Early retirement possible for couple with $1.2 million net worth

SCOTT AND MARY’S MONTHLY INCOME AT AGE 65 $6,130

In Ontario, a couple we’ll call Scott, 52, and Mary, 58, have two children, both in university, and monthly take-home income of about $10,000. With a net worth of $1,257,584, including $496,000 in RRSPs, $41,000 in TFSAs, $85,000 in Scott’s company, and $14,000 in the bank, the couple’s lives are financially secure. The kids have $59,000 in their RESP, enough for two tuitions for four years if they remain at home and maybe have summer jobs. Their mortgage, with a balance of just $29,576, will be paid off in 2.5 years. Their outlook is good, but there are a number of questions they must address if they want to achieve their wish of both being fully retired in four years. Among them: When to take Canada Pension Plan benefits, when to withdraw their money from their RRSPs, and how to manage a complicated insurance policy with an investment component. The complexity of having many assets and a single defined-benefit pension for Mary makes working out the retirement numbers a challenge.

AGE AND OTHER ISSUES

The couple’s goal is to retire as soon as possible, Mary from her job as a health-care professional, and Scott from his own IT consulting company.

But, as Moran explains, “There are issues here…. There is the age difference of six years but just three years from a life expectancy point of view given that women live longer than men. There is a question of how to wind up Scott’s company as well.”

The problem is that their CPP and OAS pensions cannot start before 60 and 65, respectively. The gap will have to be filled with income from savings. The conventional way to do that is to tap RRSPs.

If Scott winds up his company, he could transfer $85,000 in retained earnings to his RRSP.

There would have to be some taxes paid when money goes from the company ledger to dividends or wages, but there is a side benefit: the tax refund would be enough to pay off the remaining $29,576 home mortgage, Moran explains.

Scott can raise his discretionary income by cancelling his universal life coverage which costs $4,728 per year. He could put that money into his RRSP as well and buy a 10-year level-term life policy with a $500,000 death benefit for $990 per year for four years and save $3,738 yearly.

RETIREMENT INCOME

Mary has an indexed defined-benefit pension that will pay her a base of $8,638 per year at age 62 and a bridge of $4,139 to age 65.

Each partner can count on at least 85 per cent of the maximum Canada Pension Plan benefit of $13,855 per year, or $11,777.

Each will qualify for full Old Age Security, now $7,290 per year.

Their TFSAs, with a present balance of $41,000 including some investment gains, have $85,800 in combined contribution space.

The couple’s RRSPs are underfunded. Scott has $200,415 of unused RRSP room and Mary has $187,600 of room.

While they are working, every bit of money they save should go to their respective RRSPs. Mary, with a defined-benefit pension plan, has an annual limit set by a pension adjustment that cuts what she can add by what the company puts into her DB pension. However, her unused space is so large that the PA has little effect, Moran notes.

Adding $60,000 from the corporation and their TFSA assets of $41,000 to the existing $496,000 they hold in RRSPs would give a total of $597,000.

They could also divert $833 per month of present TFSA savings and add them to the current $800 per month of RRSP contributions — when the mortgage is paid off in 32 months they could also add the $11,040 per year they currently spend on mortgages.

With those contributions and savings growing at three per cent per year after inflation, in four years they will have a total of $773,550.

Assuming continuing growth for 34 years to Scott’s age 90, that capital would generate $36,600 per year or $3,050 per month in 2019 dollars.

TIMING CASH FLOW

The biggest challenge in their plan would be the first few years of retirement. From Mary’s age 62 to her age 65, the couple would have her pension and bridge, total $12,777 per year, plus combined RRSP payouts of $36,600 for total income of $49,377. That’s a little more than $4,100 per month, and not enough to cover expenses. Scott might have to work an additional year to boost savings, or Mary could take CPP early, which would reduce the payouts but fill the gap. Or they could trim their spending on travel and food/restaurants, or a combination of all of the above. Let’s assume they take CPP at 65 and fill the gap some other way.

Once Mary hits 65, her CPP of $11,777 and OAS of $7,290 would boost their income to $64,305 per year, or $5,360 per month.

After Scott turns 65, they would have Mary’s $8,638 pension, RRSP payouts of $36,600, two CPP benefits totalling $23,554 and two OAS benefits totalling $14,770.

That’s $83,560 per year or $6,960 per month.

If the income when both partners are 65 is split and each partner takes pension and other credits, then after 12 per cent average tax, they would have $6,130 per month to spend. Controlling their expenses will be key. With no mortgage to pay, no RRSP contributions, no TFSA savings, no commuting costs, car loan paid, and life insurance premiums eliminated, their monthly expenses would drop by about $4,000 to $6,000 per month, but they could create more wiggle room by reducing other expenses as well.

“Building up savings for retirement will make this plan work,” Moran concludes.

“By simplifying finances they will become much more manageable.”