National Post (Latest Edition)
Younger wife’s longer lifespan complicates couple’s early retirement
Acouple we’ll call Jason 50, who is a manager for a metals wholesale company, and Alexa, 38, a civil servant working part time, live in the Greater Toronto Area. They have an eight-year-old child we’ll call Pat. They bring home $7,869 a month. Jason and Alexa seem to be living by the book, following all the rules for a healthy financial life. They have paid off their house save for a small sum due on their Home Buyers Plan, have $515,000 in RRSPs and $60,000 in TFSAs, and $23,000 and change in education savings — it’s a picture of doing everything right. Yet there are questions.
“Given the 12-year gap between husband and wife, is early retirement at 55 or 60 a viable choice for Jason?” they ask. “Would our savings last for her life?”
Jason and Alexa worry that having all their savings in financial assets is precarious. They wonder if they should put some money into a rental property, but know that if they do that, the two-thirds weight of real estate in their total asset mix would just get more lopsided.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with the couple. In his view, “the age gap between partners creates problems for retirement savings.”
The couple’s facts are straightforward — Jason contributes $7,584 of the couple’s $7,869 monthly after tax income. In a financial sense, he is indispensable, though Alexa, who is eligible for a $451 monthly pension at age 50 and a full $715 monthly pension at 65, could probably make ends meet by drawing down savings. But their total savings of $575,000, which excludes $22,156 in Registered Education Savings, annuitized to pay out all capital and income over the 57 years from now to her age 95, assuming a three per cent annual return after inflation, would provide only $21,200 per year.
There is some life insurance in place. Jason has a term policy through his job that would pay twice his $121,860 annual salary before tax and another policy with a $500,000 death benefit he has purchased. Alexa has a $300,000 term policy and $100,000 of additional insurance through work. Their life insurance premiums are $1,344 per year. Insurance costs will rise as they grow older, but their savings will also grow, so they will reach a point where Alexa’s period of dependence has declined enough and their assets and savings have increased enough that they can reduce or even eliminate coverage, Moran explains.
Pat’s need for money for post-secondary education are well looked after. There’s $23,156 in the RESP account plus annual contributions of $2,592. There is a lifetime limit of $50,000 per beneficiary that won’t be hit if contributions are maintained. Their contributions attract $500 a year from the Canada Education Savings Grant. Assuming the total contributions and CESG grants grow at three per cent after inflation for another nine years to age 17 with the CESG stopping when total contributions hit $7,200 — that’s in six years — then Pat will have about $60,500 in 2018 dollars for post-secondary studies, enough for four years at any college or university in Ontario provided there are no out-of -home living costs.
WHERE TO INVEST
Real estate investments can throw off a lot of cash from rents and may appreciate handsomely. Jason and Alexa have no specific property in mind, but their budget, something in the $200,000 to $300,000 range, suggests a condo far from Toronto. In turn, that implies a management problem, for they would either have to spend time driving to do chores and manage tenant issues or hire a manager at a typical eight per cent to 10 per cent of gross rental income. They could cash in their $60,000 of TFSAs to make a 25 per cent down payment on a $240,000 property, but that would be giving up tax-free growth for unknown returns.
Jason wants to retire in five years at age 55. Alexa would then be 43. Providing for Alexa for 47 years to her age 90 or even 52 years to age 95, will require more capital than the average plan. It would, in fact, be a stretch. They need more time to work and save, Moran suggests. The earliest feasible retirement age for Jason would be 60, when Alexa would be 48, Moran says. She can take an early pension at 50.
By Jason’s age 60, their RRSPs with a present value of $515,000 plus annual contributions of $18,564
per year for 10 years and increasing at three per cent a year after inflation, would have a value of $904,930. Annuitized for the 47 years to Alexa’s age 90, that sum would generate $35,100 per year.
Their $60,000 of TFSAs, plus annual contributions of $2,280, the sum increasing at three per cent after inflation for 10 years would reach $107,560 and then generate $4,250 a year. Their total annual income, approximately split in two for the purpose of calculation would be $39,350 before negligible tax. That income would not be sufficient to maintain present spending, $7,869 per month, with $2,753 of savings and loan repayments removed, leaving $5,200 of expenses per month or $62,400 annually.
If Jason works to 65, things change dramatically. He can start Old Age Security at a present rate of $7,075 per year, get Canada Pension Plan benefits at an estimated rate of $13,610 per year, add Alexa’s pension with a value of $5,412 per year and obtain income from RRSPs of about $48,400 a year for the 42 years to Alexa’s age 95 and $5,750 from their TFSAs.
The sum, $80,247 per year, would pay all their bills. At 60 or 65, Alexa could add her full pension if not already started, CPP and OAS benefits.
“Retirement at Jason’s age 55 would not work unless Alexa works full time or they sell their house for something less costly and invest the difference, but at 65, with the start of Jason’s CPP and OAS, they would be secure,” Moran concludes. “This case is about the wisdom of waiting until savings support a comfortable life with a margin of safety.”