Personal Finance Family Finance

“This is a case of fixed income, moderate spending and moderate needs,” says the expert

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Jan 14, 2022 • Jan 14, 2022 • 5 minute reading • 9 Responses Marty and Eve's retirement income would exceed their expectations, with one concern: life insurance. Marty and Eve’s retirement income would exceed their expectations, with one concern: life insurance. Photo by Gigi Suhanic/National Post Illustration

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A couple we’ll call Marty and Eve, both 40, are raising three children — two toddlers and a seven-year-old — in Alberta. They bring home a combined $10,200 a month from their construction and healthcare jobs, respectively. They have $359,950 in financial assets, including their $62,800 family RESP plus a $825,000 home and a $77,000 cottage. Their mortgage has been paid and their only debt is a $135,000 line of credit. They have a secure financial basis for the future.

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They fear that their preparations for retirement in 20 years and for the post-secondary education of their children will not be sufficient. In fact, they are late building retirement savings. Their concerns are understandable.

email andrew.allentuck@gmail.com for a free Family Finance analysis.

Family Finance asked Eliott Einarson, head of the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Marty and Eve.

Retirement Goals

A $76,000 annual occupational pension from Eve’s job is expected to provide the foundation for their retirement, but their financial assets are relatively modest.

What works in their favor when it comes to their 20-year timeline is their low debt burden and the fact that their children will be out of the house by then, perhaps even pursuing careers of their own or completing their post-secondary education. Factors working against them include Marty’s decision to pay herself dividends instead of salary, thus avoiding contributions to the Canada Pension Plan. That means he gets a very modest CPP benefit and OAS doesn’t start until age 65.

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Expenses and Savings

Currently, Eve earns $60,000 a year before taxes or $3,200 a month after taxes and deductions. Marty takes home $7,000 a month after business expenses and taxes. With their $10,200 per month, they can allocate $2,400 towards paying off their $135,000 line of credit. At that rate, it will be gone in about five years.

Other expenses include $1,200 per month for childcare. That will be gone in five years when their youngest is in primary school. They also save $627 a month for the kids’ RESP, $400 a month in Eve’s RRSP, and $1,000 in their TFSAs. The balance of the expenses supports the daily expenses.

The RESP family’s current balance, $62,800, grows with contributions of $7,524 plus the Canada Education Savings Grant of $500 or 20 percent of contributions per beneficiary, $2,508 in this case times three, totaling $9,029 – call it $ 9,000 per year – will rise to $190,668 in a decade when the oldest child is ready for post-secondary education. The younger children, ages five and two, will have a longer period for accumulation, so the amounts available would be $63,555, $73,698, and $90,100 from oldest to youngest. The parents could easily calculate the average of the amounts so that each child would have $75,784. That’s more than enough per child for a first degree if they live at home and even some left over for postgraduate studies.

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Retirement Goals

Their retirement goal is $5,000 a month after taxes, but $6,000 in 2022 dollars is more realistic, Einarson suggests. Their RRSPs have a balance of $275,625, their TFSAs have $21,150, and the Children’s RESP has a balance of $62,800. All in all, they have a net worth of $1,156,950, of which the RRSPs and TFSAs, totaling $297,775, are their special retirement funds.

In five years, when their HELOC is paid off, Marty and Eve can start adding $3,000 per month to an unregistered investment account. If they keep that savings rate for 15 years and generate three percent after inflation, they can build $689,650 in unregistered assets by age 60. That would bring in $31,160 after-tax for those aged 35 to age 96.

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Eve has $169,000 worth of RRSPs. She adds $400 per month and her employer adds $450 per month. That works out to $10,200 a year. Added to existing RRSP assets, the RRSPs will grow to $579,300 in 20 years. That amount would support annual taxable payouts of $26,630 for the age of 35 through her 95th birthday, paying out all income and capital. Marty has $106,000 in his RRSP. Without further contributions, this balance will grow to $191,448 in 20 years, assuming a three percent return after inflation. That amount will generate $8650 in annual taxable income using the same assumptions.

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Adding together the income components at age 60, they would have an annual RRSP income of $26,630 and $8,650, and $31,160 from unrecorded investments. That’s a total of $66,440. After splitting qualifying income and 10 percent average tax, they would have $59,796 per year. Their TFSA with current balances of $21,150 and $6,000 each in annual contributions will grow to $371,500 in 20 years. That balance would generate $16,785 in tax-free retirement income for the next 35 years. Added to their other retirement income, they would have $76,581 annual net income. That’s $6,380 per month, just over their adjusted monthly retirement income target.

At age 65, they can each add $7,850 from Old Age Security plus Canada Pension Plan benefits of $11,000 per year for Eve and $1,450 per year for Marty. That would raise their annual income to $94,590, not counting TFSA earnings. After 15 percent average tax, they would have $80,401 and $16,785 of their TFSAs would total 97,185. That’s $8,100 a month. Splitting of eligible income would ensure that the OAS chargeback is avoided. The couple’s retirement income would exceed their expectations — with one concern.

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Marty and Eve have no life insurance policy other than an annual salary for Eve through her employer. They would do well to discuss life insurance with a few independent agents for a policy for Marty and perhaps additional life insurance for Eve. Given their rising surplus, they could cover needs until the kids move out of home in up to 20 years, or make life insurance a part of their retirement investment planning. The costs would be manageable as the needs of the family diminish. It’s worth investigating, Einarson explains.

“This is a case of steady income, moderate spending, and moderate needs,” explains Einarson. “Eve and Marty can have financial security, a comfortable retirement and give their children the resources for post-secondary education.”

4 pension stars**** out of 5

email andrew.allentuck@gmail.com for a free Family Finance analysis

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This post This couple wants to retire at 60, but needs to save faster to get there

was original published at “https://financialpost.com/personal-finance/family-finance/this-couple-wants-to-retire-at-60-but-needs-to-speed-up-their-savings-to-get-there”