Robin and Russell earn about $300,000 a year.Sarah B Groot/The Globe and Mail
Robin is age 37 and her husband Russell is 39. Together they earn about $300,000 a year, plus bonus, Robin in government and Russell in high tech.
With solid employment, a toddler and a new baby, they are looking to renovate their house and possibly buy a recreational property if they can afford it. Robin is currently on maternity leave.
They also have a condo that they rent out for $950 a month.
“We are hoping to be in a position to retire by age 55-57 and may choose to work longer, but don’t want to feel like we must,” Robin says in an e-mail. She has a defined benefit pension. Russell has no work pension but he does have savings and investments that he manages using the “couch potato” method.
Their retirement spending goal is $120,000 a year after tax. “Are we on track to retire at age 55?” Robin asks.
We asked Amit Goel, a partner and portfolio manager at Hillsdale Investment Management Inc. of Toronto, to look at Russell and Robin’s situation. Mr. Goel holds the chartered financial analyst (CFA) and certified financial planner (CFP) designations.
What the expert says
“With an early retirement goal, the couple is already saving aggressively and should continue to do so,” Mr. Goel says. Their net worth is expected to surpass $1-million in the next five years and $2-million in the next 10 years (excluding their primary residence).
“To ensure that the financial investment portfolio is capturing multiple market scenarios over the next 55-plus years, we have tested the plan across 500 scenarios known as a Monte Carlo simulation,” he says. This approach avoids using a simplistic linear growth every year, as financial markets do not generate straight-line growth year-on-year.
Ideally, Russell and Robin would like to retire at age 55. They are planning a $50,000 home renovation and hope to buy a family cottage for $400,000.
Robin’s defined benefit pension will pay $36,000 a year if she retires at age 55, $45,000 if she retires at age 57 and $53,000 if she retires at age 59.
In light of current high inflation, the plan assumes a 4-per-cent annual inflation until 2025, 3 per cent from 2026 to 2030 and 2 per cent thereafter. The forecast assumes an annual growth rate in their investments of 7 per cent a year from now to retirement and 5.5 per cent thereafter.
The couple are currently following a systematic investment plan with dollar-cost averaging. As the investment allocation is more focused on equities and long-term growth, they could benefit by investing more during down markets and less during up markets, the planner says.
Russell, who has a marginal tax rate of more than 40 per cent, should continue to contribute to his registered retirement savings plan and use the tax refunds to fill in tax-free savings account room for both of them, Mr. Goel says. The majority of Robin’s RRSP contribution room is used up by her defined benefit pension plan. She can slowly contribute to her unused RRSP room over the next 10 to 15 years.
First, the planner looks at the couple’s early retirement years, to age 70. To supplement Robin’s pension income, they should withdraw the maximum possible from their RRSP portfolio, so far as their marginal tax rate stays around 30 per cent.
“This will help ensure they are running down their RRSP portfolios,” Mr. Goel says. As a result, when the minimum registered retirement income fund withdrawals begin the year they turn 72, they will have lower taxable incomes. A lower taxable income after age 71 is also important to ensure that the couple are eligible to receive Old Age Security benefits rather than having them all clawed back. It is assumed they will receive two-thirds of the eligible amount. The planner suggests they defer OAS benefits to age 70, which will provide them an additional 36-per-cent payout.
Owing to early retirement and reduced working years, it is assumed that the couple will be eligible for 80 per cent of Canada Pension Plan benefit. Assuming Robin and Russell remain in good health, they should defer CPP to age 70. “This will provide them an additional 42 per cent payout for their remaining lives as compared to starting the CPP at age 65.”
In their late retirement years, age 71 plus, their income will break down as follows: Robin’s pension income; their CPP and OAS benefits; and minimum RRIF and life income fund withdrawals. The remaining withdrawals are to be funded by TFSA investments, the planner says.
They have two fixed-rate mortgages at 2.9 per cent and 2.69 per cent scheduled for renewal in the next 18 and 20 months. If mortgage rates stay at current levels of around 4.5 per cent or 5 per cent at the time of renewal, their annual mortgage servicing cost is expected to increase by $4,000 to $5,000 a year, thereby reducing their savings potential, Mr. Goel says.
At the time of mortgage renewal, they could consider increasing the mortgage on the rental property, the interest on which is tax deductible, and lowering the mortgage on their primary residence.
The rental condo will be mortgage-free by the time the couple retire. This would potentially increase the taxable portion of the rental income. To support their retirement portfolio, the couple could plan to sell the condo (say in 2045) and contribute the sale proceeds to their tax-efficient TFSAs, the planner says.
As the couple approach late retirement (say age 80), they may want to downsize to a condo ($300,000 in today’s dollars). This will create additional liquidity of about $250,000 to support their retirement portfolio, especially by adding funds to their TFSAs.
If Russell and Robin decide to buy a cottage, higher mortgage servicing on the cottage will reduce their savings and will push out their retirement by two to three years.
Even without the cottage purchase, the Monte Carlo simulation shows only a 55-per-cent probability of success, Mr. Goel says. “Here are some suggested options with more than an 85 per cent probability of success.”
One, retire at 55, no cottage, reduce spending by 15 per cent. “If the couple decides to reduce their spending goal by 15 per cent to $8,500 a month (in today’s dollars), they can retire at age 55.”
Two, and the recommended plan, retire at 57, no cottage. “By working two additional years, Robin will receive an additional $9,000 in annual pension income for her lifetime,” Mr. Goel says. This will help the couple retire with a much stronger and reliable income. Russell will also be in his peak earning years. Working an additional two years will add significant funds to their savings.
Three, retire at 59, with a cottage. If Robin and Russell decide to buy a cottage, they should try to fund the purchase entirely through a mix of home equity line of credit and mortgage, Mr. Goel says. This will ensure that the investment portfolio isn’t depleted. However, servicing the HELOC and the mortgage and the cottage maintenance costs will reduce annual savings.
Client situation
The people: Russell, 39, Robin, 37, and their two children
The problem: Can they afford to renovate their house, buy a cottage and still retire at 55 with $120,000 a year?
The plan: Continue to save aggressively. Weigh the tradeoff between buying the cottage and working a few more years.
The payoff: Financial security
Monthly net income: $16,415
Assets: Bank accounts $26,000; her TFSA $4,000; his TFSA $16,000; her RRSP $15,000; his RRSP $300,000; his group RRSP $10,000; current value of her DB pension $200,000; RESP $8,000; house $475,000; rental condo $200,000. Total: $1.25-million
Monthly outlays: Mortgage $2,400; property tax $200; home insurance $125; heating, electricity $350; maintenance $500; transportation $980; groceries $2,000; child care $300; clothing $400; vacation, travel $2,000; discretionary spending $1,000 (from Russell’s bonus); dining, drinks, entertainment $475; personal $60, sports, hobbies $100; subscriptions, other $90; disability insurance $90; communications $305; RRSPs $4,500; RESP $420; TFSAs $400. Total: $16,695
Liabilities: Residence mortgage $320,000 at 2.9 per cent; rental condo mortgage $108,000 at 2.69 per cent. Total: $428,000
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