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Financial Facelift

Couple want the world - in 10 years Add to ...

Suyin and Derik earn good money and will have Newfoundland government pensions when they retire. He is 47, she's 44, and they have no children.



While they enjoy their jobs, they just can't wait to get on with their lives, travelling the world doing volunteer work. This fall, for example, Suyin spent time in Haiti to help with the rebuilding effort, footing the $2,500 bill for her travel and living expenses.

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Given their agenda, they want to speed up the usual spending-and-saving process. Their goal? Be debt free in three years, finish renovating their home, buy a new car and beef up savings so they can retire early.



"Suyin wants to retire at 55 and pursue volunteer travel full time," Derik writes. "We would like to do this while we have our health, say the next 10 to 15 years," he adds. Can they save enough or "are we out to lunch on this?" he asks.



We asked Norm Collins, retirement consultant at Collins Financial Consulting of Dartmouth, N.S., to look at their situation.





What the Expert Says





Derik and Suyin recognize that if both retire in September, 2020, it will be more than two years before Derik can begin to collect his government pension and Canada Pension Plan benefit, so they have to save to cover the shortfall during this period, Mr. Collins says.



The first step is to pay off their debts. Their mortgage has a $24,300 balance with a 5.5-per-cent rate until June, 2012. They can pay it off by October, 2012, by continuing their current $1,000 monthly payments. However, if Derik and Suyin boost the monthly payments by $600 they could erase the mortgage by December, 2011, Mr. Collins notes.



Then they will need a new car. After their mortgage is retired, they will have an extra $1,600 a month and can use that money, along with about $5,000 in savings, to purchase a new vehicle in 2012, Mr. Collins says. Purchasing the vehicle outright will free up the additional $500 a month that Derik pays to lease his current car.



Then they can use the money that had been going to the mortgage and the car lease to pay down their line of credit, increasing their monthly payment to $3,100. Assuming there's no change in interest rates, the higher payments should reduce the balance on the credit line to slightly more than $13,000 by December, 2013.



"If Derik and Suyin wish, they can retire all debt by December, 2013, if they choose to use some of their non-registered savings," Mr. Collins says. Since their timetable to be debt free is just slightly more than 36 months, "Derik and Suyin are certainly not 'out to lunch,' " he adds.



Once the couple's mortgage and line of credit are paid off, $3,100 a month will be available to catch up on RRSP contributions. Derik indicates he has RRSP room of nearly $40,000. He should be able to make contributions totalling this amount over 2014 and 2015.



Then, during 2016 and 2017, with a number of years of salary increases and lower expenses (no mortgage; no line of credit; only one vehicle lease), the couple's annual savings will be in excess of $45,000.



By the time Suyin and Derik retire in 2020, Mr. Collins forecasts their non-registered savings will have grown to $305,000, and Derik's RRSP to more than $300,000. And the couple will own a mortgage-free home.



There will be two years after retirement when their income is likely to fall short of expenses, Mr. Collins says. In these years the couple's only income will be Suyin's pension, forecast to be $70,300.



Along with investment income of $7,900, their total income is expected to be $78,200, while expenses will be $80,000 and $80,900 in 2021 and 2022, respectively.



Beginning in 2023, with both receiving their employer pensions and CPP benefits, income will exceed expenditures by $15,000 a year, except for years when new vehicles are bought.



At age 65, they can begin collecting Old Age Security, which will be partially offset by a reduction in their employer pensions. Savings will increase further to $20,000 per year. The overall result is constantly increasing assets levels, reaching $1-million by the time Derik hits 69 (2031).



The forecasts are based on assumptions provided by Derik and Suyin that their salaries and inflation will rise 1.5 per cent a year.







The People

Derik, 47, and Suyin, 44.

The Problem

How to pay off debt in 36 months, buy a new vehicle, top up the RRSP, and retire by the end of 2020 - while increasing travel, both before and after retirement, focused on volunteering in poorer countries.

The Plan

Pay off the mortgage by December, 2011; purchase a new vehicle without borrowing in 2012; pay off line of credit by December, 2013; top up Derik's RRSP in 2014 and 2015; and then retire as planned in September, 2020.

The Payoff

Plenty of resources to travel and volunteer, along with consistently increasing assets

Monthly Net Income

$10,350

Assets

House, $299,000, registered investments $110,000, Canada Savings Bonds $15,000, TFSA $1,700. Total $425,700.

Monthly Disbursements

Mortgage $1,000; property taxes $215; home maintenance $200; home insurance $30; auto insurance $170; health and dental insurance and expenses $329; long-term disability insurance $271; group life insurance $37; individual life insurance $95; vehicle lease payments $975 (for two vehicles); fuel $330; maintenance $85; heat and power $250; cable, phone and Internet $225; food and restaurants $900; entertainment $250; clothes $250; charities $50; gifts $100; furniture/appliances $150; vacation $750; other $393; line of credit $1,000; union dues $52; employer pension $1,061; RRSP $500; savings $582; TFSA $100. Total $10,350

Liabilities

Line of credit $72,200, mortgage $24,300. Total $96,500.



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