Couple worries building assets won’t support comfy retirement

in Ontario, a couple we’ll call Marcie, 45, a store manager, and Henry, 38, a teacher, are raising their child, elizabeth, age nine. They bring home $7,930 per month including $772 net rental income and $135 from the non-taxable Canada Child Benefit. They wonder if the combination of Henry’s expected job pension, their property income and investment income will allow them to retire in two stages — Marcie to quit at 65 and Henry to work seven more years to his age 65. Their goal is to have $8,000 in monthly after-tax income by the time Henry retires.

It is a workable plan, but, as we’ll see, they will need to avoid overspending along the way. Family Finance asked Owen Winkelmolen, head of the advice-only financial planning firm Planeasy.ca, in London, Ont, to work with Marcie and Henry.

THE FINANCIAL PICTURE

Marcy and Henry have a decent base of assets, mostly concentrated in real estate, and are in good shape when it comes to saving for their daughter’s education.

The couple received $500,000 of their assets as gifts from Marcie’s parents. That money went into two properties with present estimated values totalling $870,000.

Their couple’s investment portfolio is weighted toward those rental properties. The properties are profitable, but together with their house, they mean real estate makes up 93 per cent of their total assets. It is essential to diversify by retirement, Winkelmolen explains. If they sold the rentals, that would bring the percentage down to 37 per cent. Henry’s defined-benefit pension plan, Old Age Security and Canada Pension Plan benefits will contribute the largest part of their retirement income. They are not contributing to their rrsps or TFSAS.

Their real estate holdings mask another problem, involving overspending. They are an ordinary couple with an ordinary level of income that is quickly eaten up and then some by their $1,491 monthly mortgage, $1,500 for food, $300 for hockey and piano lessons, and other expenses they do not track. They have been spending more than they take in each month, with the overrun being charged to their home equity line of credit, adding to their property liability. They pay it down occasionally by a few weeks of abstinence on non-essential spending, but it is a habit that could pose problems down the line.

Retirement is distant, but Elizabeth’s transition from primary school to post-secondary education is just eight years away. Her registered education Savings Plan contains a present balance of $16,025, to which they contribute $200 per month plus the 20 per cent top-up from the Canada education Savings Grant, totals $2,880 per year. That amount growing at three per cent per year after inflation for the next eight years to elizabeth’s age 17, will become $46,678. That would provide $11,670 per year for four years at an Ontario post-secondary institution, a solid foundation.

RETIREMENT SAVINGS

Their present $55,595 of RRSPS growing at three per cent per year after inflation with no further contributions will rise to $100,438 at Marcie’s age 65. That sum, invested at three per cent after inflation for 30 years would pay out $5,124 per year to the exhaustion of capital.

The couple’s TFSAS, with a present balance of $33,728 with the addition of $20,000 that they expect to receive in an inheritance but no further contributions would have a balance of $53,728.

By Marcie’s retirement, we can assume that the two rental properties with combined value of $870,000 will be sold. There would be five per cent costs for primping and 2.5 per cent transactions fees, a total of $65,250, leaving $804,750. The mortgages will still have outstanding balances of $150,185. They would have to be paid. That would leave $654,565.

The money they receive for the sale of the rentals would also have to cover their current overspending. borrowing $1,000 per month on the HELOC at 2.39 per cent per year over 20 years will leave them owing about $322,400. Subtracting that amount would leave the couple with $332,165. Given that they do not plan to contribute to their TFSAS, over that time, they will likely be able to move $240,000 to those accounts, where they could continue to earn a tax free return into retirement, Winkelmolen notes. The remaining $92,165 can go to a non-registered investment account.

RETIREMENT INCOME

The new TFSA balance of $293,728 would provide $14,985 per year for the 30 years to Marcie’s age 95, assuming three per cent annual growth after inflation. The $92,165 non-registered account would provide $4,565 over the same time frame.

In addition to investment income, Henry would have a job pension income of $30,293 per year starting at his age 65.

Their expected annual CPP benefits will be $7,426 for Marcie and $17,185 for Henry. Their Old Age Security income will be $7,384 each per year in 2021 dollars.

When Marcie retires at 65, she will able to thus draw $5,141 from rrsps, $14,985 from TFSAS, $4,565 from non-registered investments, $7,426 CPP and $7,384 for her OAS for a total $39,500 before tax.

Henry will still be working to his age 65, drawing a salary of $77,868 per year. That’s a family total of $117,368.

After splits of eligible income and 15 per cent rate on NON-TFSA income, they would have $8,500 per month to spend. That’s ahead of their $8,000 monthly after-tax target.

When Henry reaches 65 and retires, the couple will lose his $77,868 salary but gain his $30,293 job pension, $7,384 OAS and $17,885 CPP based on recently revised contribution rates. That’s a total of $95,062. After splits and 13 per cent average tax that would leave them with $7,054 per month, $946 below their $8,000 per month target.

If Marcie and Henry take control of their spending now, they can make up much of that gap and enjoy their financially secure retirement.