If Mike and Gary were new clients, I would start by congratulating them: $1.5 million in RRSPs doesn’t come overnight. They had to start at a young age and save fairly aggressively to get to this point. However, if they’re now earning $2 million as a couple and spending all of it, they’re spending close to $1.2 million after taxes per year. To expect to do that through retirement, with one person’s cash flow reduced by as much as 75% in two years, is unrealistic. If Mike wants to maintain just his lifestyle, for example, and continues to work for another 17 years, he will have to accumulate about $12 million in RRSPs or other assets—and there is no way he can do that in 17 years. So they’re going to have to find a way to adjust their spending.
To tackle this challenge, Mike and Gary need a good cash flow statement. If they track every dollar they spend for one month, they probably won’t like what they see, and the reduction in spending will come naturally—and for this couple it is really a matter of tightening the reins and adjusting to what their cash flow is going to be. That said, they can still live extremely well. Between the two of them, the $3 million they have in RRSPs will likely turn into around $4.2 million in about seven years, when Gary turns 65, assuming a 5% rate of return. Any future contributions will build on that. But if they start withdrawing some money at that time, they’ll be a long way from where they want to be to maintain a lifestyle of $1.2 million per year.
I would advise this couple to contribute the maximum to both Tax-Free Savings Accounts and RRSPs, to look at some sort of vehicle to save in a non-registered investment, too—and, most importantly, to bring their lifestyle down to what they can afford.