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financial facelift

Bob and Betty have high hopes for life after 55 but the math may not work for them to achieve all of their dreams.Glenn Lowson

Betty and Bob are in their early 30s with good jobs, a house in small-town Ontario and a baby. They plan to have a second child as well. Betty makes $80,000 a year, Bob $43,000, plus a bonus tied to sales.

As with most people their age, they have competing claims on their income – mortgage, federal Home Buyer's Plan loans, a car loan, emergency savings, retirement savings, education savings and home repairs. They have a second property, a condo, on which the rent covers costs, so they break even.

Although retirement is still a long way off, their goal is to hang up their hats at age 55 thanks mainly to Betty's defined-benefit pension plan. She works in the education field and expects her income will rise over time. Based on her current income, her pension will pay about $56,400 a year at age 55, with an inflation adjustment that depends in part on the plan's funding status.

The amount includes a bridge benefit of $7,465 to age 65. Their retirement spending goal is $70,000 a year after tax plus another $20,000 a year for travel from the time they retire to age 75.

They also want to pay for their children's postsecondary education. They are contributing $2,500 to a registered education savings plan (RESP) for their baby to take advantage of the Canada Education Savings Grant – investing the Canada child benefit in the RESP and making up the shortfall at year end. The maximum grant for each child is $7,200.

We asked Matthew Sears, a financial planner at T.E. Wealth in Toronto, to look at Bob and Betty's situation.

What the expert says

By the time Betty and Bob plan to retire in 22 years, their lifestyle expenses will have risen with inflation to $106,096 and their travel budget to $29,718 a year, Mr. Sears says. That assumes an inflation rate of 2 per cent a year.

In his forecast, the planner assumes Betty buys back the pension lost while she is on maternity leave so that she will get an unreduced pension at age 65. He assumes they make a 5.5-per-cent rate of return on their investments, that Bob gets 90 per cent of the maximum Canada Pension Plan benefits and Betty gets 100 per cent.

How they fare will depend on Betty's pension payout when she retires, Mr. Sears notes. He runs three forecasts using different assumptions.

The first assumes a pension of $56,402 a year with no indexing, in which case they have a shortfall of $1.73-million. They could either cut their retirement spending to $52,000 a year or save an additional $23,355 a year. (All forecasts take into account $20,000 a year for travel.)

In the second forecast, Betty's pension is $78,279 with no indexing. This assumes she gets a raise in line with inflation each year. They have a shortfall of $1.24-million. They'd have to cut their retirement spending to $57,200 a year or save an additional $15,850 a year.

In the third forecast, the most optimistic, the planner assumes Betty is promoted in three years to a position paying $120,000 a year. Her pension entitlement would be $98,879 at age 55 with no indexing. "This assumes Betty will receive a CPI [inflation] adjustment to her salary every year," Mr. Sears says. They have a shortfall of $605,000. They would have to cut their retirement spending to $64,500 a year or save an additional $6,750 a year from now to the time they retire.

They have a second property that could provide them with some additional retirement income or be sold to add to their investments, the planner notes. Either way, the condo would help enough to allow them to retire at the desired age of 55 with $90,000 a year in the third forecast only, Mr. Sears says. That's where Betty gets a pension of $98,879 a year.

Another alternative would be for Betty and Bob to work a little longer. In the first forecast of Betty's pension payout, they could achieve their spending goals if they delayed retiring until age 62, the planner says. For the second forecast, where her pension is higher, they would have to delay retirement until age 58.

They also face a shortfall in paying for their child's education, Mr. Sears says. Based on their current savings rate and an expected rate of return of 5 per cent, they will be able to cover three out of four years' of education expenses for their child. That assumes education costs of $20,000 a year, indexed to inflation. They would have to fund about $20,635 from their monthly cash flow or their savings.

"In order to meet their goal, they would have to start saving an additional $550 a year toward education savings," Mr. Sears says. If they have a second child in, say, 2020, the shortfall would be about $34,000, or an overall shortfall for the RESP account of about $54,000, he says. "They would need to start saving another $1,200 a year, starting today, to make up that shortfall."


The people: Betty and Bob, both 33, and their baby

The problem: Figuring out how much they would have to save to retire early and travel, having paid off the mortgage, maintained their home, raised two children and paid for their higher education.

The plan: Increase RESP savings, especially if they have a second child. For retirement, save more, work longer or prepare to spend less after they have retired.

The payoff: Financial security with goals achieved

Monthly net income: $8,000 (excludes bonus and child benefit)

Assets: House $620,000; rental property $420,000; cash in bank $11,500; his TFSA $10,000; her TFSA $7,500; his RRSP $16,000; her RRSP $10,000; commuted value of her pension plan $127,962; RESP $4,200. Total: $1.2-million

Monthly outlays: Mortgage $1,695; property tax $350; home insurance $70; heat, hydro $230; transportation $460; grocery store $600; child care $1,200; clothing $50; car loan $350; charity $30; vacation, travel $80; dining, drinks, entertainment $600; personal care $50; sports, hobbies $100; health care $163; phones, internet, TV $280; RRSPs $518; RESP $176; TFSAs $500; her pension plan contribution $748; group benefits $400; professional association $89. Total: $8,739 (shortfall comes from his bonus)

Liabilities: Residence mortgage $140,000; rental property mortgage $230,000; car loan $11,000. Total: $381,000

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