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In southern Ontario a couple we’ll call Brett, 48, and Ava, 46, have two children ages 15 and 12. Brett works for a large company in the electrical device supply business and earns $86,700 before tax each year. Ava is a part-time social services consultant making $21,000 per year. When she returns to full-time work, she expects to earn $45,000 per year before tax.

Brett and Ava have to budget carefully for their take-home income, which is $8,175 per month. They also have to cover some significant expenses including their $3,430 mortgage, $580 in property tax, $400 in educational savings for their children and $536 for a mix of term and whole life policies that add up to $1 million in coverage each. After their savings, there is little money for travel or entertainment or even for improvements to their home which, though it has a $1.1-million market price, is rather modest. They are trapped in a costly house they can barely afford.

Their problem for now is to figure out how to build up retirement saving when, in 19 years at Brett’s age 67, they stop working.

Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based Exponent Investment Management, to work with the couple.

EDUCATION SAVINGS

One things that Brett and Ava should not have to worry about is their children’s education. The family’s Registered Education Savings Plan has a present balance of $65,000 and is growing with $350 monthly additions they receive from the Canada Child Benefit and $50 more they add, for a total of $400. In two years, when the older child is ready for post-secondary education, the account, growing at three per cent per year after inflation, will provide $40,500 for the older child — three years later, if it continues to grow, there will be $53,400 for the younger child. If the accounts are averaged, each child would have about $47,000 for post-secondary studies. If the kids live at home, they would have sufficient funds for four years of tuition and books. Summer jobs could fill any gaps.

RETIREMENT FINANCE

Neither partner has a defined benefit pension plan, so they are more or less on their own when it comes to planning for retirement. Brett has $110,400 in RRSPS growing at $587 per month, while Ava has a $38,300.

The couple’s savings plan needs a boost. Brett and Ava think they can rent their basement as an apartment for $1,400 per month or about $1,000 after expenses and tax. As well, when Ava moves to full time work sometime this year, she can add $1,500 to monthly after-tax family income.

We’ll assume that the couple allocates all of Ava’s anticipated $1,500 increase in monthly take-home income to RRSPS. $1,000 will go to her plan and $500 to Brett’s. Therefore, Ava’s present $38,300 RRSP balance growing with $12,000 annual contributions at three per cent after inflation will become $377,600 by her age 65. That sum, still growing at three per cent after inflation, would generate $21,055 of taxable income per year for 25 years.

The remaining $500 per month can go to Brett’s RRSP. Along with the $587 per month already being added, the account will grow at three per cent per year after inflation to $531,040 over the 19 years to his age 67 and the account, still adding three per cent per year after inflation, would support payouts of $29,608 per year for the following 25 years to his age 92.

Adding up the two RRSP retirement cash flows, they would have $50,663 of retirement income beginning at Brett’s age 67 and Ava’s age 65. If they start their CPP benefits at that time, Brett will get $12,026 per year — a boost of 16.8 per cent beyond the base amount for deferring for two years — while Ava will receive $6,000 based on her work history.

Starting OAS at 67 would give Brett annual benefits of $8,422, including a 14.4 per cent boost over the age-65 amount, and Ava $7,362 for an age-65 start using 2020 payment data. The sum of all RRSP payouts, CPP and OAS would be $84,473 before tax. After splits of eligible income and income tax of 12 per cent adjusted for age and pension credits, they would have $6,200 per month for expenses.

LOOKING AHEAD

Their $700,000, 30-year mortgage will be their largest expense when they retire if they maintain present payments of $3,430 per month. However, if they direct $700 of the estimated $1,000 they will earn from the basement rental toward their mortgage, monthly payments at 3.34 per cent would rise to $4,130 and the outstanding balance would be paid in full by the time they retire in 19 years.

With the mortgage paid and kids gone, present expenses of $8,175 per month would decline by roughly $4,000 and would be easily covered by their anticipated $6,200 after tax cash flow. They might build TFSAS or use some surplus for things they have postponed for decades — perhaps travel, perhaps house upgrades, a new or newer car now and then or presents for their children who will then be in their thirties.

Patient saving and prudent spending should leave the couple in retirement with more than enough money to maintain their way of life. Frugality will have been its own reward. The couple will have raised their children, paid off their mortgage and built up a more than adequate retirement income. It is no small achievement for a couple with a middling income living on expensive real estate.

“This plan makes retirement income predictions with conservative assumptions,” Einarson says. “If they outlive their RRSPS, they would have income from OAS, CPP and a house they could downsize.”

PATIENT SAVING AND PRUDENT SPENDING SHOULD LEAVE MORE THAN ENOUGH MONEY TO MAINTAIN THEIR WAY OF LIFE.