The Globe and Mail
Elliot and Sally are both first responders. Elliot has retired and Sally would like to join him soon. He is 55 years old, she is 44. They have one child, who is 10.
Elliot’s defined benefit pension pays about $75,800 a year. He earns another $12,000 a year working part time. Sally, who is earning about $100,000 a year now, will be entitled to a defined benefit pension as well.
They have a mortgage-free house in small-town Ontario.
Sally can retire with a full pension at age 55 but she’s thinking of leaving a couple years earlier. Once Sally exits the work force, they plan to travel extensively.
Short term, they want to repay a $49,000 renovation loan, buy a new vehicle and “create a backyard oasis” at a cost of about $50,000, Elliot writes in an e-mail. They also want to provide a safety net for their son, who has mild special needs, he said.
Their retirement spending target is $100,000 a year after tax.
We asked Gordon Stockman of Efficient Wealth Management and Ahmed Mahiyan of Nextgen Financial Planning Inc. to look at Elliot and Sally’s situation. Both are certified financial planners. Mr. Stockman is also a chartered professional accountant and Mr. Mahiyan a chartered financial analyst.
What the experts say
Elliot and Sally’s current spending needs are well taken care of from Sally’s salary and Elliot’s pension, the planners say.
While Sally is working, it is critical that they save their surplus funds and invest properly. The planners assume a traditional balanced portfolio of 60-per-cent stocks and 40-per-cent bonds. The investment return assumption, net of fees, is 4.64 per cent with an inflation rate of 3 per cent.
Elliot and Sally have a combined $294,000 in registered retirement savings plans funded with additional voluntary contributions to their pension fund. The RRSPs are managed the same way as their pensions, with a low management fee, the planners note. “Along with their $165,000 in tax-free savings accounts, they want to plan for Sally’s early retirement at age 53 and build wealth for extensive travel expenses afterward,” they write.
“With a $2,500 monthly loan payment, they should be able to pay off the $49,000 loan in two years and save enough for the landscaping work.” After these two large cash outflows, they should be able to save aggressively.
Elliot’s pension has a bridge benefit of $13,800 that stops when he turns 65. After that, he gets the lifetime pension of $62,000 a year in today’s dollars.
Sally’s pension is estimated at $70,500 a year at age 53, including a $16,500 bridge benefit that stops when she turns 65.
“Assuming Sally retires at age 53 with a slightly reduced pension, they do not run out of money and would have a comfortable retirement,” the planners say. In fact, they have surplus cash flows to invest, an amount that will increase once the government pensions – the Canada Pension Plan and Old Age Security – start.
Elliot should convert some of the RRSP into a registered retirement income fund (RRIF) at age 65. RRIFs are eligible for income-splitting. He should start withdrawing from the RRIF to make up for the drop in income when his bridge benefit ends. Through income-splitting, they should try to keep their individual incomes as similar as possible to minimize the lifetime household tax payable.
Since both Elliot and Sally are healthy, the planners recommend they delay their CPP and OAS benefits until age 70. This will give them a boost in benefits.
Once Elliot starts collecting his OAS benefit in 2040, he needs to carefully manage his RRIF withdrawal to avoid or minimize any potential clawback of the benefit. This can be done by taking money from a non-registered account or TFSA to meet cash-flow needs. “So a little bit of planning is necessary to make sure he does not have a large RRIF after he turns 71,” the planners write. Elliot will face mandatory minimum RRIF withdrawals in the year he turns 72.
Sally’s bridge benefit stops in 2044 but her income can be supplemented by RRSP or RRIF withdrawals at that time. “Again, the goal is to make their income very similar.” The retirement numbers are “very strong” for Elliot and Sally since most of the investment and future income risk is assumed by their pension fund manager, the planners note. The majority of their retirement sources of income are also indexed to inflation, “which is a huge plus.”
Elliot and Sally have diligently saved money for their son in a registered education savings plan account, which is valued at more than $48,000. Assuming a $15,000 tuition expense every year and a tuition increase of 5 per cent over the next eight years, the RESP account should fund the cost of his four years of postsecondary education.
Their son qualifies for the registered disability savings plan. “Regarding the RDSP account, where they have saved over $18,000 so far, they should continue to fund the minimum to receive the government grant and let it grow,” the planners say.
Because of their household income, they do not qualify for the RDSP bond and additional RDSP matching grant. However, once their son turns 19, the RDSP grant and bond calculation will be based on his income. So, more can be contributed at that time.
Elliot and Sally updated their wills and powers of attorney in early 2024, which should address the need for guardianship and potential trust for their minor child.
The TFSAs can be used to manage their taxable income because withdrawals from TFSAs are tax-free. “We assume that they keep saving to their TFSAs either from the surplus cash or from transferring money from the non-registered account,” the planners write. They see very little need to draw on TFSA funds until all RRSP, RRIF and non-registered accounts are used up. “We treat the TFSAs and the principal residence as a potential tax-free gift to their son.”
Client Situation
The people: Elliot, 55, Sally, 44, and their 10-year-old son.
The problem: Can Sally afford to leave the work force in a couple years so she and Elliot can travel extensively while they are still relatively young?
The plan: Sally retires at age 53. When Elliot’s bridge benefit ends, he taps his RRSP/RRIF to make up the difference. They plan their finances so their incomes are as similar as possible.
The payoff: Peace of mind that they can enjoy travelling when Sally retires in 2032.
Monthly net income: $11,500.
Assets: Cash and equivalents $2,000; his TFSA $105,000; her TFSA $60,000; his RRSPs $173,000; her RRSP $121,420; registered education savings plan $48,125; registered disability savings plan $18,200; residence $800,000. Total: $1,327,745.
Estimated present value of Sally’s pension: $1.47-million.
Estimated present value of Elliot’s pension: $1.87-million. That is what people with no pension would have to save to generate the same income.
Monthly outlays: Property tax $500; water, sewer, garbage $200; home insurance $200; heating $100; security; maintenance $100, garden $50; car lease $500; other transportation $625; groceries $1,000; clothing $100; gifting $100; vacation and travel $1,000; loan payment $2,500; dining out $800; entertainment $300; personal care $50; club memberships $125; subscriptions $125; health care $50; phones $125; cable, TV, internet $95; RESP, TFSAs $800. Total: $9,445.
Liabilities: $49,000 interest-free family loan.
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