Despite the eight-year difference in their ages, Tess and Theo want to retire at the same time in 2033. He is 49, she is 41.
They both work in the same industry, he as an employee earning $125,000 a year, and she as a contract worker making $100,000 a year. He has a defined contribution pension plan at work, while she has one from a previous job. They have a house in a Toronto suburb with a mortgage, and two boys, age 11 and 16.
Theo and Tess have tightened up their spending recently so they have surplus cash flow that they're wondering where to put first. Should they pay off their debts, save for retirement, save for their children's education or invest in something?
When they retire, he at age 65, she at 57, they plan to downsize their house and spend winters in a sunny destination, Theo writes in an e-mail. They would spend their summers in the Toronto area.
"We don't know how to approach planning for retirement given the eight years' difference in our ages," Theo adds. In the meantime, they have two children to put through university.
We asked Matthew Sears, a financial planner at T.E. Wealth in Toronto, to look at Tess and Theo's situation. Mr. Sears also holds the chartered financial analyst (CFA) designation.
What the expert says
Theo and Tess are close to maximizing their retirement savings annually, Mr. Sears says. Based on their current savings rate and his retirement projection, they will meet the lower end of their retirement spending goal of $60,000 to $70,000 after tax. Reducing debt and saving for the children's education should be a bigger focus for the time being, the planner says.
"Once the debts are paid off, they can redirect the cash flow back to retirement savings."
They are contributing $150 a month to a registered education savings plan for their children. They assume the difference will be covered by student loans.
Their mortgage will be paid off by 2025, the same year the youngest child will be starting university. That will free up $1,766 a month in cash flow, Mr. Sears notes. They also have a line of credit that won't be paid off until 2053 unless they increase their payments, and an investment loan to buy company shares that won't be paid off until 2066. "This could be paid off any time if Theo decided to sell the company stock," Mr. Sears says. Their car loan will be paid off by 2025.
"Their goal should be to be debt free by retirement," the planner says. "If not, it will have a negative impact on their lifestyle expenses in retirement." Debt repayment should first focus on the loan with the highest interest rate that is also non-deductible, he says.
To have their line of credit at 5 per cent paid off by the time they retire in 2033, they would have to increase their monthly payment from $100 to $155.
To have the investment loan at 3.5 per cent paid off by December, 2033, the monthly payment would have to be increased from $200 to $385, an increase of $2,220 a year.
For 2018, the couple is estimating a surplus of at least $1,000 a month, Mr. Sears says. This would give them $12,000 a year to direct to debt repayment and education savings. After the increased debt repayments, they would be left with a surplus of about $9,000 a year, which could go to help with the children's education costs.
Any additional money they can put toward debt should be directed to the line of credit first, the planner says. Once that is paid off, they can then shift focus and make additional payments to the car loan or mortgage.
Can they retire at the same time?
Mr. Sears uses a number of assumptions in his retirement projection, which was run until Tess's age 95. They each receive 75 per cent of the maximum Canada Pension Plan benefit. Theo gets 72.5 per cent of Old Age Security Pension, and Tess 92.5 per cent, because they moved to Canada in 2004. As well, the plan assumes Theo continues to contribute $16,800 a year to his company pension plan (his share and his employer's share) and Tess $18,000 a year to her RRSP. The rate of return on their investments averages 5 per cent and the inflation rate 2 per cent.
Based on the above assumptions and a retirement date of 2033, the maximum lifestyle spending they can afford is $62,000 a year in 2017 dollars, Mr. Sears says. Their retirement goal was to spend between $60,000 and $70,000 a year, so this is on the lower end of the range.
If in 2025, when the mortgage is paid off, they begin making an additional $10,000 a year contribution to their RRSPs, they would be able to spend another $2,000 a year when they retire, the planner says. If they are able to save an additional $20,000 a year starting in 2025, they could spend as much as $67,000 a year when they retire.
"Further enhancing their retirement spending would be if they downsized and invested a portion of the house proceeds into their portfolio," Mr. Sears says.
A big factor in this retirement projection is the rate of return on their investment portfolio, the planner says. A one percentage point reduction in return throughout the projection (to 4 per cent) would lower their retirement budget to $54,000 a year.
Saving another $10,000 a year starting in 2025 would allow them to spend $56,000 a year. Saving another $20,000 starting in 2025 would give them $58,000 a year.
A final note about the age difference. The planner's analysis was run to Tess's age 95, accounting for the age difference. As they approach retirement, it will be important to monitor whether there will be enough funds to last Tess for life. "Delaying retirement could be an option for Tess," Mr. Sears says. By doing so, they can delay having to draw down their retirement savings. "If retiring at the same time is important to them, continuing to monitor their plan based on Tess's life expectancy will be increasingly important."
The people: Theo, 49, and Tess, 41
The problem: How to plan for retirement with an eight-year age gap. Where should they focus their efforts: retirement, education or debt repayment?
The plan: Focus first on debt repayment, then on saving for children's education and finally, saving for retirement. Keep an eye on spending.
The payoff: Financial security
Monthly net income: $12,700
Assets: Company stock $65,000; his RRSP $27,000; her RRSP $32,000; his DC pension plan $198,000; her DC pension plan $58,000; RESP $8,300; house $750,000. Total: $1.14-million
Monthly outlays: Mortgage $1,766; property tax, home insurance $340; utilities, security $330; maintenance $200; transportation $960; groceries $1,000; child care $80; clothing $140; line of credit $100; investment loan $200; car loan $386; gifts, charity $140; vacation, travel $800; expenses not broken out $1,000; dining, drinks, entertainment $640; personal care $80; health care $350; life, disability insurance $180; phones, TV, internet $365; her RRSP $1,500; RESP $150; his pension plan contribution (excludes employer's share) $780. Total: $11,487
Liabilities: Mortgage $170,000; line of credit $20,000; investment loan $56,000; car loan $35,000. Total: $281,000
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