Nat and Nadine enjoyed a windfall most could only dream of when a developer knocked on their door and offered them 65 per cent over market price for their modest suburban townhouse.
Suddenly, they had enough to buy a new house with money to spare. Now that they're mortgage-free with cash in the bank, their thoughts are turning to quitting their jobs. He is 61 and has worked for the government for the past nine years. She is 58 and has spent 10 years working for a big company with a pension plan.
"We are thinking about retiring sooner rather than later so that we can enjoy life at a more relaxed pace," Nadine writes in an e-mail. "But we are concerned that we might not have prepared enough or made the best choices toward retirement (isn't everyone?)," she adds. "We met later in life, spending the first 10 years together consolidating and paying down previous debts. The past 10 years we've concentrated on paying down the mortgage and keeping new debt to a minimum by living within our means."
Their only son is well established and living in Toronto.
Soon after their windfall, the couple bought a house in the same town for $585,000. The extra $188,000 went into their non-registered investment account. Their plan is to quit their jobs in two years, work part-time for a couple of years and then retire fully. "Do we have enough money to do so?" Nadine asks. They plan to save another $100,000 over the next two years. Their retirement spending goal is $6,000 a month, or $72,000 a year, after tax.
We asked Tom Feigs, a certified financial planner (CFP) at Money Coaches Canada, to look at Nadine and Nat's situation.
What the expert says
Nadine and Nat will be in the enviable position of having their pension plans mature unreduced within the same year, 2020, Mr. Feigs says. Nadine is three years younger and her pension matures at her age 62, while Nat's matures at his age 65. Naturally, they would be better-off financially to continue working at their current jobs for another four years, the planner says.
"They have also reached debt freedom: no consumer debt, no mortgage. All of the pieces are falling together leading to their final goal – retirement," the planner says.
Nat and Nadine should immediately move funds from their savings accounts to take advantage of their substantial unused tax-free savings account contribution room, Mr. Feigs says. TFSA funds can be invested for the long term just like an RRSP. "Continue to move funds from non-registered savings to their TFSAs each year to build up investment growth that is not taxed."
If they wanted to retire in two years rather than in four, they would have to increase their annual savings by $15,000 and lower their spending expectations to $67,000 a year in today's dollars, Mr. Feigs says. "While this may feel a bit short, they might not spend at the same pace later in life," he says. "Assuming a drop in spending beyond age 80 to $50,000 in today's dollars, the target of $72,000 annually could be fulfilled in the earlier years."
Their combined net income after taxes and deductions is $10,055 a month. Their monthly outlays over the past year averaged $8,568, which includes pension plan contributions of $770 and registered savings (RRSPs and TFSAs) of $3,925 a month. Their surplus, which varies from month to month depending on their spending needs, goes to a savings account.
In his calculations, the planner assumes they work for another four years, retiring in 2020 with $75,300 a year after accounting for income tax and inflation, which "exceeds their desired spending target." The forecast does not include the couple's home "so they can live out their lives without depending on this home equity." The home will serve as a cushion later in life if unexpected costs arise such as home care, health treatments or unforeseen family circumstances."
To illustrate, this is where their income will come from when Nadine is 65 and Nat is 68: Nadine's defined benefit pension plan $11,431 a year; her Canada Pension Plan $14,386; Old Age Security $7,598; her RRSP, LIRA and RRIF $16,467; TFSA 0; and non-registered savings $8,213, for a total of $58,095.
Nat's income breaks down as follows: Defined benefit pension plan $9,340, Canada Pension Plan $13,121; Old Age Security $7,486; TFSA 0; non-registered savings $10,338; RRSP, RRIF $2,050, for a total of $42,335. So together they will have $100,430 before subtracting income tax. They will draw on the TFSAs once the non-registered funds run out.
As for their investments, the planner recommends they consolidate their various investment and savings accounts with one or two money managers who do a good job of reporting and who offer one simple low fee of less than 1.3 per cent of assets.
The people: Nat, 61, and Nadine, 58
The problem: When can they afford to retire?
The plan: Consider working a little longer or lowering cash flow expectations. Save and invest in earnest, transferring cash from bank accounts to TFSAs. Continue contributing to TFSAs to build up a pool of non-taxable income. Invest TFSA funds for the long term.
The payoff: Peace of mind.
Monthly net income: $10,055
Assets: Bank $20,300; her defined contribution (DC) pension plan $66,700; estimated present value of her defined benefit (DB) pension plan $177,000; her RRSP $155,867; his RRSP $34,000; her TFSA $10,050; non-registered savings $188,000; estimated present value of his defined benefit pension plan $134,000; residence $585,000. Total $1.4-million.
Monthly outlays: Property tax $285, home insurance $55; heating $74; hydro $100; water, sewer $46; phone, TV, Internet $200; cellphone $100; car insurance $160; gasoline, parking $55; car repairs $63; club memberships $200; groceries $800; personal grooming $90; entertainment, dining, movies, drinks $470; other $15; home repairs $150; garden $15; dental $10; clothing, shoes $75; gifts $20; charitable $100; golf, hobbies $40; subscription $15; pet food $140; veterinarian $17; travel $250; other discretionary $200; life insurance $113; bank fees $15; RRSP contributions $3,075; TFSA $850; pension plan contributions $770; Total: $8,568. Surplus $1,487.
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