Justin Tang/The Globe and Mail
For years, Melissa and Mike have been saving money so they can travel extensively when they hang up their hats in two years. He works for the government, earning about $120,000 a year, she is in between jobs.
They plan to retire in April, 2021, when he is 60 and she is 53. They’ll sell their Ontario home and move to Vancouver Island, freeing up some capital in the process.
“We are looking at properties outside Victoria in the $550,000 range,” Mike writes in an e-mail. “We receive daily e-mails from a realtor showing what is available.”
Mike and Melissa will have a variety of pension sources, including overseas pensions (work and government) and defined-benefit pension plans in Canada. As the time draws closer, though, Melissa is having second thoughts.
“While we think our investments are sufficient and we think we have a clear plan, one of us is not 100-per-cent certain,” Mike writes – “the worrywart in the relationship!” She’d like some reassurance.
“With only two years until our planned retirement, what can we do to strengthen our position?” Mike asks. We asked Jason Pereira, a senior financial planner with Woodgate & IPC Securities Corp. in Toronto, to look at Mike and Melissa’s situation.
What the expert says
Mike and Melissa should be able to achieve their goals based on certain assumptions, Mr. Pereira says.
To maintain their standard of living, they will need after-tax income of $51,000 a year. They plan to spend another $25,000 a year travelling. They’ll replace their car every 10 years starting in 2028 at a cost of $32,000. They have no interest in leaving an estate.
The planner assumes Melissa finds a job paying $60,000 a year – a conservative estimate based on her work history – starting Jan. 1, 2020.
First, he looks at their cash flow. Mike is earning $120,000 a year plus he’s getting $34,300 a year from an overseas work pension plan, indexed to inflation, for total income of about $154,000. This amounts to $116,682 after income tax, Canada Pension Plan and employment insurance deductions. Their lifestyle expenses add up to $65,200, leaving $51,482 for savings and debt repayment, broken down as follows: his defined benefit pension contribution $13,917 a year, his tax-free savings account $6,000; her TFSA $6,000, the line of credit $22,138 (paid off over the course of the year) and a joint emergency fund, yet to be established, of $3,427.
The planner assumes they sell their Ontario house and move to British Columbia, netting $235,000 in the process. (His employer will pay for the move.) That is added to their retirement savings. So when they retire two years from now, their savings will total $844,630.
That assumes an average rate of return on their investments of 5.6 per cent.
The recommendations: Their investment portfolio could be improved, Mr. Pereira says. They have nearly 70 per cent in stocks and stock funds, higher than indicated by their conservative risk tolerance. “Their portfolio is a jumbled mess of overlapping mutual funds and individual positions,” he notes. He recommends they switch to a financial planner who can help them devise a more suitable asset allocation, offer financial planning services, and put in place a portfolio management strategy.
Mike and Melissa can retire as planned in two years. In the meantime, Mike should continue to contribute the maximum to his work pension plan and RRSP. They should both contribute the maximum to their TFSAs for the rest of their lives. They should set aside an emergency fund of $45,000 over the next three years.
When they retire, they should draw from their RRSPs initially to take advantage of their low tax rates in the time before they turn 65. He assumes they both begin collecting reduced Canada Pension Plan and Old Age Security benefits at the age of 65.
In 2022, their first full year of retirement, their income breaks down as follows: Mike’s work pension $34,171; his overseas work pension $37,060 (with inflation); their combined RRSP withdrawals $36,000; and withdrawals from their non-registered account $7,512, for a total of $114,743.
Mr. Pereira suggests they convert their RRSPs to registered retirement income funds at the age of 71 and begin making mandatory withdrawals at 72. “In their case, there is limited material benefit to starting early because the amounts are relatively small,” he says.
If all goes well, and based on the above assumptions, Melissa and Mike could spend more than they plan when they retire – up to $110,000 a year, including travel, to her age 95, Mr. Pereira says.
Client situation
The people: Mike, 58, and Melissa, 51
The problem: Can they afford to move from Ontario to Vancouver Island, freeing up some capital for retirement?
The plan: Tweak investment portfolio, continue saving, move as planned and withdraw RRSP funds first when they retire.
The payoff: The comfort of knowing there is some wiggle room in their plan.
Monthly net income: $9,725
Assets: Bank accounts $59,900; his RRSP $48,630; her RRSP $77,730; her LIRA $34,010; his TFSA $62,630; her TFSA $61,565; residence $785,000; estimated value of his defined benefit pension plan $853,000; estimated value of her pension plan from previous employer $321,000. Total: $2.3-million
Monthly outlays: Property tax $700; home insurance $160; utilities $305; transportation $140; grocery store, clothing $750; line of credit $500; vacation, travel $1,000; personal care $150; dining, entertaining $750; sports, hobbies $390; other $10; life insurance $80; phone, internet $175; TFSAs $1,000; his pension plan $1,160; charity $30. Total: $7,300. Surplus: $2,425
Liabilities: Home-equity line of credit $22,138
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