Zoe and Andy.Mark Blinch/The Globe and Mail
Like working parents everywhere with young children and long commutes, Andy and Zoe felt like hamsters on a wheel, rushing here and there, driving the children from one activity to another, “just because it was what was done and what all our friends and colleagues were doing,” Zoe writes in an e-mail.
Zoe is 45, Andy 50. They have two children, ages 6 and 8.
When the COVID-19 pandemic struck last year, Andy was laid off. “It was a godsend,” Zoe writes. “The short term distress was replaced by the relief of having one parent at home, taking on the home schooling and household management.”
Zoe is fortunate in having a well-paying management job and a government pension. They have a house in Southern Ontario that they want to renovate to the tune of $50,000, and Zoe has saved $12,500 in a tax-free savings account to this end. The rest will come from a home-equity line of credit. With a larger mortgage, they wonder whether they should extend the amortization to give them more spending room for vacations and such. And can they afford for Andy to stay home?
We asked Robyn Thompson, a certified financial planner and founder of Castlemark Wealth Management Inc. in Toronto, to look at Zoe and Andy’s situation.
What the expert says
Over the next 15 years, Zoe and Andy would like to live off one income – Zoe’s. Zoe would like to retire at age 60 with an annual after-tax income stream of $75,000 in today’s dollars, or $98,961 at retirement, indexed at a rate of 2 per cent, Ms. Thompson says. They plan to renovate their house, replace their car and take family vacations every second year at a cost of $6,000. As well, the couple want to cover the cost of their children’s higher education, estimated at about $20,000 a year for four years for each child.
Zoe and Andy can renovate their house and achieve their retirement spending goal of $75,000 a year after tax even if Andy stays at home, the planner says.
First off, the couple should focus on increasing contributions to their TFSAs as cash flow allows, Ms. Thompson says. Zoe has $12,500 in her TFSA, Andy has $4,500, leaving them with “a significant amount of unused contribution room.” They are contributing only $125 a month.
Zoe holds a $6,700 guaranteed investment certificate in a non-registered account, paying 1.2 per cent annually. When it matures, she should cash it in and move the cash to her TFSA, the planner says.
She recommends Zoe cease contributions to her RRSP and redirect this amount to her TFSA. This will increase her monthly contributions to $375. With any surplus cash flow, they should contribute the same amount to Andy’s TFSA.
Zoe’s TFSA has been earmarked for home renovation costs, but the planner suggests they borrow the money instead of withdrawing from the TFSA. “I caution the couple against using the tax-advantaged vehicle to cover short-term goals,” the planner says. “In their case, the TFSA should be viewed as another retirement vehicle.” Because TFSA withdrawals are not taxed as income, Zoe could avoid having her Old Age Security benefits clawed back later.
Zoe and Andy’s registered education savings plan is held in a managed exchange-traded fund portfolio, with an allocation of 40 per cent to fixed income and 60 per cent to equity. They contribute $500 a month ($250 for each child) and should continue contributing to take advantage of the Canadian Education Savings Grant of up to a maximum of $7,200 per child, the planner says. The RESP can provide tax-deferred growth on contributions of up to $50,000 each. Using a 5-per-cent expected rate of return and a 2-per-cent inflation rate, the RESP will grow to $150,000 by the time the older child goes to school at age 18.
Using the above return expectation and inflation rate, the RESP will be able to fund 83 per cent of the children’s education goals, Ms. Thompson says.
When the mortgage comes up for renewal this spring, they have the option of adding a home equity line of credit (HELOC) to cover the $50,000 in renovation costs. The planner suggests they also borrow enough to pay off their car loan, which carries an interest rate of 6 per cent.
Because their combined mortgage and HELOC payments will be higher than existing mortgage payments, Ms. Thompson recommends they extend the amortization from 15 to 20 years to give them more spending room. “The downside is that Zoe and Andy will be servicing mortgage debt in the first five years of retirement.”
When Zoe retires, she will receive a defined benefit pension of $65,760 a year plus a bridge benefit of $18,065 from age 60 to 65. Zoe will receive the maximum Canada Pension Plan benefit and Andy will get a reduced amount.
“If the couple continue to be in good health, I recommend delaying their CPP payments until 70,” Ms. Thompson says. By waiting until age 70 to collect their CPP benefit, they will receive 42 per cent more than if they were to begin collecting at 65. “The increased benefit provides protection against longevity risk,” the planner says.
At 61, Zoe’s first full year of retirement, she will receive $84,478 in pension income, $45,270 will be drawn down from Andy’s RRSP, and Andy will receive Old Age Security benefits of $9,323 (adjusted for inflation). This will allow for sufficient after-tax income to cover lifestyle expenses of $123,175, including mortgage payments, Ms. Thompson says.
At 71, Zoe’s first full year of collecting CPP, she will receive $77,080 in pension income. They will have combined CPP income of $44,693 and OAS of $21,854.
The couple’s investment accounts are held at several different institutions with no clear stated objectives or risk assessment to their investments, Ms. Thompson says. High mutual-fund fees in Andy’s RRSP (1.94 per cent) erode his portfolio performance. “A fee-for-service financial planner can help them map out what their retirement could look like, and solidify retirement, health care, and estate plans, which seem somewhat vague at present,” the planner says.
Using a 4.5-per-cent projected rate of return, 2-per-cent inflation, contributions to TFSAs, RESPs, non-registered accounts, and not factoring in Zoe’s pension value, their net worth of their estate will grow to $1.4-million by the time Zoe turns 60. With real estate valued at $1.9-million and investments valued at $490,550, the estate will grow to $2.4-million at Zoe’s age 90.
Client situation
The people: Zoe, 45, Andy, 50, and their two children.
The problem: Can they afford for Andy to stay home and manage the household until Zoe retires in 15 years?
The plan: Build up their TFSAs first. Borrow the money for renovations and the car loan. Extend the mortgage amortization.
The payoff: The lifestyle they want without sacrificing their future.
Monthly net income: $7,855
Assets: Zoe’s non-registered account $6,700; her TFSA $12,500; her RRSP $30,340; Andy’s stock $5,000; his TFSA $4,500; his RRSP $101,470; the children’s RESP $45,000; residence $800,000; present value of Zoe’s DB pension $570,740. Total: $1.6-million
Monthly disbursements: Mortgage $1,710; property tax $365; home insurance $90; utilities $350; maintenance, garden $125; car payment $220; other transportation $265; groceries $600; clothing $30; gifts, charity $55; vacation, travel $75; other discretionary $85; dining, drinks, entertainment $200; personal care $25; sports, hobbies $205; subscriptions $30; health care $15; life insurance $180; phones, TV, internet $205; RRSP $250; RESP $500; TFSA $125; credit-card payments $100; Zoe’s pension plan contributions $1,170; group benefits $425. Total: $7,400
Liabilities: Mortgage $279,000; car loan $2,500. Total: $281,500
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Some details may be changed to protect the privacy of the persons profiled.
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