Linda and Lamont earn good money, she in a senior management job, he in sales. Even so, they are feeling the pressure of putting Lamont's two sons from a previous marriage through grad school, paying off the mortgage on their Toronto home and saving for retirement.
"My husband and I are a 'married late in life' couple," Linda writes in an e-mail. He is 56, she is 55. They've been married for five years. Together, they bring in about $290,000 a year, depending on bonuses. Neither has a pension plan.
"We bought a house together in 2009 with a heavy mortgage," Linda adds. They still owe about $450,000. "My dream is to be able to stay in the house, but it looks like we will need to downsize so we have enough money for our retirement," she writes.
"Ideally, I'd like to retire before 65 but would be able to do part-time work." Lamont, too, could easily transition to consulting. Their dream is to buy a flat in Spain or Portugal and winter there.
"We do love to travel and take the boys with us on at least one big trip each year, but that is likely to peter out as they finish their education," she writes. "Is it realistic for us to retire by 62 or 63 and keep our house?"
We asked Warren MacKenzie, a principal at HighView Financial Group, a Toronto investment counselling firm, to look at Linda and Lamont's situation.
What the expert says
Linda and Lamont have been good savers, tucking away more than $4,200 a month, Mr. MacKenzie notes. They ask if they can continue to fund their children's postsecondary education, semi-retire in five to seven years and be able to spend $75,000 a year in today's dollars. The children's mother is helping with university costs, which the planner estimates at $20,000 a year for four years. Linda and Lamont can fund their share from their salaries.
Linda wonders whether it would be better to put additional money into their registered retirement savings plans or pay down the mortgage. "On the surface, because they expect to earn more on their investments than the interest rate they are paying on the mortgage [2.92 per cent], and because their tax rate will be lower at the time they start to withdraw money from their RRIFs [registered retirement income funds], it makes sense to put any extra money into the RRSPs rather than making additional mortgage payments," the planner says.
Their financial plan shows that if they earn an average return of 4 per cent (inflation plus two percentage points), they will have enough money to achieve their financial goals, Mr. MacKenzie says. This assumes they continue to save at the current rate until they semi-retire in 2022. By the time they fully retire, in 2027, their investments are expected to be about $1,080,000 (RRSPs) and $525,000 (non-registered).
"They can earn this rate of return with a balanced investment portfolio, so it makes no sense for them to jeopardize their financial security by aiming for a higher return and taking more investment risk than necessary," he adds. They are doing that now.
They should convert their RRSPs to RRIFs as soon as they retire so they will qualify for the federal pension tax credit, the planner says. In their first full year of retirement in 2027, their cash flow will consist of $33,000 in Canada Pension Plan benefits, $17,000 of old-age pension benefits and $126,000 of withdrawals from their registered and non-registered accounts.
"One of their important goals is to be able to stay in their home for 20 years or more," Mr. MacKenzie says. The financial plan shows the home being sold in 25 years.
Another goal is to buy a small apartment in Spain or Portugal. "This goal is achievable based on the following assumptions," the planner says: They buy the apartment in seven years' time for $400,000, the costs of maintaining it are covered by the rental income (eight months of the year), the apartment appreciates at the rate of inflation, and they sell it when Linda is 77. Mr. MacKenzie suggests that as much as possible of the money earmarked for the purchase of the condo in Europe be sheltered from tax in tax-free savings accounts.
One thing that could derail their retirement plan is their investments. "Their portfolio is almost 100 per cent in equities, of which about 80 per cent is in the Canadian market," Mr. MacKenzie says. "If we experience a serious market crash, taking more risk than necessary might mean that at some point in their retirement, they will have to tighten their belts or they will run out of money."
Retirees who have so much of their portfolios in stocks are exposed to "sequence of returns risk," the planner says. "It is possible that we could experience a year when the market drops by 50 per cent. If that was to happen during the early years of their retirement, and they still needed to withdraw substantial sums from their investments, they would be forced to sell twice as many securities to get the required cash flow," he says. They could exhaust their savings and eventually face a lower standard of living.
The people: Linda, 55, and Lamont, 56.
The problem: Will they have to sell their house to finance their retirement?
The plan: Keep saving at the current rate, shift to a more balanced portfolio, buy the apartment in Europe and proceed as planned.
The payoff: No more fretting about the future.
Monthly net income: $14,455 (excluding bonus)
Assets: Her RRSP $451,000; his RRSP $265,000; his mutual funds $30,000; her TFSA $1,000; children's RESP $23,525; residence $1.45-million. Total: $2.2-million
Monthly disbursements: Mortgage $2,360; property tax $600, hydro $250; other housing expenses $555; car lease $220, car insurance $300; fuel $400; other auto $105; grocery store $500; clothing $320; gifts, charitable $100; vacation, travel $1,500; dining, drinks $600; grooming $200; entertainment $100; pets $100; subscriptions $45; drugstore $20; life insurance $120; telecom, TV, Internet $275; RRSP: $3,330; RESP $600; TFSAs $250. Total: $12,850
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