Gloria and Peter own a $1.1-million condo in a small British Columbia town that they share with their son, 21, a student who works part-time and plans to go to graduate school.Melissa Renwick/The Globe and Mail
At the age of 53, Peter is planning well in advance of the day when he hangs up his hat and joins his wife Gloria in the postwork world. Gloria, 61, is retired and has deferred taking government benefits to age 70.
Peter is earning $120,000 a year including bonus. While neither has a defined-benefit pension, Peter’s employer provides partial matching of his contributions to his registered retirement savings plan and his tax-free savings account.
Gloria and Peter own a $1.1-million condo in a small British Columbia town that they share with their son, 21, a student who works part-time and plans to go to graduate school. They have a mortgage of $90,000. They also own a $300,000 co-op vacation property in California that they rent out for a few months every year and which they plan to sell at some point.
Peter and Gloria would like to stay in their home for as long as possible, even if it means spending less money in retirement or working longer. Their $800,000 investment portfolio came from savings throughout their working careers and a family inheritance.
They plan to buy a car in three years – and every 10 years thereafter – at a cost of $40,000. They need to replace the air conditioner in their vacation place. The couple also want to help their son with a down payment on a home.
Their retirement spending target is $80,000 a year after tax. Are they on track?
We asked Trevor Fennessy, a certified financial planner and associate portfolio manager at CWB Wealth Partners in Calgary, to look at Peter and Gloria’s situation. Mr. Fennessy also holds the chartered financial analyst (CFA) designation.
What the Expert Says
“With 10 years until retirement, it’s great that Peter and Gloria are taking a closer look at their overall retirement picture,” Mr. Fennessy says. “A glimpse into the future should provide peace of mind – and the motivation to continue saving diligently over the final years of Peter’s working career,” the planner says.
Between now and when he quits working, Peter will continue to maximize contributions to his employer-sponsored savings programs to capture all available company matching, Mr. Fennessy says. Inclusive of his employer’s contributions, Peter will be contributing $900 a month to his RRSP and $400 a month to his TFSA. These contributions are assumed to increase with inflation as Peter’s salary increases.
Their mortgage rate recently jumped to 7.2 per cent from 1.7 per cent, so any funds available beyond Peter’s group contributions should be used to pay down the mortgage, the planner says. When it comes up for renewal again next year, they plan to shorten the amortization to 10 years so that it will be paid off by the time Peter retires.
Peter and Gloria should prepare for a further increase in their monthly mortgage payment when they renew. “Even if the couple renews at 5 per cent, their monthly payment will increase by more than 20 per cent to account for the shortened amortization period.” Peter and Gloria must adjust their discretionary spending to account for this increase if they hope to enter retirement debt-free, the planner says.
The couple will need to dip into their investment portfolio over the next while to cover some capital expenditures. The air conditioning unit at the vacation property will need to be replaced for $15,000 in early 2025. As well, they would like to purchase a new vehicle for $40,000 in 2027. “To cover these costs, they should draw from their non-registered savings, or simply cut back on their discretionary spending wherever possible to provide funding,” the planner says.
Peter and Gloria’s savings, continuing contributions, and debt repayments will allow them to enter retirement with a household net worth of about $2.94-million, Mr. Fennessy says. This will consist of $1.38-million in investable assets and $1.56-million in real estate. This is assuming a 4.5-per-cent rate of return on all investment accounts, a 2.1-per-cent inflation rate, and 1 per cent annual growth for real estate.
Peter and Gloria have a spending goal of $80,000 a year in current after-tax dollars. They would also like to replace their vehicle every 10 years for $40,000, adjusted for inflation. Peter and Gloria will be selling their vacation property when Gloria turns 80 and travel to the property becomes prohibitive, owing to travel insurance costs, the planner says. “Based on these outlined expenditures, Peter and Gloria are on track to meet their retirement goal and leave a net estate of roughly $1.73-million for their heirs at age 95,” Mr. Fennessy says.
Peter and Gloria’s income throughout retirement will comprise the Canada Pension Plan and Old Age Security benefits and withdrawals from their investment portfolio. Early withdrawals from the registered accounts, ahead of mandatory conversion to registered retirement income funds at age 71, will be helpful to smooth out the couple’s taxable income levels, Mr. Fennessy says. It is unlikely that the OAS clawback will become an issue, he says.
Their investment portfolio will be entirely depleted when Peter reaches 95, the planner says. They will still have their primary residence, but this leaves very little in the form of retirement savings if Peter lives beyond 95.
“For longevity protection, Peter could follow in Gloria’s footsteps and delay his CPP or OAS to age 70,” Mr. Fennessy says. He had been planning to take them at 65, but waiting will give them higher benefits, which in turn will allow more of their investment portfolio to remain in place.
The equity in the couple’s home provides a solid buffer for covering medical expenses that they may need in their later years.
A secondary goal that the couple has indicated is to help out their son with a $100,000 down payment. To facilitate this gift, Peter and Gloria would need to decrease their retirement spending by 5 per cent, the planner says. Alternatively, they could delay the gift until the sale of the vacation property.
“Upon sale of the vacation property, Peter and Gloria should anticipate a sizable tax bill due to capital gains tax,” Mr. Fennessy says. They should maintain thorough records of all capital improvements that they have made to the property. These expenses will help to increase their adjusted cost base and reduce the overall taxable capital gain. Since the gross capital gain will be shared between them, barring any significant future capital appreciation, it is not likely that they will be affected by the newly proposed increase to the personal capital gains inclusion rate, the planner says.
Client Situation
The People: Peter, 53, Gloria, 61, and their son, 21.
The Problem: Can they afford for Peter to retire in 10 years or so?
The Plan: Peter continues to save in his employer-sponsored plans. He defers taking government benefits to age 70. They put off the gift to their son until the vacation co-op is sold.
The Payoff: The reassurance that they can age in place in their own home without having to worry about money.
Monthly net income: $7,350.
Assets: Cash $19,000; his stocks $93,000; her stocks $5,000; his TFSA $27,000; her TFSA $9,000; his RRSP $148,000; her RRSP $495,000; registered education savings plan $11,000; residence $1,100,000; vacation property $300,000 Total: $2,207,000
Monthly outlays: Mortgage $735; condo fee $135; property tax $310; water, sewer, garbage $50; home insurance $105; electricity $165; maintenance $300; transportation $375; grocery store $1,000; clothing $400; gifts, charity $175; vacation, travel $800; vacation property net cost $300; dining, drinks, entertainment $250; personal care $85; sports, hobbies $150; subscription $45; health care $100; life insurance $50; phones, TV, internet $230; RRSP $900; TFSA $400. Total: $7,060.
Liabilities: Mortgage $90,000 at 7.2 per cent
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