Beth and Justin have done everything right. Their Toronto house is fully paid for, their savings add up to more than $680,000 and they have no debt.
They’ve achieved all this despite raising three children, 10, 12 and 14. Justin is 49, Beth 46. He runs a small creative business from home, she works in financial services. Between them, they earn $96,000 after tax.
“Beth and I have always been savers,” Justin writes in an e-mail. They pay off credit card balances each month, make coffee and lunch at home, have no cleaning lady, no air conditioning, own only one car – “but we try to walk or bike everywhere possible” – and dry their washing on the clothesline.
Like so many Canadians, they want to quit their jobs as soon as possible and do some occasional contract work or freelancing. Justin is wary of registered retirement savings plans because he fears that he and Beth may have to pay more in taxes to withdraw the money later than they are saving now. “We seem to get conflicting advice,” he writes.
Ideally, Justin would like to retire by the time he is 55. Neither he nor Beth know how much money they will need to live on once they’ve hung up their hats.
We asked Warren Baldwin, regional vice-president of T.E. Wealth in Toronto, to look at Beth and Justin’s situation.
WHAT THE EXPERT SAYS
Retiring in six years when Justin is 55 is simply not financially possible, Mr. Baldwin says. Their core expenses require an after tax income of $46,000 a year, an amount that will rise along with inflation. This excludes expenses that will stop when they retire, such as RRSP and education savings contributions and spending on their children.
While their income needs would be offset by contract and freelance work, Beth and Justin would be forced to draw heavily on their savings during the early years, leaving less money to earn income, dividends and capital gains for the future.
They could sell their house and downsize, but that would be disruptive to the family. Instead, Mr. Baldwin assumes they will retire in nine years when Justin is 58 and Beth 55. He has not taken into account any post-retirement earnings. He assumes a 5-per-cent annual rate of return on investments and a 2-per-cent annual inflation rate.
Nine years from now, they will each have about $70,000 in a tax-free savings account and $500,000 in each of their RRSPs, he says. The $46,000 in lifestyle expenses will have risen to $55,000. They will have to draw on their registered savings to carry their retirement until they become eligible for the Canada Pension Plan at age 60 and Old Age Security at age 65. If they had to support one of their children longer than expected, or if a financial emergency rose, their retirement plans could be altered quite dramatically.
Beth and Justin have provided amply for their children’s education, Mr. Baldwin notes – perhaps more than they need to. Justin made it clear he and Beth want the children “to work as hard as possible during the summer to pay a good portion of their university education.”
“They may wish to consider fine-tuning the education savings and redirect some of this cash flow toward enhancing their retirement savings,” the planner says.
Beth and Justin have made a point of maximizing his RRSP contributions rather than hers, leaving her with substantial unused RRSP contribution room. Yet Justin is able to deduct business expenses from his earnings, putting him in a low marginal tax bracket (21 per cent versus Beth’s 31 per cent, Mr. Baldwin estimates).
If the contribution was made in her name instead, they would save about 50 per cent more in taxes for the same amount of RRSP contribution, he says. As well, they could save taxes in retirement by having Beth contribute to a spousal RRSP for Justin, evening out their incomes in retirement.
To save money, Justin and Beth are considering cancelling their term insurance coverage. Mr. Baldwin suggests they reconsider. Their financial circumstances are “somewhat fragile,” he notes. If one of them were to die, the burden on the surviving spouse to support the family and save for retirement “could be quite onerous.”
As it stands, their savings nine years from now will provide for them until they both reach age 90 (the plan assumes Beth outlives Justin by several years, with retirement expenses being reduced by 25 per cent when she is on her own) without having to sell their home, leaving them with a comfortable cushion indeed.
Client situation:
The people
Beth, 46, Justin, 49, and their three children.
The problem
Are they saving enough to retire in a few years, and does contributing to RRSPs make sense for people in their tax bracket?
The plan
Work a little longer, take full advantage of Beth's unused RRSP room and have Beth contribute to a spousal RRSP for Justin to even out income and lower the total tax bill in retirement.
The payoff
A long and comfortable retirement without having to sell the family home before they are ready to do so.
Monthly net income
$8,000
Assets
Family home $900,000; bank accounts $4,000; RESPs $114,000; RRSPs $530,000; TFSA $23,000; non-registered savings $11,000. (Share of jointly held family cottages not included.) Total: $1.58-million.
Monthly disbursements
TFSA $835; RESP $625; RRSP $1,200; groceries, drinks, dining out $750; clothing $100; orthodontist $150; miscellaneous $100; property taxes $540; house insurance $75; utilities $300; telecom, cable $150; repair, maintenance $350; appliances $75; family vacations $600; music, books $20; auto expenses $450; life insurance $135; gifts $200; vet $25; children's music, sports $500; children's summer camp $400; fitness, recreation $220. Total: $7,800. Saving capacity $200.
Liabilities
None
Special to The Globe and Mail
