In Ontario, a couple we’ll call Marc, 60, and Lani, 65, are looking ahead to Marc’s retirement. A project manager in manufacturing, Marc expects to work another seven years to his age 66; Lani has not worked for a decade. They want to ensure that their children, ages 15 and 19, have sufficient funds for their post-secondary education, but are concerned that their savings won’t support the retirement they want. As the only breadwinner, the family’s financial future rests on Marc’s shoulders.
Their goal is to stretch Marc’s $6,300 per month take-home pay as far as they can.
“We need a view and a strategy to make our retirement work,” Lani explains.
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Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with the couple.
The family budget
Currently all of Marc’s income is being used for living costs and savings, with $850 per month being directed into RRSPs and TFSAs.
In retirement, the couple believes they will need $5,500 per month to maintain their present way of life. That implies a pre-tax income of about $6,500 per month.
The first challenge Marc and Lani face is putting their kids through university. They are well prepared.
Their Registered Education Savings Plan has a $100,000 balance now. They are adding nothing to it, but the allocation of $50,000 per child should cover tuition and books at most Ontario post-secondary institutions. If the kids live at home, costs would probably be fully covered. Summer jobs could fill any gap or Marc and Lani could add $2,500 per year for the younger child, 15, for two years and capture the $500 Canada Education Savings Grant.
Marc and Lani have little debt, just $20,000 remaining on their mortgage. With a three per cent variable rate and 10-year amortization, they pay $200 per month. Their assets total $1,972,000 including their $750,000 home and the RESP account. This would seem a substantial amount of wealth, but with no defined benefit pension plans, just one income earner and two kids to put through university, they need to be diligent stewards of their money.
Marc has been managing their investments using mutual funds purchased through a discount brokerage with fees as high as 1.6 per cent of net asset value. With a portfolio now valued at well over $1 million, Marc and Lani could use a private investment manager with lower fees. The advantage of this move would be that their portfolio would be traded for their needs rather than other investors’ needs for cash, fears or insistence the manager follow investment fashions of the moment. Mutual funds often have too many cooks. A custom portfolio would be traded for Marc and Lani’s needs alone. Total fees could be as low as half of 1 per cent of net asset value. They could shop the money management market to determine cost savings, Einarson suggests.
The couple has a non-registered investment account with a present balance of $190,000 which, left to grow at 3 per cent per year after inflation for seven years to the beginning of Marc’s retirement would increase to $233,700. They could use this money to buy a cottage that could be a heritage for their children. We’ll leave this account out of their future income.
Marc has RRSPs with a present value of $460,000. He adds $350 per month. If he maintains this rate of savings for the next seven years to his planned retirement, the account would grow to $598,000. That capital could generate $33,340 per year for the next 25 years to his age 91 with a three per cent average annual return after inflation. His TFSA, to which he adds $3,000 per year, has a present value of $46,000. With the same assumptions, the TFSA would grow to $80,250 in seven years and add $4,475 in tax-free income for 25 years to his age 92.
Lani has an RRSP with a value of $360,000. It would grow to $442,755 with a three per cent return over the rate of inflation for the next seven years. This sum would generate $24,700 of annual taxable income over the next 25 years to her age 97. Her TFSA with a present value of $48,000 to which she can add $3,000 per year for the next seven years to her age 72 would grow to $82,700 and provide an income of $4,610 per year for the following 25 years.
Marc will have a Canada Pension Plan benefit at age 66 of $14,300 per year and Old Age Security benefits of $7,813. Those are 8.4 per cent and 7.2 per cent above the age 65 levels, respectively, a bonus earned for deferring by one year. Lani can expect CPP benefits of $10,254 per year and a basic OAS benefit of $7,289 per year if benefits start in this, her 65th year. The annual cash flows add up to $106,781. If eligible income minus $9,085 TFSA cash flow, net $97,696, is split and taxed at 15 per cent, with TFSA income put back in, the couple will have $7,680 per month to spend, more than enough to cover their current expenses. With the mortgage paid and RRSP savings ended, their margin would be even larger. It is a cushion that should leave them at ease, Einarson suggests.
Raising savings for a new car or unknown expenses is a wise course as is creating a reserve for long-term care. If they don’t need it, a care reserve could be for the kids to inherit, Einarson suggests. “These folks have thoughtfully and carefully built their retirement. The plans should work.”
Retirement stars: Five ***** out of five
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