This couple is so meticulous in their planning, they're even thinking about their cats' future
Their frugal ways will protect their financial future,' expert says
One thing that might get in the way of this Saskatchewan couple's plans is debt.
A couple we’ll call Phil, 60, and Laura, 58, live in Saskatchewan. Phil works for the federal government and Laura for the provincial government. Their combined take-home incomes total $9,802 per month. They have two children in their 30s. Their goal is retirement ASAP provided that they can have $80,000 in after-tax income. Their problem is the complexity of their investments and pensions. Phil has a defined-benefit plan, Laura a defined-contribution plan. They live in an inexpensive neighbourhood and have a $600,000 house that would cost far more were they in Toronto or Vancouver.
Phil and Laura’s focus is on the future. In the last years of their careers, they want to be sure of having enough in pensions and investments to maintain their way of life.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Phil and Laura.
One thing that might get in the way of their plans is debt, but they are already tackling the $111,439 they owe on their house aggressively, paying off $2,480 per month. Their goal is to pay off the mortgage quickly and, indeed, with their current rate of paydown it should be gone in about four years. We can consider the mortgage well under control.
Another issue is their financial assets, which are held in a dozen mutual funds mostly sold by their bank, most with management expense ratios over 2.0 per cent. Those fees could be lower.
A meticulous budget
Phil and Laura are meticulous cost managers. They budget $210 per month to care for their two cats when they become old. They have Christmas gifts and non-Christmas gifts in separate accounts.Given ample cash flows from two government jobs and net worth a bit over $1 million, their security is not in question. However, the retirement income they seek will require a close look at the start dates for Phil’s job pension, TFSAs intended for children’s weddings, income expected from RRSPs, and the fees they pay for investment management. Phil’s annual pension will start at $57,636, dropping to $43,771 when a $13,865 bridge ends at 65.
They have a combined total of $440,128 in RRSPs including Laura’s DC pension to which she and her employer contribute. 95 per cent of that sum is Laura’s. Phil, with a solid defined-benefit pension has not needed to build his RRSP. If Laura adds $1,760 per month for two years with three per cent growth after inflation, it will become $509,800. If that capital is spent over the period from her age 60 to 95, it will generate $29,034 per year in 2021 dollars.
Retirement income management suggests the couple delay start of payout of Laura’s RRSP for a few years to grow its value. They will trade a five-year income dip for a three-decade boost in payouts.
If Phil retires before he is 65 but Laura is 60, they can have his $43,771 pension and $13,865 bridge to 65, her $8,921 CPP benefit and her $29,034 RRSP benefit. That’s a total of $95,591. After splits of eligible income and tax at an average 16 per cent they would have $79,340 per year. They would be close to their $80,000 goal. On a pure cash-flow basis, they could trim a few expenses or work an extra year, deferring withdrawals from RRSPs and adding to savings. They would also have sufficient time to pay off the mortgage before retirement.
When Phil turns 65, his pension will be $43,771 per year with no bridge. They can add his age 65 CPP benefit, $12,859, and his OAS, $7,518, and $29,034 from RRSPs and her $8,921 CPP. That’s a total of $102,103. After splits and tax at an average 18 per cent, they would have $83,724, more than their $80,000 goal.
When both are 65, they will have Phil’s $43,771 pension, his $12,859 CPP, her $8,921 CPP, two OAS benefits totaling $15,036 and $29,034 from RRSPs. That’s a total of $109,620. After 19 per cent average tax, they would have $88,793 to spend.
Income management
When they finish paying off their mortgage in three to four years, their expenses will drop by about $30,000 per year. They will be able to save a good deal more. Or they could cut other categories of spending such as $1,900 per month for food including some foods compatible with allergies. Finally, they could review their fees for investments. For example, their bank charges 2 per cent for a tech fund, and a the same for a growth fund. They could get each of those as exchange traded funds for half that amount or less, saving $4,585 per year on $458,587 of funds. That money could be added to the investment capital going forward.Other ways to cut expenses: Use most of their cash to pay down the $111,439 mortgage even faster and before higher interest rates are charged. They can have their $80,000 if Phil works two more years and Laura three more and if they use their cash for accelerated payments.
Social values
Finally, there is the question of whether in retirement the couple will spend less or more than in their working years. Phil and Laura seldom travel and then not far. They do not spend much money on clothes for the office. And they seem to have no repressed desire to spend a great deal to make up for trips they have not taken. We have not estimated the growth of their TFSAs because they are likely to use them to help pay for their children’s weddings.“This couple’s planning and record keeping are flawless,” Moran says. “They budget more money than they will need in retirement and without estimating returns and total assets with lower investment fees. Indeed, starting when both are 65, they are likely to save after-tax income and thus grow their financial assets, particularly if they cut investment management costs. Their growing assets will be insurance against unexpected costs. Their frugal ways will protect their financial future. Few retirement plans are so well built.”
5 Retirement Stars***** out of 5
Financial Post
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