In Toronto, a couple who we'll call Sam and Agatha ponder the question of just when they can afford to retire. Sam, 43, is a middle manager in a major corporation and Agatha, 42, is a school teacher.
Together, they have a comfortable annual gross income of $200,000. They have a house with a market price they estimate at $550,000, a $212,000 mortgage, two young children to raise and educate, and a wish to retire at the age of 59 in 2021 with at least $100,000 in pretax annual income in 2005 dollars.
"I am a fairly senior guy in my company," Sam says. "What I need is the assurance that everything is in place to make our retirement possible as planned."
What our expert says
Facelift asked planner Warren Baldwin, a registered financial planner and regional vice-president with fee-only financial planning company T.E. Financial Consultants Ltd., to speak with Sam and Agatha in order to assess the feasibility of their plans and to determine how they can achieve them.
"They are in good financial shape for their age," Mr. Baldwin says. He notes that they can accumulate $1-million in their registered retirement savings plans by 2021. He adds that Agatha's pension plan will generate $55,000 a year if she works until 2021 when she will be 58. Sam will be a year short and Agatha two years short of the date they can make an early application for Canada Pension Plan benefits.
They will have to wait for six and seven years, respectively, to receive Old Age Security. Nevertheless, in 2021 they will be able to support annual spending of $116,000 in future dollars, assuming a 3-per-cent average annual rate of inflation, the planner estimates.
Sam's company pension is currently worth $44,425 and is growing with his own contribution and a matching amount from his company. Adding 7-per-cent annual growth to annual RRSP and pension contributions of $16,500 (which will rise with indexing at an assumed rate of 3 per cent a year), Sam will have $530,000 in 2021 dollars when he is ready to retire, in addition to the $415,000 in his RRSP for a total of $945,000. Assuming these funds produce an annual return of 7 per cent, his annual retirement income will be $66,150, Mr. Baldwin says. As well, Sam salts away $6,000 a year in his non-registered savings.
Agatha is a member of the Ontario Teachers' Pension Plan and has total pension credits to date of $140,000. Her pension, which is indexed, will be based on current earnings of $75,000, indexed at 3 per cent a year and paid out when she achieves factor 85 (when age plus service equal 85: she will be 57 in 2021 and have 28 years of service) and she will then get an estimated $55,000 a year in 2005 dollars. She also tucks away $6,000 a year in non-registered investments.
Adding up Sam's 2021 total retirement income of about $68,000, plus Agatha's yearly pension of $55,000, the couple will easily exceed their target of $100,000 a year in pretax income, Mr. Baldwin says.
At the beginning of their retirement, Sam and Agatha will have six sources of money: two RRSP accounts, two taxable investment accounts and two pension plans, the planner says. Rather than deplete the tax-deferred accounts, it would be preferable to take money from the taxable investments as needed, he says. Once the couple is eligible for CPP payments, each will receive about $11,000, which is the $6,839 current maximum payment adjusted for inflation and reduced by 30 per cent. That reduction reflects a penalty of half of 1 per cent per month for each month prior to age 65 that a person cashes in CPP.
In 2027 and 2028, Sam and Agatha can apply for OAS. Currently, OAS pays $476.97 a month indexed to the rate inflation and will add to their income. Sam's total income will be $136,000 in 2027, including $11,000 in estimated OAS payments. A year later, Agatha will be receiving $89,000 including OAS. Assuming 3-per-cent inflation for 22 years, the OAS clawback, currently about $60,000, will have risen to $115,000. Sam may suffer some income reduction from this, but Agatha will not, Mr. Baldwin says.
Before they retire, however, they have two children, ages three years, and six months, to raise and educate. The couple currently has a joint registered education savings plan with $22,000 of assets for the children. The couple contributes $4,000 a year in total, $2,000 per child, and thereby qualifies for the $400-a-year maximum Canada Education Savings Grant.
Fifteen years from now, assuming that the plans receive $4,800 a year every year and grow at 7 per cent a year with no interim taxation, the plan will have $181,000. Adjusted for the potential later entry of their toddler into postsecondary education, each child can expect to have $90,000 or more for tuition, books, accommodation and related expenses. If they spend $10,000 per child per year for tuition and books in 2005 dollars, or $15,000 per year in inflation-adjusted dollars, there will still be a surplus for living away from home, Mr. Baldwin says.
Sam and Agatha have a $212,000 mortgage. They are paying interest at 3.5 per cent on a variable rate loan. They pay $2,200 a month total. The couple are paying down the mortgages at a rate of $26,400 a year. That should eliminate the mortgage in about nine years, Mr. Baldwin says.
"Sam and Agatha have very strong control factors in their favour," Mr. Baldwin says. "They understand their finances. The only weakness is in their choices of investments." The couple need to find time to improve their returns, he advises. After all, by retirement, even without adjustment to their asset mix, they will have $1.5-million in invested assets, he says.
"We recognize that we are not sophisticated investors," Sam says. "We have bought mutual funds over the years and have often been disappointed. We have been moving out of mutual funds as the holding periods for back loads expire. We are going to study the market and save the fees that we are paying for management that does not give us the bang for the buck that we expected."
Interested in a free Financial Facelift? Then drop a line to the writer at 444 Front St. W., Toronto M5V 2S9 or [email protected]
Client situation
Sam, 43, a middle manager in a corporation, and Agatha, 42, a teacher, live in Toronto with their two small children.
Monthly after-tax income: Sam, $6,400; Agatha, $3,825. Total: $10,225.
Assets: House, $550,000; cars, $50,000; Sam's RRSP, $110,000; Agatha's RRSP, $44,000; RESP, $22,000; non-registered assets, $60,000.
Monthly expenses: Mortgage, $2,200; food, $550; clothing, $175; home maintenance, $200; property taxes, $442; life, car and home insurance, $300; pet care, $55; cars, gas, maintenance, $650; utilities, $500; vacations, $200; day care, $1,100; RESP, $335; miscellaneous, $500; non-registered savings, $1,000; other savings, $1,068; Sam's RRSP, $650; charity, $300. Total: $10,225.
Liabilities: Mortgage: $212,000.
