WITH FIVE KIDS, RETIREMENT AT 42 IS STRETCHING IT.

In Saskatchewan, a couple we’ll call Rudy, 37, and Martha, 32, want to retire within five years. Rudy will then be 42. They have five children ranging in age from two to nine, take-home income of about $ 8,222 a month and a $250,000 house with no mortgage. Their financial assets add up to $ 374,310. They live simply but want to move up to a larger house with a $ 400,000 price tag.

“We have lived through many lean years and discovered that the simple life is easy and wonderful,” Martha explains. A part- time crafts teacher, she explains that her goal is a balance of life and work. “Our children are our priority and we want to be able to spend as much time with them as possible,” she says. Rudy, who is an administrator in a construction business, would give up his full- time job while Martha could continue to give part time lessons. With no job pensions at all, it’s a kind of back-to-basics plan. Will it work as a financial strategy is the problem.

Family Finance asked Guil Perreault, head of G. Perreault Financial Inc. in Winnipeg, to work with Rudy and Martha. “Doubtful,” is his evaluation of the couples’ early retirement plans and a simple “No” is his view of buying a $400,000 home.

EDUCATING THE KIDS

Rudy and Martha add $ 83 a month to their RESP balances. Martha’s dad gives them $ 1,000 a month which they add to the RESPs, raising total contributions to $13,000 a year. That allows the RESP to attract the Canada Education Savings Grant of the lesser of 20 per cent of contributions or $ 500 per beneficiary to age 17 to a lifetime limit of $7,200 per beneficiary. With this rate of contribution, and assuming a 3 per cent annual return after inflation, the present balance of $30,000 will grow at $15,600 per year with termination of the CESG as each beneficiary reaches 17.

Each of t he f i ve children would have money for post- secondary education. The calculation is complex, for the eldest child, now 9, would be drawing money before the youngest is out of high school. The family RESP with sums for each child averaged over their seven year age difference would provide $ 40,000 to $ 50,000 in 2017 dollars per child, enough to cover tuition at any university in Saskatchewan and a good deal of living expenses as well. The parents would have to balance out the benefits by controlling payouts so that the eldest would have the same money from the fund as the youngest. Summer jobs could fill in any funding gaps, the planner notes.

TIMING RETIREMENT

Retirement in five years would stress their savings. If they do not trade up to a larger house and spend their cash reserve of $ 110,000 for it, their $ 344,310 of present financial assets not counting the RESP, growing with $54,492 of annual savings at 3 per cent growth after infla- tion, would hit $ 678,800 in 2021. That sum, if annuitized to pay out all income and capital in the next 58 years to Martha’s age 95, would generate $ 23,400 a year. We’ll add Martha’s $5,000 annual income from teaching crafts for total income of $28,400 a year. That’s $ 2,370 a month in 2017 dollars.

At this level of income, using today’s subsidy rates, they would be able to get GST r ebates and about $2,250 a month for the nontaxable Canada Child Benefit if all kids are over 6. With this plan, family income would be $ 3,900 a month. This income would cover present expenses and allow a little saving.

However, without an allowance for replacing the couple’s 14- year- old van, buying the larger house, and adding mortgage payments and paying higher property taxes and utilities that would go with a larger house, it is not possible for a family of MIKE FAILLE / NATIONAL POST seven.

If Rudy and Martha were to use up all of their savings in the 18 years from his age 42, when he would retire, to age 60, when he could apply for Canada Pension Plan benefits, and if they use all of their savings with no deduction for a new house, they could have $ 50,800 annual income before tax.

SAVINGS STRATEGIES

At age 60 and allowing f or t he f i ve- year difference between Rudy’s age and Martha’s age, with all of their capital paid out, if they were to take Canada Pension Plan benefits, currently a maximum of $13,293 a year, reduced by 20 per cent for shortened years of work, and then cut by 36 per cent for taking benefits five years early, they would have $ 6,800 annual benefits for Rudy and, five years later, benefits of $ 4,200 for Martha on the assumption that her income from work teaching was half time. That won’t work, Perreault says. When each partner is 65, Rudy then Martha would receive $ 6,942 Old Age Security benefits with a five year lag for Martha.

Their total income with no capital l eft would be $ 24,885 a year. It’s just not enough money.

Rudy would have to stick with his job or at least do part- time work that brings in $ 30,000 a year for the couple to generate savings for later life, Perreault suggests.

BUILDING FINANCIAL SECURITY

There is another way. If Rudy works to age 60 and he and Martha add, as they do now, $ 4,262 a month to registered and non- registered savings other than RESPs totalling $ 344,300 and obtain a 3 per cent annual return after inflation, they would have $ 822,000 in capital. That sum, still generating a 3 per cent return after inflation, would produce $34,525 for 40 years to Martha’s age 95. CPP at age 65 $13,293 for Rudy and $ 6,555 for Martha five years later based on her part time work, and two OAS pensions of $ 6,942 each with the five year lag would produce final income of $68,257 before tax. After 10 per cent average tax with no tax on TFSA payouts, the couple would have about $5,100 a month to spend.

Financial security requires Rudy working at least to age 60,” Perreault concludes.