesn’t bother me at all. So I sold all the TD e-series mutual funds and converted them into XEQT in both our TFSAs and RRSPs.

We also stopped adding to our non-registered accounts but we still max out TFSA and RRSPs.

The main reason we stopped buying individual stocks is that there is a tremendous amount of empirical evidence that suggests that buying individual stocks is a loser’s game.

So I honestly asked myself why I even started buying dividend-paying stocks? I came up with 4 reasons: Continue Reading…

Relying on Inheritance: Retirement Cash Flow Review

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By Dale Roberts, Retirement Club/Cutthecrapinvesting

Special to Financial Independence Hub

The Globe & Mail offers ongoing real-life retirement funding (cash flow plan) scenarios. They also invite a financial planner to offer their opinion. They call the series Financial Facelift. A recent article caught my eye. I thought I would give it a go using a popular free use retirement software that allows DIY retirees and near retirees to run their own plans.

The following is a cash flow review from the Globe. I was curious, so I started to enter the details at MayRetire:  a very intuitive, easy-to-use (free use) retirement cash flow calculator.

And I’ll show you how:  you can join Dale for a …

How to use MayRetire Intro Zoom Call Session

You can join a 12 pm or 7 pm EST session this Thursday, April 16th.

Time: Apr 16, 2026 12:00 PM Eastern Time

Join Zoom Meeting: Click on this Zoom Call LInk

Enter this Passcode: 156627

Meeting ID: 865 0137 0741

Time: Apr 16, 2026 07:00 PM Eastern Time

Join Zoom Meeting: Click on this Zoom Call Link

Enter this Passcode: 828943

Meeting ID: 585 884 9710

The Financial Facelift scenario

Ennis and Kara are planning to retire soon, leaving behind joint family income of more than $340,000 a year. Ennis is 61 years old and earns $220,000 a year in senior management. His wife, Kara, is 54 and earns $120,000 in research.

Both have defined-benefit pensions. Ennis’s will be $27,960 a year, while Kara’s will pay $9,000 a year. Both pensions are only partly indexed to inflation, his 50 per cent, hers 60 per cent.

“We’ve received no shortage of advice on how to prepare for this transition, but are interested in getting an experienced, objective view on whether we can retire on our timeline or are being overly optimistic,” Ennis writes in an e-mail.

Both anticipate receiving inheritances at some point.

Their goals are to travel and help their three young adult children buy first homes when the family cottage is sold. Their share will be about $150,000.

Two of their children are still living at home.

Check out Retirement Club for Canadians

The couple’s home in an Ontario city is valued at $1.1-million, and has a $300,000 mortgage. Their retirement spending goal is $135,000 a year after tax.

The G&M asked Ian Calvert, a certified financial planner and head of wealth planning at HighView Financial in Oakville, Ont., to look at Ennis’s and Kara’s situation.

What the expert says

Ennis and Kara have a net worth of about $2.18-million, Mr. Calvert says.

“They have a healthy asset base, and their pensions are a strong component of their retirement plan,” he notes. “However, without any non-registered assets or tax-free savings accounts (TFSAs), all of their withdrawals in retirement will be treated as taxable income, with the exception of their cash savings.”

To fund their cash flow requirements, they will need to withdraw about $129,000 a year from their combined RRSPs and locked-in retirement accounts, or LIRAs, the planner says.

“Before they start consistent withdrawals from these accounts, they should consider converting their RRSPs to registered retirement income funds (RRIFs) and unlock 50 per cent of their LIRAs,” Mr. Calvert says.

Unlocking 50% of the LIRAs

The unlocking of retirement assets adds more flexibility: They are moving assets out of LIRAs, which have annual withdrawal maximums, into RRSPs, which do not.

Moving assets from RRSPs to RRIFs makes sense because they are entering their withdrawal phase and need consistent income from these accounts.

“It’s important to remember that the 50 per cent unlocking is a one-time option that should be completed at age 55 or older when you are completing the transfer from a LIRA to a life income fund (LIF) and starting to withdraw.”

The couple’s $129,000 withdrawal, plus combined pension income of $37,000 a year, will give them a total family income of $166,000 a year, less $31,000 in income taxes. This will meet their after-tax spending target of $135,000.

“The required annual withdrawals from their retirement savings represent about 10 per cent of their portfolio,” the planner notes. “It would be challenging to maintain their capital at this withdrawal rate, and they should expect a decline in capital over time.”

Fortunately, they have two items that will reduce the withdrawal rate. “First, they are expecting a combined inheritance of about $1.3-million in the next few years,” Mr. Calvert says. “Second, they will both be getting Canada Pension Plan and Old Age Security benefits.”

When their inheritance comes through, they should use part of it to fund their TFSAs to the maximum available limit at the time, Mr. Calvert says. Currently, the lifetime maximum TFSA contribution is $109,000 each, increasing by $7,000 each year.

This will leave a substantial amount to be invested in their non-registered portfolio.

“Investing the remaining non-registered funds to generate steady and reliable income would be beneficial for a couple of reasons,” the planner says. With $1-million or so to invest, “they should build a portfolio structure that not only will participate in growth, but will generate a consistent dividend yield of about 3.5 per cent, or $35,000 a year.”

Relying on inheritance

The inheritance money will give them much more flexibility, the planner says. They will have funds they can access without adding to their taxable income. However, the new investment income from the funds they can’t shelter in their TFSAs will be reported and taxed every year.

“Once their inheritance is received, they could withdraw $35,000 per year from the non-registered portfolio and reduce the withdrawals from their RRSPs and LIRAs to about $89,000 a year. This, combined with their pension income of about $38,000 (with inflation), would bring their total income to about $162,000 year while reducing their taxes to $27,000 per year, he says.

When to take CPP and OAS will depend on the timing and amount of their expected inheritance, the planner says. Without the inheritance, starting their benefits at age 65 would help reduce the annual withdrawals from their portfolio, the planner says.

Because of the seven-year difference in their ages, Ennis and Kara have time to think about when to take benefits. “They could take a hybrid approach,” the planner says. “For instance, if no inheritance was received by 2029 when Ennis turns 65, they could start his CPP and OAS payments to reduce the withdrawals from their savings,” he says. “They would still have lots of time to make the decision for Kara because she won’t turn 65 until 2037.”

They also ask about helping their children. “The challenge in their current position is they don’t have the after-tax capital to do it today,” Mr. Calvert says. “Large withdrawals from their RRSPs would not be tax-efficient and would further hasten the decline in their capital,” he says. “Their only other option is to pull equity from their house, which would come with additional debt servicing.”

The situation

The people: Ennis, 61, Kara, 54, and their three children, 20, 24 and 26.

The problem: Can they afford to retire soon and still meet their retirement spending goal?

The plan: A lot depends on the anticipated inheritance. They’d be drawing heavily on their registered savings in the early years. Ennis could start his government benefits at 65 to keep the withdrawals to a minimum. Continue Reading…