Estelle and Roger are in their early 30s with a toddler and a second child on the way.
They have a home in Edmonton with a big mortgage, a car loan and some sizable expenses on the horizon – a basement renovation, a new vehicle, and in five or 10 years, a trip to Europe with the children.
He has an executive job, she works part-time as a supply teacher. Together they bring in about $171,200 a year. They're prodigious savers but they're feeling the weight of the yoke. "We have saved pretty aggressively before our daughter was born but our priorities are beginning to shift," Roger writes in an e-mail. "It would be nice to have some extra money to spend on other things."
Their questions: "Are we saving enough for retirement? Can we survive on my income only until the children start school?"
We asked Ron Graham, an independent financial planner in Edmonton, to look at Estelle and Roger's situation.
What the expert says
Estelle and Roger are much better off than they seem to realize, Mr. Graham says. They can meet their retirement spending goal – and everything in between – even if Estelle never returns to work, he adds.
Their take-home pay is $9,425 a month ($6,900 from Roger and $2,525 from Estelle), while their expenses, including $825 of saving, total $8,800. In addition, Roger and his employer contribute 12 per cent of his salary ($1,305 a month) to a group RRSP and savings plan.
Roger can retire with an unreduced pension of $61,307 at age 62. Their spending goal is $7,000 a month. At 62, Roger can start drawing Canada Pension Plan benefits of $9,769 a year. Estelle will get $1,976 a year from a previous work pension at age 65.
Mind you, if Estelle does not go back to work, she will not have enough years of service to qualify for an Alberta Teachers' pension, the planner says. She will get CPP benefits of about $1,200 at age 60. After income taxes of $10,400, they would have $5,156 a month to spend. They would need to withdraw $30,000 a year from their RRSPs or $24,000 a year from their tax-free savings accounts between 62 and 67 to meet their spending target, he says.
Once they turn age 67, they will begin collecting Old Age Security benefits of $6,704 a year each, so their monthly take-home from pensions and government benefits will be $6,331. They would need to withdraw $12,500 a year from their RRSPs or $8,000 from their TFSAs to meet their target, Mr. Graham says.
Roger and Estelle have saved $151,585 in RRSPs and $10,341 in TFSAs. If the only money they save in future is through Roger's group RRSP and savings plan at work, in 30 years they will accumulate $631,726 (plus investment earnings) and have enough – with their pensions – to meet their retirement goal, Mr. Graham says.
They should continue the $200 a month contribution to the registered education savings plan for their children, Mr. Graham says. When their second child is born, this should be increased to $400 a month so that they can take full advantage of the Canadian Education Savings Grant. They also will get another $100 a month from the Universal Child Care Benefit.
If Estelle returns to work once the children are in school, either full- or part-time, she will continue to contribute to her pension plan, which would give them more money both during their working lives and when they hang up their hats. Mr. Graham ran a couple of projections to illustrate.
In the first one, Estelle goes back to work full time in six years. Both Estelle and Roger continue to contribute to their RRSPs and TFSAs. "In this scenario, they can meet their spending target and leave an estate of over $14-million," Mr. Graham says. His calculations assume an average annual return on investment of three percentage points above the inflation rate.
In the second projection, Estelle goes back to work and qualifies for a teacher's pension but neither of them save any more of their take-home pay. Roger's work savings continue unchanged.
"In this scenario, they can still meet their retirement goal but there would only be $2-million left as an estate," Mr. Graham says. A third alternative has them continuing to save in their RRSPs and TFSAs but spending substantially more – $130,000 a year – when they retire.
In the meantime, Roger can draw on his work savings plan to meet whatever expenses are coming their way, the planner says. "If he is concerned that the money will not be there in retirement, he can borrow and replace his investments," Mr. Graham says, in which case the interest on the loan will be tax-deductible.
Estelle and Roger have neglected an important part of financial planning: They have no wills, powers of attorney or personal directives. They should have these documents prepared as soon as possible, Mr. Graham says.
The people: Estelle, 33, Roger, 32, and their 18-month old.
The problem: Figuring out if they can loosen the purse strings a bit without jeopardizing their retirement goal.
The plan: Relax. You're already ahead of the game thanks to Roger's pension plan, savings plan and group RRSP. When Estelle goes back to work, you will have plenty of money to pay off the mortgage and save.
The payoff: Feeling comfortable living a little more for today.
Monthly net income: $9,425
Assets: Bank accounts $14,220; Roger's work savings plan $18,230; TFSAs $10,340; his RRSPs $123,810; hers $9,080; est. present value of his DB pension $39,140; est. value of hers (non-vested) $18,700; present value of her DB pension from previous job $21,270; RESP $5,620; home $550,000. Total: $810,410
Monthly disbursements: Mortgage $2,145; property tax, insurance $380; utilities, maintenance $415; transportation $760; groceries $700; child care $800; clothing $200; car lease $565; gifts $200; vacation $550; entertainment $810; hobbies $165; life insurance $40; telecom $245; RRSPs $100; RESP $200; TFSAs $525. Total: $8,800
Liabilities: Mortgage $433,445 at 2.79 per cent; car loan $30,265. Total: $463,710
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