via The Globe & Mail | October 3, 2014
After more than a quarter of century in the military, Bart is growing weary of moving. His wife, Suzanne, has a good job with a pension, their home in small-town Ontario is paid for and their children are not eager to change schools.
So at 42, Bart is wondering whether he can retire in a couple of years and work at a job that would pay him much less than the $91,000 a year he is making now.
Suzanne, who is 45 and earns about $99,000 a year, would continue to work. If they had to move she would leave behind her job and her government pension.
Their near-term goals include helping their children, age six and eight, with their post-secondary education. As well, Suzanne and Bart will both need new vehicles soon.
But their big dream is to take one long, expensive holiday – lasting up to a year – with their children, “definitely before the children finish high school,” Suzanne writes in an e-mail. She’s not sure if she can get the time off work.
While they have some savings, their main source of retirement income will be their defined benefit pension plans. “Are we on track for meeting these goals?” Suzanne asks.
“Will we still be able to meet our goals if Bart retires? Are we crazy to think we could travel the world with our kids and still meet these goals?”
What the experts say
If Bart quits the military in 2015, he will have a pension of $43,000 a year indexed to inflation, the planners note. Bart figures he can earn about $20,000 a year working part time. Suzanne will continue at her current job until she retires at age 60.
Bart and Suzanne are spending about $57,000 a year now, not including their savings. The planners added a cushion to that number, lifting it to $60,000 a year. When they retire, Bart and Suzanne would like $80,000 a year. “We decided we would like extra funds for more travel and a bit of fun,” she writes.
They have about $111,500 combined in their registered retirement savings plans and about $59,000 in their tax-free savings accounts, Mr. Ardrey and Mr. Baldwin note. Bart will get a $35,000 severance payment, which he intends to roll into his RRSP. The planners assume Bart will save $3,600 a year in his RRSP and both will contribute $5,500 a year to their TFSAs. Suzanne has very little RRSP room because of her work pension.
The planners assume an average return on investments of 5 per cent a year with inflation of 2 per cent a year. They add new car purchases of $30,000 in 2015 and 2018, then again in 2029 and every 10 years thereafter.
Their year-long vacation with the children will cost $75,000 in today’s dollars. They will not work during that time, and money that would normally go to savings will go instead to cover expenses.
A key assumption, the planners say, is that Suzanne and Bart will return to their jobs once the holiday is over.
When Suzanne retires at age 60, she will get an indexed pension of $63,035 a year with a bridge benefit (ending at age 65) of $9,395. They will be entitled to Canada Pension Plan benefits at age 65 and Old Age Security at age 67.
“However, Bart’s pension has a CPP clawback provision, so for every dollar in CPP he receives, he will lose a dollar of pension,” Mr. Ardrey points out.
Their retirement spending goal is $80,000 a year, which will have risen to $107,142 a year with inflation, the planners say. This will be more than covered by their pension income on a pretax basis, but they will need to draw on their investment income to meet their after-tax goal.
“Based on these assumptions, they have sufficient savings and income from their pensions to fund their lifestyle now and when Suzanne retires,” the planners conclude.
Their plan is not without risk, Mr. Ardrey and Mr. Baldwin say. If one or both is unable to return to work after the big holiday, “then it would throw their retirement plan into jeopardy.” As well, they will have to borrow to finance their car purchases and their vacation, which will hamper their ability to save in future.
“Managing their budget when their income falls will be a priority.”
The couple could save on their investment management fees by switching from mutual funds to low-cost alternatives such as exchange-traded funds, the planners say. By the time Suzanne retires, their combined portfolio will be worth more than $1-million. A one-percentage-point saving would amount to $10,000 “each and every year.”
The people: Bart, 42, Suzanne, 45, and their children, six and eight.
The problem: Can Bart retire from the armed services next year without jeopardizing their financial future?
The plan: Bart retires next year and gets a part-time job earning $20,000. He continues to save. Suzanne works until age 60 and retires with a pension. They keep a keen eye on their budget after their income drops.
The payoff: No more having to move every few years. Financial security thanks mainly to their pension plans.
Monthly net income: $10,060
Assets: Bank accounts $2,200; his TFSA $29,165; her TFSA $30,000; his RRSP $86,300; her RRSP $25,215; RESP $55,000; residence $250,000; share of out of province farmland $50,000; estimated present value of his defined benefit pension plan $1,119,660; estimated PV of her pension plan $346,570. Total: $1,994,110
Monthly disbursements: Property tax $360; water, sewer $100; home insurance $80; hydro, heat $210; maintenance, garden $250; transportation $520; groceries $850; child care $220; clothing $100; loan payment $110; gifts $50; vacation, travel $600; dining, drinks, entertainment $335; clubs, sports $390; other personal discretionary $400; life insurance $25; telecom; TV, Internet $150; RRSPs $500; RESP $415; TFSAs $915; other savings (for loan repayment, top up RRSP and TFSA contributions if needed, and big trip) $3,000; pension plan contributions $860. Total: $10,440
Liabilities: Home buyers’ plan loan: $9,090
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