A military pension provides bulletproof financial security for Ontario couple
Couple will exceed retirement target of $100,000 a year, but first they have to untangle all their pensions
Author of the article: Andrew Allentuck
In Ontario, a couple we’ll call Stuart and Celia, 52 and 49, respectively, have two kids ages 13 and 16. They have annual income of Celia’s salary of $41,820, net, from her job in health care, and Stuart’s armed forces disability and retirement pensions, which work out to $90,648 after taxes. They also have savings in cash and a RRSP.
With their $310,000 house, retirement assets, military pensions and investments, they have a complex financial future. Their combined present after-tax incomes from Stuart’s military pensions and Celia’s job is $132,468 per year, or $11,039 per month. The couple’s goal is to provide funds for their children to obtain university degrees without going into debt, and to reach a retirement target of $100,000 per year after taxes.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Stuart and Celia. His goal: Unravel their various pension incomes.
Decades of military service have given Stuart a $90,648 annual pension after taxes, composed of $4,719 monthly military pension, $1,530 monthly Veterans Affairs pension and disability top-up, and a $1,305 monthly bridge supplement. This works out to $7,554 per month, net. Celia’s income adds $3,485 per month.
They have a $200,175 mortgage on their house, with 22 years to run, so it will be paid off by when Stuart reaches 74. The present interest rate is 1.69 per cent, about the rate of inflation. However, rates are likely to rise in the future. Stuart and Celia can direct discretionary income to paying down the mortgage from time to time, Moran suggests. They have $63,000 in cash. Given present low interest rates, there is no rush, so mortgage paydowns can stay as is, and reserve cash for TFSAs.
Stuart and Celia have done a good job of building value in their children’s Registered Education Savings Plans. The present total is $61,103. They contribute $352 per month, $176 per child, or $2,112 per child, per year. If the parents continue to add $4,224 per year until the elder child is 17 and the government grant portion (CESG) stops, and then $2,112 for three more years until the younger one can no longer receive the grant, they will have amassed $77,300 or $38,650 per child. That should be enough for four years of tuition and books at an Ontario university, if the kids live at home and commute.
Retirement planning
Stuart has various pensions. His military pensions total $90,648 per year, net. The military pension is defined by the Canadian Forces Superannation Act, which mandates a reduction when he turns 65, but is matched by the member’s Canada Pension Plan payment, so leaves the member with income unchanged.The couple has no TFSAs. If they start adding $4,000 per month immediately from cash, and continued saving for three years, and then $1,000 per month afterwards, for 16 years, they will have $494,360 in 2021 dollars when Celia is 68, for payouts of $27,564 for 25 years. This assumes the money continues to grow at three per cent per year, after inflation.
They have $154,662 in RRSPs, and add $150 per month. If they continue this contribution for 16 years to Stuart’s age 68, and achieve a return of three per cent after inflation, they will have $285,558 in 2021 dollars. If that sum continues to grow at three per cent per year after inflation, and is spent starting when Celia is 65 to age 90, it will generate a taxable indexed income of $15,922 per year or $12,737 after tax.
Income by age
When Stuart turns 60, the annual family income of Celia’s $41,820 salary, and Stuart’s pension income of $90,648 (including CPP), amounts to $132,468. They would have $11,039 a month to spend. They would achieve their target retirement income of $100,000 per year after tax.From the time Celia is 62 to 65, family income will be her $41,820 after tax salary, Stuart’s $90,648 pension, but he will add $5,907, net, OAS benefits, for total income of $138,375 after tax. They would have $11,531 per month to spend.
When Celia is 65 to age 68, she will continue to work and the couple will have her $41,820 income, $90,648 pension, Celia’s estimated $9,000 net CPP pension, two OAS pensions totalling $11,808, net, and RRIF income of $12,737, net, for a total of $166,013 after taxes. That’s $13,834 per month to spend.
When Celia retires at age 68, family income will be Stuart’s reduced $90,648 pension, RRIF income of $12,737, two OAS benefits amounting to $11,808, and untaxed TFSA benefits of $27,564, for total income of $142,757 per year, or $11,896, per month.
With substantial income from several pensions, Stuart and Celia will achieve their retirement income goal. They can enhance their retirement income by use of spousal RRSPs so that Stuart, with the higher income, gets tax credits, and Celia gets income from RRIFs.
When fully retired, with the elimination of expenses for children, RRSP and TFSA savings, and mortgage, the couple will have near bulletproof financial security. “Their many income sources put a solid foundation under their retirement,” Moran concludes.
5 Retirement Stars ***** out of 5
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