The pandemic has hit their current income, but if they follow this plan, they can travel, buy a cottage and retire with almost $12,000 in monthly income
In Ontario, a couple we’ll call Liam and Catherine, both 42, and their 12-year-old twins, Max and Ozzie, have built their lives around travel. Liam and Catherine were world travellers before they had children and, pre-pandemic, took the kids to theme parks, historic sites and ski resorts.
Liam works for a niche player in the internet-based service industry. His pay includes commissions that have tumbled in the pandemic. Catherine is a civil servant. Combined present take-home income is $10,723 per month, though that varies with Liam’s commissions and bonus.
They want to retire in 18 years at age 60, travel and buy a cottage. Their goal is a retirement income that is 65 per cent of their pre-pandemic income. That works out to $12,000 per month.
Getting to a retirement income that is 18.5 per cent higher than their reduced income currently is a challenging calculation.
They have a $343,000 mortgage on their $900,000 home, a $28,500 car loan on a vehicle that has depreciated to $20,000, an $8,000 share at a golf course, $288,000 in RRSPs, $62,900 in TFSAs, $77,720 in RESPs, a defined benefit pension for Catherine, and an employee share purchase program from Liam’s company.
Their financial assets — not including house or car — total $587,620, and total debts are $371,500. They need to manage their debts, asset growth and spending for the next two decades.
Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with the couple to see if they could reach their retirement goal. It was no simple task, and considered factors such as the pandemic hit on income, and assets like shares that are yet to be priced.
Max and Ozzie each have a Registered Education Savings Plan. Liam and Catherine contribute $360 per month to the plans, which have a current combined value of $77,720. In five years, when they reach age 17, the Canada Education Savings Grant, which adds the lesser of 20 per cent of contributions or $500 per year per beneficiary, up to a $7,200 per beneficiary limit, comes to a stop. By then, the RESPs, growing at three per cent per year after inflation, will have a combined value of $118,450 or $59,225 per child. Each child will have $14,800 per year, enough for four years of post-secondary education if they live at home.
Looking ahead to their retirement, Liam and Catherine can expect their mortgage and car loan to be paid in full. That will shave off $4,011 per month. They will also no longer contribute $360 per month to RESPs for the twins. However, they want to double their $1,200 per month present travel spending and buy a cottage for perhaps $400,000. Those costs would make their basic retirement budget $7,500 to $9,500 per month in 2021 dollars, depending on interest rates and length of mortgage when they finance their cottage.
Calculating retirement income
In 18 years, Liam and Catherine will be able to depend on her defined benefit government pension that will provide $46,800 yearly, including a $7,400 annual bridge to age 65. At 65, she will lose the bridge but gain OAS, so her income is unchanged. Catherine will be eligible for CPP at age 60, at $7,400 per year, for total taxable income of $54,200 per year.
Liam has no defined benefit pension plan, but has $288,000 in his RRSP and will add $20,000 in 2021 and $15,000 per year after that. His employer adds another $5,668 per year through a matching plan. So, his RRSP should grow to $1,023,000 in 18 years, when he reaches age 60. Growing at three per cent per year for the following 30 years, to age 90, his RRSP will generate $50,672 per year taxable income.
Liam’s $52,900 TFSA will have a value of $83,000, assuming a top up with his bonus. If the TFSA grows with $6,000 annual contributions for the next 18 years, it will have a value of $286,000, and provide tax-free income of $14,167 per year for the following 30 years.
Liam has $159,000 of company stock and programs that add $20,000 per year to that capital. Assuming this account grows at three per cent per year after inflation, it would have a value of $753,024 when he is 60, and distribute $37,300 of taxable income for the next 30 years to age 90. He expects $8,000 in CPP benefits at age 60.
At age 60, Catherine’s taxable income of $54,200 per year, after 16 per cent tax, would amount to $45,528 per year or $3,794 per month.
At 60, Liam will have his $50,672 RRSP payout, $37,300 from company stock, and CPP income of $8,000, for total income of $95,972. After tax, at a 22 per cent tax rate, he would have $74,858 per year or $6,238 per month to spend.
Together, they would have $120,386 after tax, plus TFSA cash flow of $14,167 per year, for a total of $134,553 per year or $11,213 per month. That’s not far from their $12,000 retirement income target.
OAS and the clawback
At 65, Catherine would lose her bridge but gain OAS benefits. Her income would be $61,600, including CPP benefits. After tax, at a rate of 18 per cent, she would have $50,512. Liam would add $7,480 OAS for a total income of $103,452. His income tax rate at 25 per cent reduces his annual income to $77,590. He would have to pay the OAS clawback of 15 per cent of annual income over $79,845. That works out to $23,607 clawback, reducing his total after tax income to $74,050.
Together, at age 65, they would have cash flow of $124,562 per year. Adding the TFSA cash flow, $14,167, they would have $138,730 per year, or $11,560 per month to spend, even closer to their $12,000 monthly target.
Liam receives annual grants of his company’s stock. He can sell shares periodically and buy diversified ETFs or low-fee mutual funds to reduce his dependence on his employer’s fortunes. Capital growth can cut debt the couple takes on with a cottage mortgage.
Retirement stars: 5 ***** out of 5