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Early retirement would leave little room for extras

Photo: Tim Fraser for The Globe and Mail

Cecil and Donna describe themselves as a traditional family – "working father, stay-at-home mom, two kids" – living a modest lifestyle on a modest income in suburban Toronto.

He is 50, she is 48. Their children are 16 and 13.

The $110,750 a year Cecil earns working at a private school might be considered higher than average but it is not all that much when it comes to supporting a family of four. Still, they have done remarkably well over the years, paying off their student loans and building up their savings. They have no car and "minimal entertainment expenses." Last month, they made the final mortgage payment on their $350,000 home.

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"With two children poised to enter university in the next few years, will we be able to help them while still possibly travelling on my income, or should my wife be looking to re-enter the work force?" Cecil writes in an e-mail. Their goal is to give each child up to $50,000 to help with their postsecondary education costs, with the rest coming from scholarships. Because Cecil has no company pension, they also need to build up their retirement nest egg. Their biggest expense besides the mortgage has been travelling out West every other year to visit Donna's family.

We asked Adam Weinstock, an investment adviser and portfolio manager at ScotiaMcLeod in Pointe-Claire, Que., to look at Donna and Cecil's situation.

What the expert says

With the mortgage paid off, the couple's monthly surplus has risen to $1,850, giving them the flexibility to meet all their needs, Mr. Weinstock says.

First, the education costs. Each child has $17,000 in their registered education savings plans. For their daughter, Cecil and Donna can make contributions for one more year so she will have $20,000 in her RESP when she starts university. To give her another $30,000, they will have to dig into their pockets to the tune of $625 a month over the four years she is in university.

Because their son's RESP will be about $29,000 when he starts his postsecondary studies, they will have to give him an extra $21,000 or $437.50 a month over four years. There is only one year in which both children will be in university at the same time, so Donna and Cecil should still have enough to boost their retirement savings from $800 a month to an average of $1,800 a month over the next few years, Mr. Weinstock says. First, though, they should build up a $10,000 emergency fund.

When Cecil retires, their spending will drop to about $31,800 a year because they will no longer be making the RRSP contributions. Can Cecil retire at age 60 without consigning the family to the poorhouse?

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Yes, but the couple have to understand the effect of that decision on their retirement income, Mr. Weinstock says. Cecil's Canada Pension Plan benefits will be cut by nearly 40 per cent if he begins collecting at age 60. They won't begin collecting Old Age Security benefits until age 65. So from age 60 to 65, they would need to draw about $24,000 after taxes (or $32,000 before tax) from their portfolio to sustain their current modest lifestyle. At age 65, when they begin collecting OAS, their withdrawals would drop to about $11,500 after taxes.

Assuming a 5-per-cent return on investments in a conservative, balanced portfolio, the couple's current retirement savings of $300,000 plus annual contributions of $21,600 would grow to about $767,000 by the time Cecil is 60. A balanced portfolio would include bonds, guaranteed investment certificates and dividend-paying stocks with a history of steadily raising their payouts, Mr. Weinstock says. While they won't run out of money, they will have less room financially for extras, the adviser says. Mind you, they will still have their house to fall back on.

If Cecil worked until age 65, in contrast, their savings would grow to about $1.1-million and their combined CPP and OAS income would be $25,344. They would only have to withdraw about $6,500 a year after tax to supplement these benefits, leaving them plenty of room for travel and other luxuries.

"Their nest egg and government benefits will be more than enough to provide them with their current level of income in retirement and will even afford them a higher standard of living should they so choose," the adviser says.

Client situation

The people: Cecil, 50, and Donna, 48, and their children, ages 16 and 13.

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The problem: How to help pay the children's way through university and save for retirement with one salary and no pension.

The plan: Build an emergency fund. Top up RESPs, then give money to children throughout university. With the mortgage paid, tuck extra money into RRSPs.

The payoff: No big student debts for the children and a secure if modest retirement for Donna and Cecil.

Monthly net income: $5,300

Assets: RRSPs: $300,000; stocks $1,500; TFSA $5,000; RESPs $34,000; home $350,000. Total: $690,500

Monthly disbursements: Property tax $250; home insurance $120; RRSP $800; food $650; clothes $100; phone, TV, Internet $180; entertainment $50; subway $50; insurance $400; travel $400; gifts $100; home maintenance $350. Total $3,450. Surplus $1,850

Liabilities: None

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