Question from Jenn of Edmonton: My husband and I would like to travel in our retirement and want to make sure we have enough money to do so.
I earn about $145,000 a year, my husband $48,000. He has no pension and about $100,000 in a registered retirement savings plan. I have about $300,000 in a defined contribution plan from a former employer and am contributing to a defined benefit pension with my current employer. I can retire with a full pension from my current job after age 66 (although I’d prefer to retire early if I can afford to and still travel). I also have about $125,000 in RRSPs.
My mortgage will be paid off when I am 65. Both my husband and I are the same age. We own a second property that is vacant land. We owe about $141,000 on it but it has a value of about $200,000.
We have recently inherited about $300,000 and are not sure how best we should invest this money so that we can reach our goal of travelling or perhaps living in a warmer climate for two to three months a year in our retirement.
Ms. Birenbaum has worked in financial services for over 25 years within the Credit Union, full-service brokerage and independent Financial Planning industries
Rona Birenbaum is a certified financial planner who founded Toronto-based Caring For Clients in 2000.
Pack your bags Jenn – we’ve got good news for you. You can maintain your current lifestyle in retirement and add $10,000 a year to your vacation budget, assuming you:
· Retire debt-free, at 66, with a full pension. The defined benefit pension, boosted by the Canada Pension Plan and Old Age Security (we assume you receive the maximum based on your current income levels), forms the bedrock of your retirement income.
· Maximize your RRSPs – use some of the inheritance money to catch up if you have room. Your husband should make contributions that reduce his income to no lower than $40,000 in any one taxation year. Any more and the tax benefit over the long term favours a tax-free savings account.
· Maximize your TFSA room now and annually thereafter. The inheritance money is a good source for an immediate top-up.
· Accelerate repayment of your mortgage to the extent permitted with your inheritance funds.
· Allocate your $800 a month savings to your TFSA accounts.
· Experience an annual compounded return on your investments of 4 per cent while inflation is 3 per cent.
It’s not easy to make financial decisions without an actual scenario to help you visualize. We typically offer our clients several. Here are a few for you to consider:
1. Spend your winters in the south for three months a year from 66 to 80. You would use up your savings by 80 and your home equity would last until 90, after which time your income would be limited to your pensions.
2. Stay home in the winter. By 90 you will have spent your savings and can sell your home to fund your needs beyond 90.
3. Save an extra $1,400 a month between now and retirement. You can then winter down south and have your savings last to 90.
4. Retiring early requires a trade-off. For starters, it reduces your defined benefit pension income significantly. There would be fewer years for saving and growth, as well as more years of withdrawals. The extra travel might be what you’d have to give up.
This is just a quick summary: A more detailed financial planning exercise would allow you to create other retirement scenarios and find the sweet spot that satisfies your lifestyle and retirement security objectives. Happy planning and bon voyage Jenn.