Brad likes his job, but at 61, he wonders at what point it would be realistic for him to plan to hang up his hat.
Brad brings in about $97,740 a year before tax working in the media field. His wife, Bonnie, has been earning pocket money doing occasional jobs, bringing in about $7,000 a year. They have three children who are beginning to be established in their careers, Brad writes in an e-mail. "We want them to learn from our mistakes, so they are not in the position we find ourselves in."
Brad and Bonnie are not in a bad position. Their Toronto house is valued at $2-million. Still, he seems worried they haven't built up enough of a nest egg. They have tried to manage their debts, but they "haven't had much luck investing," Brad writes. He has a defined benefit pension plan that will pay him about $45,400 a year at age 65. Because he has reached full pension, he no longer contributes to the plan.
"As well, in the last few years we haven't contributed to RRSPs, but rather we've done pre-payments on our mortgage," Brad adds. "We're not sure what is the best financial route. Can we learn to manage our funds?" Their retirement spending goal is $60,000 after tax.
We asked Michael Cherney, an independent Toronto-based financial planner, to look at Brad and Bonnie's situation.
What the expert says
"Brad and Bonnie say they have made mistakes, but I don't see many," Mr. Cherney says. "Brad loves his job and is not in a rush to retire. But he wants to know his options."
Brad and Bonnie are excellent savers, the planner says. They have been able to set aside about $19,000 a year now that their children are finished their education. "In recent years, much of that has gone to paying down their mortgage, although they have also made some improvements to their home."
In addition to his pension of $3,783 a month (current dollars), Brad will get full Canada Pension Plan benefits, currently $1,114 a month, at the age of 65. Bonnie will get only a negligible amount ($28 a month) at 61. This assumes they start drawing benefits at the same time. They both qualify for full Old Age Security benefits, currently $585.49 a month. Brad has two RRSPs totalling $66,706. Bonnie has a spousal RRSP of $93,146.
Before Brad retires, Mr. Cherney suggests the couple pay off the remaining mortgage balance of $40,753. As well, Brad should contribute as much as possible to his RRSP while he is still working. He would get a "handsome" tax deduction of anywhere from 37.9 per cent to 43.4 per cent. Because he is no longer paying into his pension plan, Brad has unused contribution room of $17,800 a year.
"Here is an opportunity to leverage the difference in marginal tax rates in pre-retirement (a 40-per-cent range) versus post-retirement (a 22-per-cent range)," Mr. Cherney says. In his calculations, the planner assumes Brad contributes $17,500 to his RRSP in each of 2018, 2019 and 2020. "This would yield tax savings in the neighbourhood of $7,000 a year, which they could put toward the mortgage, retiring it by the end of 2020."
If they prefer, Bonnie and Brad can "pull back" from this aggressive savings plan by extending Brad's retirement date, Mr. Cherney says. "After all, he does enjoy his job."
In his calculations, the planner assumes Brad and Bonnie will live to the age of 95, the inflation rate will average 2.5 per cent a year and their investments will yield 4.5 per cent a year net of fees. Based on these assumptions, the couple will have gross monthly income of $6,250 when Brad retires.
"Due to pension income-splitting and CPP pension sharing, they will be able to split most of their retirement income, resulting in a lower tax bill," Mr. Cherney says. Their net after-tax income will be $5,312 a month, which surpasses their $5,000 target. "Income-splitting and CPP pension-sharing are particularly beneficial in this situation, where one spouse earns most of the income and would otherwise be taxed much more highly during retirement."
Now for their investments. Brad's two RRSP accounts have done well, but one is invested solely in a Canadian stock fund. Diversifying internationally could lower risk, Mr. Cherney says. The other holds only two stocks. "As a general principle, it makes sense that if you are going to invest in individual stocks, you should have more diversification." In addition, bonds should always be included in a well-diversified retirement account.
Bonnie's self-directed spousal RRSP needs work. She is holding $28,286 in cash, which will end up being a drag on returns, the planner says. She also has several high-risk investments that have not turned out well. "All three of these accounts could stand to be transferred to a robo-adviser" or online portfolio manager.
Finally, "it would be negligent not to mention the couple's largest asset by far – their home," Mr. Cherney says. "An asset worth $2-million, tax-free, is the ultimate safety valve. They could downsize and with all the freed-up cash, meet any challenge that comes up."
The people: Brad, 61, and Bonnie, 57.
The problem: Can they afford for Brad to retire at the age of 65 without risking their goals?
The plan: Pay off the mortgage, contribute as much as possible to Brad's RRSP and take the plunge at 65 if he wants to.
The payoff: A clear understanding of their retirement options.
Monthly net income: $6,320
Assets: Cash $5,000; his RRSPs $66,706; her RRSP $93,146; estimated present value of his pension plan $666,000; residence $2-million. Total: $2.8-million.
Monthly outlays: Mortgage $750; property tax $587; home insurance $118; utilities $348; maintenance, garden $235; transportation $353; groceries $878; clothing $115; gifts, charitable $125; vacation, travel $295; dining, drinks, entertainment $168; personal care $143; subscriptions $59; dentists $14; prescriptions, vitamins $145; health, dental insurance $18; life insurance $160; disability $102; phones, TV, internet $117. Total: $4,730. Surplus of $1,590 goes to savings.
Liabilities: Mortgage $40,753
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