Jennifer and George are in their mid-40s with two children, 8 and 10. Together, they earn a tidy sum.
“We only started saving when my husband finished his PhD and got a full-time job three years ago,” Jennifer writes. “Our income went up substantially, with potential for further increase over the next few years.”
Jennifer works part-time for the government, grossing about $31,500 a year, and hopes to begin working full-time within the next three years. She also earns about $7,000 a year in freelance income, but this will stop when she begins working full-time.
George earns about $120,000 a year in base salary. Bonus and other benefits lift his taxable income to about $150,000 a year. He has a group RRSP at work in which his employer matches his contributions.
In addition, they rent out a flat in their B.C. house for $800 a month. They bought the house two years ago.
As their peak earning years approach, they are wondering how to apportion their rising income.
“Our question is, what is the most effective way to build our wealth relatively late in life, with so many conflicting demands?” Jennifer asks. They hope to retire at the age of 65 with desired cash flow of $100,000 a year.
We asked Brinsley Saleken, a financial planner and portfolio manager at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Jennifer and George’s situation. Macdonald Shymko is a fee-only financial planning and portfolio-management firm.
What the expert says
Let’s start with the couple’s savings plan. George should be taking full advantage of his registered retirement savings plan with a view to catching up with his unused contribution room, Mr. Saleken says.
Next, the couple should catch up on their unused tax-free savings account (TFSA) room. As long as Jennifer’s income remains fairly low, “the benefit of RRSP contributions (for her) are somewhat muted,” Mr. Saleken says. At some point they may consider a spousal RRSP for Jennifer to ensure a balance of retirement assets.
As for the mortgage, the planner assumes it will be paid off at or before they retire because of their current payment schedule.
“One of the more significant investments the family can make is toward Jennifer’s career and the potential to move to full-time [work],” the planner says. This will add to the family’s income, provide health care benefits in retirement and build up her defined benefit pension plan. (She has been contributing to the plan for less than a year.)
Next, their retirement spending goal. Mr. Saleken doubts they can achieve it without upping their savings, which would mean trimming their lifestyle spending just when the money has begun to flow. Jennifer and George would need about $123,000 a year to generate cash flow of $100,000, assuming they split their income for tax purposes.
“Based on their stage in life, child-rearing expenses and current lifestyle, they may find that it is difficult to replicate a similar lifestyle in retirement,” the planner says. “They will need to be highly efficient and disciplined to achieve their stated retirement goals in light of short-term priorities such as travel and lifestyle.”
In his calculations, Mr. Saleken assumes inflation of 2 per cent a year and a lifespan of 92 for George and 96 for Jennifer. They will continue adding $2,437 a month, including company matching for George, to their savings of $96,500 (excluding RESP).
The numbers show if they get a net return on investments of 5 per cent a year from now to the age of 65, and a gross return of 5 per cent a year thereafter, they would have before-tax cash flow of $86,500 a year, including Canada Pension Plan and Old Age Security benefits. This falls far short of their goal. To achieve $100,000 a year after tax, they would need to save an additional $2,900 a month.
“Clearly, enhanced saving needs to be the focus if the long-term goal is of greater priority than maintaining current lifestyle,” the planner says. Because there is so little room for error in their plan, Jennifer and George need to draw up a well-developed investment policy statement based on their risk tolerance and goals.
The people: George, 45, and Jennifer, 43, and their two children.
The problem: How to catch up with their retirement savings while still meeting current financial demands.
The plan: Focus on George’s RRSP, then their TFSAs. Review Jennifer’s RRSP in future. Draw up an investment policy statement to get the most from investments.
The payoff: Better understanding balancing present needs and future aspirations.
Monthly net income: $13,526
Assets: Bank accounts $2,000; securities $12,000; house $540,000; her LIRA $7,500; her TFSA $10,000; his group RRSP $44,335; his RRSP $20,665; RESP $35,000. Total: $671,500
Monthly disbursements: Mortgage: $2,490; property tax $235; utilities $310; maintenance, house cleaning $875; transportation $330; grocery store $1,200; child care $350; clothing $570; student loan $25; gifts, charitable $550; vacation, travel $800; other discretionary $350; entertainment $740; personal care $175; misc. personal $275; sports, hobbies $620; subscriptions $85; children’s activities $325; bank fees $40; life insurance $190; TV, Internet $150; RRSPs $250; RESP $415; TFSAs $835; her pension plan $100; his group RRSP $680; group benefits $120. Total: $13,085
Liabilities: Mortgage $463,000; student loan $600. Total: $463,600
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