via The Globe and Mail | May 2013
Adrian and Abby live in Alberta with their two youngsters, ages 3 and 5. Abby is 40, Adrian is 45. They both have good jobs and manage their money well, but Adrian frets about the future.
“My husband thinks we’ll never retire,” Abby writes in an e-mail. She is concerned too, but she wants to enjoy life now by cutting back her work in the health care sector from four days to three and buying a condo in the ski resort town of Canmore.
She’s willing to sacrifice.
“We don’t eat out,” Abby writes. “I colour my own hair and cut the kids’ hair. The kids wear hand-me-down clothes from my sister’s kids as well as used sports equipment.”
“We want to know when/if we can retire and whether we can finance a serious ski habit in the meantime,” she adds. They have a rental property that they are planning to sell.
Abby has a defined contribution pension plan and Adrian, a lawyer, has a group registered retirement savings plan in which his employer matches his contributions. The value of both pension plans depends on how their investments perform.
“Can you help us understand where we stand?” Abby asks.
We asked Matthew Ardrey and Warren Baldwin of T.E. Wealth in Toronto to look at Adrian and Abby’s situation. T.E. Wealth is a fee-only financial planning firm. Mr. Baldwin is regional vice-president; Mr. Ardrey is manager of financial planning.
What the experts say
Like many Canadians, Abby and Adrian lack a plan and organization to get them to their retirement goal. The trick is to balance their future goals with their need to live their lives today, the planners say.
Abby and Adrian figure they could use the proceeds from the sale of their rental property to buy the Canmore property, an approach the planners endorse.
“Having three properties would likely overextend their budget,” Mr. Ardrey says. The sale of the rental property will likely trigger a capital gain, and if the resort condo is used personally, mortgage interest on it will not be tax-deductible, he notes.
In preparing their forecast, the planners assume both Abby and Adrian will retire in January, 2033, when Abby will be 60 and Adrian 65. They assume Abby will scale back her workload to three days a week. The return on their current investment assets and future savings is assumed to be 5 per cent a year on average, while the inflation that affects their lifestyle expenses is assumed to be 2 per cent a year. They also assume the couple continues to contribute to their group pension plans and that they will both live until age 90.
Both Abby and Adrian will receive maximum Canada Pension Plan benefits at age 65 and Old Age Security benefits at age 67.
When they retire in 20 years, their retirement spending target of $80,000 would buysoma.net have increased to $118,876 because of the 2-per-cent inflation factor. When Abby turns 72, when they are both receiving RRIF payments, their combined after-tax income would be $198,111, while their expenses would be $160,915. By the time Abby turns 90, $1,166,446 in investment assets would remain, along with their real estate.
“Based on these assumptions, Abby and Adrian are in a good position to meet their retirement goals,” Mr. Ardrey says.
Indeed, the couple may want to spend more when they retire, the planners say. “If instead of leaving behind investment assets for their estate, they spent all of the money, they could have maximum expenses of $87,423 in today’s dollars.”
The planners also found a big hole in the couple’s budget. Their combined after-tax income is $179,000 and their combined savings and spending is about $123,740, leaving $55,260 of annual spending unaccounted for.
“This is a significant amount of leakage.” Abby and Adrian should draw up a budget so they understand what they are spending today and fix any holes in their plan while there is still time, the planners say.
The couple could also benefit from a consolidated investment plan. The planners suggest holding no cash outside of an emergency fund and having a better balance among the equity exposures to Canada, the United States and internationally.
Abby and Adrian are also likely paying too much in fees for the retail mutual funds held outside of their group pension plans. The planners suggest they switch to lower-cost exchange traded funds or pooled funds.
When they retire, the couple will have amassed a portfolio of $2,478,919. At that point, they would typically have to leave the shelter of their group plans and invest on their own, the planners note. A one-percentage-point difference in fees on this portfolio at retirement would result in an income or growth reduction of $24,789 each and every year, they say.
Abby, 40, Adrian, 45, and their two kids, 3 and 5.
Figure out if they can afford a resort condo without endangering their retirement plans.
Sell the rental, buy the condo. They are on the right track, but they need a budget so they can better see where their money is going.
Achieving their goals with a little care and planning.
Monthly net income
Cash, short-term deposits; $16,500; RESP $45,300; her RRSP $64,380; her work pension $73,200; her TFSA $5,070; her non-registered $27,665; his RRSP $48,075; his TFSA $6,220; his work RRSP $162,000; residence $785,000; rental condo $415,000. Total: $1.65-million
Mortgage $2,600; property tax $385; utilities $315; house maintenance, cleaning $490; security $25; transportation $665; groceries $1,300; child care $1,500; clothing $150; charitable $150; vacation $300; discretionary $725; health, life insurance $755; telecom $215; savings $735. Total: $10,310. Surplus: $4,605
Home mortgage $485,000; condo mortgage $190,000. Total: $675,000
Some details may be changed to protect the privacy of the persons profiled.
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