Situation: Professional couple with six-figure income but no company pension wants to retire at 55
Solution: The numbers say it won’t work before age 60 and that 65 would be the safer bet
In Ontario, a couple we’ll call Terry, 42, and Connie, 38, are raising their year-old child, Lou. Barely at the beginning of middle age, they have a $575,000 house, nearly $374,000 in RRSPs, and only one significant debt — their $295,900 mortgage. Their after-tax income currently checks in at $8,260 per month. Terry, a computer scientist, and Connie, a part-time financial consultant, believe that there is life after 9 to 5, but their goal of retirement in 13 years when Terry is 55 is problematic.
“We worry how long Terry can maintain his current, demanding pace,” Connie explains. “He may need to throttle down before his mid-50s. Would that work?“
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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Terry and Connie. “For their ages, they are off to an excellent start,” Moran explains. “Their mortgage debt can be paid off in a dozen years. Then their expenses will drop by the amount of their discontinued mortgage payments.”
Currently, Terry and Connie bring home $8,080 per month from regular salary. Terry gets a variable bonus of 15 per cent of salary. It is not guaranteed, so it is not included in calculations, Moran explains. They add about $180 per month from the Canada Child Benefit, which is not taxable.
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The largest item in their budget is $2,400 for RRSP savings. They do not contribute to RESPs because all educational savings are taken care of by Terry’s parents. If the parents maximize contributions of $2,500 per year to qualify for the lesser of $500 or 20 per cent of contributions, then in 17 years when the CESG has to end, they will have contributed $42,500 and received the $7,200 CESG limit per beneficiary. On this schedule, the CESG will have stopped in Lou’s 14th year. At this point, the education fund, assuming a 3 per cent average annual gain after inflation, would have a balance of $64,600 in 2018 dollars, sufficient for books and tuition at a local college or university. If Lou lives at home, the fund would suffice, Moran estimates.
The couple’s RRSPs currently add up to $373,506. If they continue to add $2,400 per month, as they are doing now, then with 3 per cent growth after inflation it would become $998,300 at Terry’s age 55, his threshold for retirement. If that sum is withdrawn even over the next 39 years to Connie’s age 90, it would generate taxable indexed income of $43,800. However, if they work and grow their RRSPs to Terry’s age 60, they would become $1,310,200 and provide an annual pre-tax income of $62,000 per year for the following 34 years to Connie’s age 90.
The couple has no TFSAs. This makes sense given that they divert spare income to paying down their mortgage debt. However, Connie expects a $150,000 inheritance. If they use this money for TFSAs, then Terry can fill $57,500 of TFSA room while Connie, who became a resident of Canada in 2015, can contribute $10,000, the limit in that year, for her first year of residence and $5,500 for each year thereafter, has $26,500 of room. That is $84,000 of room in total.
If they use the inheritance to start filling up their TFSAs in 2018 and add $5,500 each for the next 13 years, the combined accounts would, with the 3 per cent after inflation return we assume, have a balance of $300,000 at Terry’s age 55, and $408,300 at his age 60. If withdrawn evenly, the TFSA balance at 55 would support payouts of $12,770 to Connie’s age 90. If contributions continue to Terry’s age 60, the fund would have a balance of $400,000. That would support payouts of $18,900 to Connie’s age 90, Moran estimates.
If Terry retires at age 55, then we’ll estimate he gets 70 per cent of the Canada Pension Plan maximum at 65, currently $13,610 or $9,527 per year with an age 65 start. For retirement at 55 and a five year wait to age 60 to start benefits, he would get about $6,100 per year. Connie, who will have been a resident in Canada for only 17 years when Terry is 55, would, based on her income to date, have a CPP payout of perhaps $2,700 per year based on her earned income to date and expected for the period to Terry’s retirement. Terry’s annual Old Age Security benefit would be $7,040 if he begins at his age 65. At that time, Connie will have been resident in Canada for 30 years. She would receive at most $5,280 per year.
Adding up retirement income components, the couple would have $43,800 from RRSPs at Terry’s age 55. They could add TFSA cash flow $12,770 for total income of $56,570. If the income were split and income tax paid at an average rate of 10 per cent with no tax on TFSA income they would have $4,350 to spend each month at age 55. If they work to Terry’s age 60, they would have $62,000 from RRSPs, $18,900 from TFSAs, and they would have $6,200 per month to spend.
After they start CPP at 65, they would have $62,000 from RRSPs, $18,900 from TFSAs, $12,320 from OAS and $8,800 from CPP. That is a total of about $102,000. After 14 per cent average tax on all income other than TFSA income they would have about $7,500 to spend each month.
Present monthly expenses of $7,490 would decline to $5,134 if the mortgage were paid off. There would also be costs associated to raising Lou, who would be 13 when Terry is 55. Let’s say that they need to spend $6,000 per month when Terry is 55. Clearly, they would not have the income at age 55. At age 60, they would be able to cover estimated expenses with $6,100 of after tax income. With CPP and OAS added when Connie begins to draw her benefits at 65, their monthly income of $7,500 would more than cover estimated expenses.
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Retirement stars:Three retirement stars *** out of five