DAVE CHAN / THE GLOBE AND MAILDave Chan/Globe and Mail
Bernard and Marla are planning to hang up their hats in a year or so, buy a camper van – a small motorhome – and travel the continent, visiting family and friends in the summer and heading south to a warmer climate in winter. He is 59, she is 56.
After raising three children and paying off the mortgage on their B.C. home, they are well fixed to realize their goals. Bernard is bringing in $101,000 a year at his managerial job with the government, which means he has a defined benefit pension plan. Marla makes $107,000 a year as a self-employed health-care provider with no pension plan.
They’d like to have $60,000 a year after tax to spend when they quit working. They also plan to renovate their kitchen and add to the master bedroom.
They wonder whether they are on track to retire from work at the same time in November, 2019. “Should we take Canada Pension Plan benefits at age 60 or 65?” Marla asks in an e-mail. Is their portfolio properly diversified? Should they take out a home equity line of credit to buy the camper?
We asked Heather Franklin, a fee-only financial planner based in Toronto, to look at Bernard and Marla’s situation.
What the expert says
Marla and Bernard can retire early as planned “with caveats,” Ms. Franklin says. She is concerned about the home renovation (estimated cost $100,000) and the camper van purchase ($130,000) so close to the time they plan to retire. While they have the money in the bank for the renovation, they may want to consider scaling back a bit, perhaps renovating the kitchen but skipping the bedroom extension, she says.
Borrowing to buy the camper van may well be “too taxing on their income and financial resources,” Ms. Franklin says. Instead, she recommends they rent a camper to try it out; they may find the experience is not what they imagined. They could travel and rent a condo somewhere warm each winter for 10 years for what they are proposing to pay for the camper.
If he retires from work at the age of 60, Bernard will get a pension of about $36,000 a year, including pension adjustment, falling to about $30,000 a year at 65. He will split the pension income with Marla. By then, their spending goal will have risen to $63,500 or so with inflation. They can make up the big shortfall in the first five years – until they begin receiving government benefits – by drawing on their savings, including their tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs).
At 65, Bernard and Marla will get about $19,000 each in CPP and Old Age Security benefits, the planner says. She does not recommend taking CPP benefits at the age of 60 because of the 36-per-cent reduction in benefits. The government benefits plus Bernard’s pension would give them about $68,000 pretax, the planner says. Any shortfall would be drawn from their savings.
As to their portfolios, Bernard and Marla hold mostly dividend-paying stocks and some growth stocks. “Dividend stocks are an excellent choice as a portfolio anchor because they produce both income and growth opportunities,” Ms. Franklin says. Bernard’s pension plan can be viewed as the fixed-income portion of their holdings.
Marla’s RRSP could use some fine-tuning because of her big cash holdings. She “might consider redeploying this cash into stocks,” the planner says.
Although the couple have a substantial amount of cash in bank savings accounts, they have not contributed the maximum to their tax-free savings accounts. They should endeavour to catch up, directing any surplus cash (after the renovation) to their TFSAs to take full advantage of the tax-sheltered growth, she adds. “TFSAs provide Canadians with the only true tax-free investment.”
Once they have caught up with their TFSAs, Marla and Bernard may want to open a non-registered, or taxable, investment account. “Dividend income within this account would be taxed at a preferential rate due to the dividend tax credit,” Ms. Franklin says. The dividend tax credit does not apply to dividend income from an RRSP, which is taxed as income when it is withdrawn.
Client situation
The people: Bernard, 59, and Marla, 56
The problem: Are they in shape to retire by the end of next year?
The plan: Consider scaling back the renovation and forgoing the camper van. Top up TFSAs.
The payoff: Goals comfortably achieved.
Monthly net income: $13,400
Assets: His cash $8,275; her cash $145,960; his TFSA $39,085; her TFSA $45,300; his RRSP $87,145; her RRSP $630,710; estimated present value of his DB pension plan $425,000; residence $505,000. Total: $1.89-million
Monthly outlays: Property tax $170; home insurance $115; utilities $210; maintenance, garden $150; car insurance $225; fuel $500; other auto $170; groceries $600; clothing $125; vacation, travel $1,000; other discretionary (gifts, charity) $1,000; dining, drinks, entertainment $750; personal car $50; clubs, subscriptions, other $110; health care, life, disability insurance $240; phones, TV, internet $335; RRSPs $2,390; TFSAs $835; pension plan contribution $770; professional association $335. Total: $10,080 Surplus of $3,320 goes to savings account.
Liabilities: None
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