Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Robert and Ashley.
Moving toward retirement
Robert is already drawing his $4,300 monthly pension and receives $700 monthly Canada Pension Plan benefits. He and Ashley add $1,700 from their part-time work.When Ashley’s $800 monthly CPP kicks in at 65, it will bump them up to their $7,500 monthly goal.
They have financial security now because they live within their means. Over time, as they replace part time work with pension income, their financial security will grow. Moreover, Robert’s $4,300 monthly work pension has a 100 per cent survivor option. If Robert were to pass away first, Ashley will lose some benefits, including his OAS and some CPP as well as the ability to split income, but her cost of living will decline, so she would be taken care of.
At full retirement when Ashley is 65, they can end $6,000 per year of TFSA savings and $18,000 of general savings as well as $1,020 of Robert’s professional dues. Those cuts in spending add up to $25,020 per year or $2,085 per month. That will lower their present $6,700 monthly allocations to $4,615.
When CPP and OAS start
At 65, each will add $615 OAS per month to income, $1,230 total, but they could trim or end part time work.There are two variable investments in the couple’s portfolio, Ashley’s $700,000 RRSP and $120,000 of TFSAs. We’ll leave the TFSAs to cover the big cash expenses with some left over for an emergency fund, so only the RRSPs will be part of their retirement income. The RRSPs are well invested in banks, energy companies, a real estate investment trust and excellent American growth shares. The couple appears to have competent investment guidance.
If the $700,000 in the RRSPs were to grow at 3 per cent after inflation and were spent over the 33 years from now to Robert’s age 95, it would generate $33,709 per year.
Thus, when Robert is 65 and fully retired and with no further part time work for either partner, their income would consist of Robert’s $51,600 annual pre-tax pension, his $8,400 CPP and $7,380 OAS, plus $33,709 RRSP income for a total of $101,089. Split and taxed at an average rate of 17 per cent, they would have $6,990 per month to spend. That’s short of their $7,500 monthly after tax goal.
When Ashley is 65, their pre-tax income will rise with her $9,600 CPP benefit and her $7,380 OAS payment. Those sums will boost pre-tax income to $118,069. After 18 per cent tax, they would have $8,068 per month to spend, well ahead of their $7,500 monthly goal. Their recurring expenses would be about $4,000 per month, leaving surplus of $4,068 per month.
Alternatives
Rather than allocate the TFSA for immediate needs, they might work another couple of years and save. They save $2,000 per month now, so four-and-a-half more years of work will allow for significant additional growth in assets, while delaying drawdowns, Moran notes. At that time, they would be 66 and 60, not really old by today’s standards, and then be in position to do everything they want. But there are also other solutions.The more things Robert and Ashley can cut out of their $95,000 spending plans, the sooner they can afford to retire. They might let one car go, saving $1,200 per year of costs, half the $2,400 per year they now spend on fuel and repairs. That would deflate future spending by perhaps $15,000 to $35,000. If they defer their renovation, the budget process becomes even easier to solve. Their monthly $700 entertainment and travel budget could be reduced to allow savings to grow faster.
They could use some of their surplus for serious illness plans, though such insurance tends to be costly. For now, saving is a form of insurance. And since timing the renos, the cars and even contributions to weddings are in their control, they can afford not to buy costly long-term care or critical illness policies.
“My recommendation would be to work until they have saved sufficient cash to pay for their $95,000 of goals,” Moran says. “Time to work some more and time to let their investments grow — it is all on their side and under their management. What it comes down to is that Robert and Ashley have choices — spend now and save later or save now and spend later. Their financial future is secure and in their control.”
Retirement stars: Five **** out of five
Financial Post
