Shelley and Stan have been married less than a year and already they're thinking about retiring, mainly because of the 13-year difference in their ages. She is 51; he is 64.
"I had always planned to retire at 60 or later," Shelley writes in an e-mail. She has a good executive-level job, earning more than $235,000 a year including a bonus. She also has a defined-contribution pension plan at work.
"However, with an older spouse, I want to be able to travel while he is still able," Shelley writes. Although she would like to retire earlier if possible, "I don't want to run out of money," she writes. "I could live 40 years in retirement."
Stan works in education, bringing in $95,000 a year. He contributes to a defined-benefit pension plan. They each own their own houses, his with a mortgage, hers without. Stan is a generous father, renting his house to his son at cost to help him get a start in the tough Toronto market. Stan also is paying $1,400 a month for his daughter's apartment while she is in university.
"As we prepare for retirement with such lofty goals, we wonder if we need to sell that house (Stan's) soon and reinvest the equity sooner rather than later," Shelley writes. She also worries about having to carry two places if one of them requires nursing home care in future.
"Can we afford to retire early in 2021 and live the lifestyle we want?" Shelley asks. Their retirement spending goal is $130,000 a year after tax.
We asked Michael Cherney, an independent Toronto financial planner, to look at Shelley and Stan's situation.
What the expert says
From a financial planning perspective, Shelley and Stan do some things well and some things not so well, Mr. Cherney says.
What they do well: They max out their registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), the planner notes. "That is rare."
As well, Stan "has done a great thing" simply by being part of a defined-benefit pension plan. Mind you, he has only 16 years of service under his belt because of a mid-life career change. They own two detached houses in Toronto's "very rich" housing market.
What they could improve on: "To the extent Stan is helping his son save enough money for his own down payment in today's crazy market, he may just be a generous dad [by renting his house at cost], which is pretty hard to fault," the planner says. "But from his and Shelley's perspective, they are missing out on some valuable rent."
They are also paying that $1,400 a month for Stan's daughter's apartment while she is in school.
Their lifestyle expenses are higher than they need to be, Mr. Cherney says. "They budget $15,000 a year for travel, $14,000 for golf and $10,000 for dog walking and other pet expenses."
They both plan to keep working until Stan turns 70 in 2021, "which will significantly increase the value of his pension," the planner says. He would be entitled to a pension of $35,076 a year. His Canada Pension Plan and Old Age Security benefits will also be higher. Shelley would be 57.
The planner assumes they live to age 95, the annual rate of inflation is 2.5 per cent and their annual rate of return on their investments is 4.5 per cent.
He further assumes they continue to max out their RRSPs and TFSAs as long as they are working, and that they sell Stan's rental house in 2018 and net $275,000 after mortgage, taxes and expenses. When they retire, they sell the home they share now, buy a two-bedroom condo and net $400,000 after expenses. Then "they invest the net proceeds of these home sales in a diversified portfolio of exchange-traded funds."
Mr. Cherney recommends the couple take advantage of pension income splitting, which allows them to divide their retirement income in half. They would also take advantage of the $2,000 federal pension income deduction.
Even working another five years, they won't quite meet their $130,000 spending goal, but they come close, the planner says. If Shelley works an extra 16 months and retires at the end of 2022, when she will be 58, they can expect $166,000 a year in effective pre-tax income, which would give them the desired $130,394 after tax (in 2016 dollars).
Their current spending outlays will be much lower by the time they have retired, Mr. Cherney says. They will no longer be paying Stan's daughter's rent and tuition, or carrying the losses on the second home. They will stop contributing to their RRSPs and TFSAs, and typical work-related expenses such as transportation, clothing and lunches will drop. If they could get by on less, they could put up their feet a little sooner.
The people: Stan, 64, and Shelley, 51
The problem: Can she retire early so they can spend more time travelling without finding herself short of savings in her later years?
The plan: Work another five years, making maximum contributions to RRSPs and TFSAs. Plan to sell the rental house and invest the net proceeds. Split income in retirement.
The payoff: A secure retirement with money to spare.
Monthly net income: $16,465
Assets: Bank $3,000; her RRSP $333,362; her locked-in RRSP $78,142; her DC pension $307,802; her stocks $25,570; his RRSP $175,548; estimated present value of his DB pension plan $352,500; her TFSA $40,425; his TFSA $19,337; RESP $8,000; her residence $1,000,000; his rental house $550,000. Total: $2.89-million
Monthly outlays: Mortgage $970; property taxes $750; water, sewer $300; property insurance $215; hydro, heat $450; maintenance $300; garden $60; transportation $795; grocery store $1,400; daughter's apartment $1,400; clothing $705; bank fees $50; gifts, charitable $470; vacation, travel $1,250; other $200; dining, drinks, entertainment $1,875; grooming $125; club membership $60; sport, hobbies $1,200; pet expenses $800; subscriptions $50; dentist $25; drugstore $40; telecom, TV, Internet $215; RRSPs $150; TFSAs $917; pension plan contributions $1,678; professional association $15. Total: $16,465
Liabilities: His mortgage $235,000; line of credit $50,000. Total: $285,000
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