Careful spending, no debt give Alberta couple some comfort

In Alberta, a couple we’ll call Sam, 56, and Mary, 59, are coasting toward retirement. Their four children are grown, though two are pursuing postgraduate degrees with the aid of a modest balance in family RESPs. They have no debts, $552,000 of financial assets and a problem scheduling the start of their retirements. Their careers in nonprofit organizations are successful, but the end is in sight. The question — when can they afford to quit? If one quits at 62, will the partner’s retirement at 67 maintain their way of life.

“I am headed into retirement in three years,” Mary says. “My concern, of course, is the dilemma — will we have enough money? My husband is thinking he has to work 11 more years to 67.”

Family Finance asked Eliott Einarson, a financial planner with Ottawa-based Exponent Investment Management, to work with Sam and Mary. Neither has a defined benefit pension plan, so their retirement incomes, except for CPP and OAS, are almost entirely in their own hands. Their retirement will be financially secure if they can maintain their present savings rate of $2,932 per month until both partners have fully retired.

BUDGET PLANS

Their savings rate works out to 40 per cent of takehome income. Yet before they get to retirement, they will have to replace both of their old cars. They figure that two cars will cost them $32,000. They already have $31,700 in cash savings which they can use to replace their older car at an estimated cost of $22,000. A newer, small one a few years later will not be a problem. Their home needs renovations, but they can be financed out of the $450 per month they set aside for repairs.

If Mary retires in three years at age 62, family income will shrink. $650 of her RRSP savings of $817 per month and $830 of her catch up TFSA savings of $1,665 per month can be eliminated from their present monthly $7,320 budget. That leaves $5,840 they will have to generate each year for short term goals until Sam retires, Einarson estimates.

TIMING TWO RETIREMENTS

Mary has $149,100 in her RRSPs. To that, she adds $817 per month of her own funds and a $250 contribution by her employer. If the account grows at 3 per cent per year after inflation, it would have $203,700 in three years. That sum would generate $10,855 per year for 28 years to her age 90 assuming a three per cent annual return after inflation.

Mary’s TFSA with a $30,700 balance to which she adds $833 per month in current and catch-up contributions would grow to $65,370 in three years. That sum, if spent over the 28 years to her age 90 would generate $3,380 of tax-free income.

The Canada Pension Plan would pay Mary an estimated $6,948 at age 62, making total taxable income $16,913 after 5 per cent average tax plus $3,380 from the TFSA, total $20,293 per year.

On top of that, she and Sam would have his annual $46,080 after tax income for total disposable income of $66,373 per year or $5,530 per month. It would support $7,320 present allocations less $2,100 of savings composed of Mary’s $817 RRSP savings, $450 miscellaneous cash savings and elimination of her $833 monthly TFSA savings, net $5,220 per month.

At 65, she would have Old Age Security, $7,075 per year before tax, making her permanent income about $26,000 per year after pension income credits and tax. Sam would still be working, bringing home $41,760 per year for total income of $67,600 after tax or $5,650 per month after tax. That’s enough for their present spending net of savings and

with a reduced charitable contribution — they currently donate $733 a month — in keeping with their reduced earning capacity.

If Sam retires at his age 67, he would lose his income but be able to add his retirement income to Mary’s. His RRSP, with a present balance of $302,800 and $250 monthly contributions, will grow to $458,700 by the time he is 67. That sum, annuitized to pay out all income and capital to Mary’s age 89 would generate $26,300 per year.

Sam’s TFSA account with a present balance of $38,000 would grow with $500 monthly current and catch up contributions to $131,750 in 11 years and support annuitized payouts with the account still growing at three per cent per year to Mary’s age 90 of $7,566 per year.

Sam would receive estimated Canada Pension Plan payments of $9,348 per year, including a two-year bonus of 16.8 per cent and his Old Age Security with a 14.4 per cent bonus for delaying the start for two years, would rise to $8,094 per year in 2018 dollars. The total of benefits would be $17,442.

Adding up Mary’s $10,855 RRSP income $7,075 OAS before tax, plus TFSA cash flow $3,380, and Sam’s $26,300 RRSP income, $9,348 from CPP, $8,094 from OAS, and his $7,566 TFSA cash flow, they would have $61,672 taxable income plus TFSA cash flow of $10,946. If their taxable income is split and eligible pension income from RRIFs is taxed at 15 per cent, they would have about $52,420 after tax income plus $10,946 TFSA income for a total of $63,400 or $5,280 per month, enough for maintaining their way of life.

LOW SPENDING IS A PROTECTION

They are frugal. With their $2,932 of monthly savings for TFSAs, RRSPs, and taxable accounts removed from their budget, their spending, including $733 monthly charitable contributions, falls to $4,388, well within their after tax projected incomes.

Even if Sam were to retire at the more conventional age of 65, their annual income from their RRSPs, TFSAs and government benefits would only drop by perhaps $600 per month, still sufficient to support their budget, though with scant reserves for unexpected expenses. Einarson estimates.

“This forecast works because there are no debts,” Einarson says. “The mortgage is paid off, spending is modest, and the high rate of savings and reserves when taken out — $2,932 per month — leaves an easily supported core of personal spending and donations. Careful spending has paid off. Sam and Mary are financially secure.”