Their wealth is in their house, RRSPs and TFSAs
Situation: Couple, 58 and 62, worry their resources may not carry them through retirement
Solution: Downsize house, pay debts, stop child’s university subsidy, cut investment fees
A couple we’ll call Harry, 62, and Bonnie, 58, live in Alberta. A communications industry manager and a part-time administrator, respectively, they bring home $8,240 per month. For life in their small town, it’s plenty. They have three children in their 20s. One is in fourth-year university. Looking ahead to retirement starting in three years when Harry is 65, they want to spend $40,000 on home renovations to get their $800,000 house ready to sell, then downsize to a $500,000 house, pay $61,500 of liabilities and then spend $30,000 for a truck and recreational vehicle, probably good used models. Their retirement goal — $5,000 per month after tax plus $10,000 a year for five years for travel.
They have substantial resources with $940,000 of financial assets, moderate and manageable debts and time to prepare for their years of leisure. They have a life insurance policy for others’ benefit. We exclude it from Harry and Bonnie’s spendable assets.
Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based Exponent Investment Management Ltd., to work with Harry and Bonnie.
Assets
The financial base for the couple’s retirement will be $878,000 in financial assets. That includes $874,000 in RRSPs and $4,000 in a chequing account. Their liabilities include a $49,000 mortgage and a line of credit with a $2,500 balance and a commitment to give their youngest child $10,000 for tuition, room and board so that he can finish a first university degree.
Downsizing their $800,000 home would leave them with $760,000 after five per cent selling and primping costs. If $500,000 is reserved for a smaller home, the $260,000 left could pay off $51,500 mortgage and line of credit debts and the $40,000 reno bill. Take off $30,000 for the truck and trailer RV and there would be $138,500 left.
$105,000 could be added to their $34,000 balance of TFSAs to raise them to the 2020 limit of $69,500 each. With no further contributions, the sum would rise to $151,900 in 2020 dollars in three years assuming growth at three per cent per year after inflation. That sum would generate $580 per month or $6,978 per year at three per cent after inflation for 34 years starting in three years to Bonnie’s age 95 to exhaust all capital and income.
$33,500 would be left over. They would like to use it for more travel. It would also be an emergency reserve.
Retirement income starting at 65
Harry’s Old Age Security benefits will start to flow in three years when he is 65 at $7,362 per year. Four years later Bonnie could receive her OAS in the same amount.
Bonnie has an RRSP with a value of $238,000. In three years with no further contributions, the account can grow to $260,075 in 2020 dollars and a three per cent return after inflation. It would then be able to pay $11,950 per year for 34 years to her age 95. Harry’s $646,000 RRSP, with the same three per cent return assumption would grow to $705,900 in three years. It would then be able to pay $32,430 per year to her age 95.
Each partner can receive Canada Pension Plan benefits. Harry could start at age 65 in one year and receive $13,945 of taxable income. At 65, Bonnie could trigger her CPP benefits at $5,700 per year.
The couple’s annual income at the start of their retirement in three years would be $6,978 from TFSAs, $7,362 from Harry’s OAS, $11,950 plus $32,430 from RRSPs, and $13,945 from Harry’s CPP. The $72,665 total with TFSA cash flow removed and the balance split, taxed at an average rate of 14 per cent and with TFSA income restored would leave them with $5,290 per month to spend. That would exceed their $5,000 per month after-tax goal though not enough for $10,000 annual travel.
When BonnIe turns 65, she would add her $7,362 OAS and her $5,700 CPP, both at annual rates. Income would rise to $85,727. With splits of eligible income and TFSA cash flow removed, they would pay tax at an average rate of 15 per cent and, with TFSA cash-flow restored, they would have $6,160 per month to spend. They could accrue $1,600 a month in special savings and have their annual travel splurge.
In retirement, the couple’s present outlays of $8,240 per month would shrink with elimination of their $2,000 monthly gifts to one child for university costs. A smaller house with the mortgage eliminated, reduced utilities and savings on fuel for driving to work would lower their monthly costs.
These numbers provide a sketch of what Harry and Bonnie can do for their retirement. Downsizing their house will provide the margin of comfort they need to travel without financial concerns provided that they stay within their outlined budget. Their budget for discretionary spending will grow when they end their subsidy to their son for university expenses. He is scheduled to finish studies in a year.
Cutting costs
Neither Harry nor Bonnie will have company pensions. Their wealth is in their house, RRSPs and TFSAs. These financial assets are invested in a handful of mutual funds with customary fees as much as 2.5 per cent per year, which is too high for many investors. That fee level is enough to eat up average dividends on Canadian and U.S. stocks.
The couple’s $940,000 of financial assets are sufficient for them to hire a portfolio manager for a typical annual fee of one per cent of funds under management per year. Compared to the 2.5 per cent fee they pay now, a fee cut to one per cent would save them $14,100 per year.
“This case is about balancing retirement income with a spending plan that includes buying a truck and recreational vehicle for $30,000 and downsizing their home,” Einarson explains. “Efficient allocation of savings to RRSPs and TFSAs will make the plan work. Saving funds surplus to spending would set a reserve for unexpected medical costs and loss of one OAS and much CPP when the first partner passes away. This plan is durable and resilient. It will work even better if the couple can cut their presently hefty investment management costs.”
Retirement stars: 4 **** out of 5
