In their mid-50s, Craig and Sharon are turning their thoughts to the day they will leave their successful careers behind and be free to spend more time on their hobby farm. His job in education pays $79,500 a year, while she makes $85,000 a year in the sciences.
They have two children, ages 13 and 18, who they hope to help through university.
“We started our careers late after spending time in very bohemian lifestyles during our 20s,” Sharon writes in an e-mail. In their early 40s, they worked in the non-profit sector. Now that they are in their 50s, with higher-paying jobs, “we have begun to save feverishly,” she writes.
The goal is for Craig to retire at the age of 63 and work part-time for another couple of years. Sharon would retire at 65.
“We feel strongly about setting up our children for financial success,” Sharon writes. They have opened in-trust accounts for the children “so they do not start saving late, like we did.” They are contributing to a registered education savings plan.
The couple’s retirement spending goal is $64,000 a year after tax, including $15,000 for travel, and they wonder if they can achieve it without having to dip into their capital. “We want to leave our children with a large inheritance if possible.”
We asked Jason Pereira, a financial planner at Woodgate & IPC Securities Corp. of Toronto, to look at Craig and Sharon’s situation.
What the expert says
First off, Mr. Pereira recommends the couple pay off their $5,000 car loan because it is costing them 5.19 per cent a year. They are also planning about $20,000 worth of home improvements this year. Their son will start college this fall at a cost of $14,000 a year. And they need to replace their car at a cost of $15,000. The planner suggests they set aside $54,000 for an emergency fund to cover six months of current expenditures.
Next, he looks at the children’s trust accounts, which are set up as informal trusts in the children’s names. “I highly advise against doing this,” Mr. Pereira says. All interest and dividends are taxable to the parents until the children are 18, he notes. “The bigger issue is that the kids will have legal ownership at 18 and can do as they please with it,” the planner says. “While we all hope our kids will turn out perfect, we can’t count on it. Best not to create that problem in the first place.”
Instead, Mr. Pereira suggests the couple either save in their own name and “gift” money to their children in future, or if the assets are sufficient to make it worthwhile, set up a formal trust with the help of a lawyer.
When it comes to their investments, Craig and Sharon are making “common do-it-yourself errors,” Mr. Pereira says. They have an assortment of stocks mainly in Canada, and far too much equity given their risk tolerance. Instead, he suggests they get professional help building a properly diversified portfolio with a target asset allocation of 60-per-cent stocks and 40-per-cent bonds with a target rate of return, after fees, of 6.4 per cent now and 5.6 per cent after they have retired.
The planner recommends the couple contribute as much as possible to their registered retirement savings plans while they are still working full time. From the time they retire until age 71, they will need to draw on their tax-free savings accounts. “Post 71 (when they must begin making mandatory minimum withdrawals from their registered retirement income funds), they can resume making maximum TFSA contributions and never need to touch the money,” he adds.
Any free cash flow after that should go to a joint investment account invested in corporate class mutual funds, Mr. Pereira says. (Corporate class funds can reduce the tax bill through the deferral of tax until time of sale and also can convert dividends and interest to capital gains.)
Craig and Sharon should put off collecting Canada Pension Plan and Old Age Security benefits until they are 65, the planner says. Craig should convert his RRSP to a registered retirement income fund at age 71, while Sharon should convert hers when she retires.
If all goes well, by the time Sharon retires (in 2028), their RRSPs will total $1,102,435 and their TFSAs $286,197, for a total of $1,388,632, Mr. Pereira says.
In 2029, their first full year of retirement together, their income will break down as follows: Canada Pension Plan benefits $20,213; Old Age Security benefits $17,609; his defined benefit pension $30,350; her RRSPs (regular and spousal; this figure also includes her defined contribution plan) $19,356; and TFSA withdrawals $32,507; for a total of $120,035 before tax. A tax bill of $10,354 will leave them with cash flow of $109,681 a year, Mr. Pereira says. As for maintaining their capital, they will have $2.3-million at retirement and $2.5-million at age 95.
The people: Craig, 57, Sharon, 54, and their two children, 13 and 18
The problem: Can they retire with $64,000 a year after tax without having to dip into their capital?
The plan: Take full advantage of RRSPs and TFSAs. Develop a more diversified and less risky investment strategy.
The payoff: Enough savings to allow them to leave a substantial estate to their children while still meeting their retirement spending goal.
Monthly after-tax cash flow: $11,362 (includes tax refunds).
Assets: Home $650,000; spending account $5,000; joint bank account $49,086; joint non-registered $144,340; his RRSP $224,286; her RRSPs $165,640; his TFSA $46,355; her TFSA $46,355; RESP $79,270; estimated present value of his DB pension plan $280,000; value of her DC pension plan $6,745. Total: $1.7-million
Monthly outlays: Housing $1,577; living expenses (groceries, clothing) $1,600; transportation $780; personal $1,150; communications $225; miscellaneous $500; gifts, charity $140; travel $600; health care $118; union dues $82; group benefits $65; his pension contributions $520; her DC pension $375; his RRSP contribution $1,150; her RRSP $1,146; his TFSA $458; her TFSA $458. Total: $10,944
Liabilities: Car loan $5,000; interest-free credit card $4,500. Total: $9,500
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