Alia Youssef/The Globe and Mail
Vancouver professionals Nancy and Nathan are in the enviable position of being able to contemplate retiring from their jobs at age 55 while still enjoying a comfortable standard of living.
He is 42, she is 40. They have two children, age 6 and 9. Together Nathan and Nancy bring in $170,000 a year in employment income plus $4,000 a year in net rental income from an investment property. Nancy has a private practice that she plans to continue part-time after she leaves her current job. Both contribute to defined benefit pension plans at work indexed to inflation. At age 55, Nathan will get a pension of $27,345 a year in today’s dollars, while Nancy will get $13,415 a year plus a bridge benefit from 55 to age 65 of $5,350.
“We are wondering how we should be dividing up our extra money among RESPs [registered education savings plans], RRSPs [registered retirement savings plans] and mortgage prepayments,” Nathan writes in an e-mail. If they retire early, will they still be able to pay for their children’s university education? “How much should our RESP account have when the kids are 18, assuming a four-year degree?” Nathan asks. “Are we saving enough to retire at age 55?”
Their retirement spending goal is $80,000 a year after tax.
We asked Brinsley Saleken, a fee-only financial planner and portfolio manager at Macdonald, Shymko & Co. Ltd. in Vancouver, to look at Nathan and Nancy’s situation.
What the expert says
Mr. Saleken starts with the retirement question. It would appear that the family has a surplus of about $1,850 a month for savings or additional mortgage payments, the planner says.
In preparing his forecast, Mr. Saleken assumes income, university costs and real estate prices rise in line with inflation. He assumes Nancy and Nathan take Canada Pension Plan and Old Age Security benefits at age 65, getting only 75 per cent of the maximum CPP benefit because they retired early. He assumes the rate of return on their investments is 4.64 per cent a year based on an asset allocation of 57-per-cent equities and 43-per-cent fixed income. Finally, he assumes a life expectancy of 92 for Nathan and 96 for Nancy.
“While their goal of about $80,000 after tax, or $96,000 before tax in today’s dollars, is within reach (assuming full income-splitting), it is not a certainty,” Mr. Saleken says. Given the “backbone” of their work pensions, government benefits and the asset base they have already built, their dream “is not out of the question.”
Their savings capacity, in addition to their pension contributions, appears to be about $22,200 a year, the planner says. If they continue to save at this rate – “and employ a more systematic approach to their investment decisions – they may just exceed their goal,” Mr. Saleken says.
Assuming a more conservative, 4.5-per-cent rate of return after fees, “which we think appropriate including 2 per cent inflation,” they fall short, the planner says. “If we bump that up by one percentage point to 5.5 per cent, they reach their goal.” This would require a larger allocation to equities for which there are no guarantees, the planner notes.
In assessing their risk tolerance, it appears Nathan and Nancy would be more comfortable with the conservative portfolio, he says. “The advent of the pandemic gave them jitters and they moved more heavily into cash.” The first step should be for them to draw up a proper investment policy statement. This would allow for a more disciplined approach to asset allocation and increase the likelihood of success.
It would also make a big difference if they could save more, Mr. Saleken says. “Adding $850 a month at 4.5 per cent would bring their goal almost within reach,” the planner says. At 5.5 per cent with the additional savings, they would surpass it. Working a couple more years would also make a significant difference because their pensions are based on years of service and they would also be able to save more, he says.
Next, Mr. Saleken looks at how Nancy and Nathan should use their surplus cash flow: funding the children’s education, saving for retirement, or eliminating debt. They should continue to contribute at least $2,500 a year for each child to their RESP to take full advantage of the Canada Education Savings Grant, he says. Then they should maximize Nathan’s RRSP contributions because of his high marginal tax rate. Nathan could make his RRSP contributions to a spousal RRSP for Nancy to help even out their retirement income.
As for the mortgage, if they continue with their current base payments, the mortgage would be paid off in 2039. They should plan to retire the mortgage before Nathan retires in mid-2033, the planner says. This would require an extra $700 a month. They have already been making extra payments to the mortgage.
For the children’s education savings, Nathan and Nancy should continue to contribute $2,500 a year for each child to take full advantage of the federal education savings grant (20 per cent of contributions or up to $500 a child each year with a lifetime limit of $7,200 for each child) and apply for the B.C. Training and Education Savings Grant, which is available when a child turns 6. The grant must be applied for before the child turns 9, so the younger child is still eligible, Mr. Saleken says. RESP contributions are capped at $50,000 a child. “Once all of the matching grants have been earned, there is less incentive to continue to contribute,” he notes.
Assuming $36,000 in contributions for each child (the amount needed to get the maximum federal grant), and matching grants of $7,200 federally and $1,200 provincially, the RESP is projected to have a value of about $118,000 by the time the elder child finishes high school, the planner says. This assumes a rate of return on the education savings similar to the couple’s retirement savings.
“If both children attend college for four years at $20,000 per year each, the education expense would be roughly $160,000 in today’s dollars,” Mr. Saleken says. He suggests that in five years or so, when the elder child’s federal grant is maximized, Nathan and Nancy reassess whether they should continue contributing to the RESP or redirect the funds to their tax-free savings accounts for greater flexibility. A similar review should be done for the younger child.
Client situation
The people: Nathan, 42, Nancy, 40, and their two children
The problem: Can they retire from their jobs early, pay for their children’s higher education and end up with retirement spending of $80,000 a year?
The plan: Weigh how higher savings, working a couple more years and potentially improving their investment returns will affect their retirement goals. Recognize that reaching for higher returns will involve a certain amount of risk. Try to pay off mortgage before they retire.
The payoff: All their financial goals achieved.
Monthly net income: $11,420
Assets: Bank accounts $11,000; his TFSA $5,390; her TFSA $7,370; residence $1,275,000; share of vacation property $125,000; RESP $56,000; his RRSP $117,700; her RRSP $59,865; commuted value of his pension if he quit today $310,000; her pension contributions to date $31,605. Total: $2-million
Monthly outlays (past year): Mortgage $1,890; property tax $390; home insurance $200; utilities $250; home maintenance $1,410; transportation $515; groceries $225; child care $120; clothing $100; vehicle loan $450; gifts, charity $220; vacation, travel $335; dining, drinks, entertainment $650; personal care $300; drugstore $20; life insurance $55; phones, TV, internet $175. Total expenses $7,305. Savings: RRSPs $665; her pension plan contributions $320; RESP $415; extra mortgage payment $825. Total savings $2,225 Total expenses and savings: $9,530 Surplus: $1,890
Liabilities: Mortgage $74,000; line of credit $279,000; car loan $17,145. Total: $370,145
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Some details may be changed to protect the privacy of the persons profiled.
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