Lucas and Penelope are in their early 40s and have two children aged 9 and 5. Their family income is approximately $ 195,000 per year. Both have company-sponsored registered retirement savings plans at work to which they and their employers contribute.
“We never really met a financial advisor to plan for our retirement,” Lucas wrote in an email. “Most of the decisions we make are based on articles and / or online resources provided by our company’s RRSP provider,” adds Lucas. “Financial planning was something both of our parents had never discussed, and we hope to change that with our children. “
Penelope and Lucas have a house in the Greater Toronto Area with a small mortgage that they hope to pay off in a few years. In addition, they have a condo in Ontario, rented to a relative, and another in Alberta – “this was our first house as a married couple” – which they are renting at a loss. “We tried to sell it a few times, but with the economic downturn we couldn’t get what we paid for it, so we decided to rent it,” writes Lucas.
They wonder if they can afford to retire at 65 on a budget of $ 80,000 per year after tax. “Until what age do we have to work? Lucas asks. “Should we sell the rental condo? “
We asked Ian Calvert, vice president and director of HighView Financial Group in Toronto, to review Lucas and Penelope’s situation.
What the expert says
Real estate represents 78 percent of the family’s assets, Calvert says. “As Penelope and Lucas begin to plan for retirement, they will need to shift to more liquid assets on their balance sheets. “Given their age (she’s 42, he’s 44), they have enough time to focus on their savings and build more liquid assets, says the planner.
“Because they still have two decades left to retire, they must take advantage of the power of capitalizing in a tax-deferred environment to capitalize on that time and build up their retirement accounts.”
Together, they save $ 17,000 per year in their employer RRSPs. By including their employers’ contributions, they save a total of $ 26,000 per year. Their current registered savings are $ 375,000. “If they continue with this savings rate, their combined retirement savings would rise to $ 1.9 million by 2042, when Lucas turns 65,” the planner said. This assumes that they can earn an annual rate of return on their portfolio of 5 percent. “On average, this is a realistic and achievable performance goal,” says Calvert.
With a 4% rate of return, their combined savings would be $ 1,678,000 by 2042, he says, still enough for them to comfortably retire.
To achieve that goal over time, they’ll need both the dividend income and the growth in value that stocks provide, he says. Most of their savings are in group RRSPs, which may have limited investment options, according to the planner. Among their options, Lucas and Penelope chose to invest their retirement savings in target date mutual funds. “In this type of investment vehicle, there is an asset allocation formula that gradually becomes more burdensome over time,” explains Calvert. “In other words, they aim to be more conservative as they approach retirement by reducing their exposure to equities.”
These funds simplify investment decisions, but they may not have an asset mix aligned with the target return clients need to meet their goals, according to the planner. In some fund of fund products, there is a charge for the underlying mutual funds and another cost for managing the fund itself, rather than a single overall charge. This challenge is exacerbated by the fact that employer savings plans don’t always show total costs, he adds.
An alternative to the fund of funds would be to choose from the group plan options. In doing so, they would have more control over their asset allocation and could tailor it to their own specific retirement goal. An example would be the selection of individual funds within the range of group plans. Not only would this allow them to control the amount of stocks in their portfolio, but it would also give them flexibility on the mix between Canadian, US and global stocks.
Lucas and Penelope’s level of retirement savings, combined with their future Canada Pension Plan and Old Age Security benefits, should give them enough cash to meet their spending goal without having to sell any of their assets. properties, says Calvert.
“However, an important aspect to consider in their retirement forecast is inflation,” says the planner. With an estimated inflation rate of 2% per year, their spending goal of $ 80,000 will drop to $ 121,000 after taxes in retirement. With combined CPP benefits estimated at $ 35,000 per year and OAS benefits of $ 20,000, they will need about $ 85,000 per year from RRSPs / registered retirement income funds, according to the planner. (Income taxes are estimated at $ 19,000.)
“At this withdrawal rate, their retirement assets will comfortably last until the end of their life if they control their spending,” Calvert said.
One concern with the couple’s plan is the lack of future flexibility. “Building their group RRSPs should be the cornerstone of their retirement plan, but they shouldn’t neglect their tax-free savings accounts,” he says. In fact, all funds withdrawn from their RRSPs will be considered taxable income at retirement.
Currently, they have a combined TFSA of $ 15,000, which leaves a substantial amount of contribution room unused. “Even if the contributions are low, they should start an automated monthly contribution to their TFSA and use them as investment accounts, not just high interest savings accounts,” Calvert says. “Having access to tax-free withdrawals from their TFSA later in life will be a major enhancement to their retirement plan because of the flexibility that will result.
As for the condo in Alberta, Lucas and Penelope have to weigh the potential for capital gains against the current negative cash flow of $ 200 per month. “If they expect a constant appreciation of the property, it may still be a good idea to wear it,” says the planner. “However, if the price of the property has been relatively stable and produced negative cash flow, the capital could earn a better return elsewhere.”
The people: Lucas, 44, Penelope, 42, and their two children, 5 and 9
The problem: Are they saving enough to retire at age 65 with a budget of $ 80,000 per year? Should they sell the condo losing money?
The plan: Continue with their company sponsored RRSPs. Target a return of 5 percent. Contribute as much as possible to their TFSA to give them more flexibility after they retire. Weigh the potential for capital gain when deciding whether or not to sell the condo in Alberta.
The reward : A comfortable retreat
Monthly net income: $ 12,215
Assets: $ 1 million residence; rental condos $ 700,000; bank accounts $ 35,000; his TFSA $ 10,000; his TFSA $ 5,000; his RRSP work $ 230,000; his RRSP work $ 130,000; registered education savings plan $ 50,000. Total: $ 2.16 million
Monthly expenses: Mortgage $ 3,000; property tax $ 310; home insurance $ 75; utilities $ 260; maintenance, garden $ 75; transportation $ 810; groceries $ 800; child care $ 600; clothing $ 40; line of credit, car loan $ 625; gifts, charity $ 300; vacation, travel $ 100; meals, drinks, entertainment $ 255; personal care $ 20; club memberships $ 60; pets $ 20; sports, recreation $ 20; subscriptions $ 10; pharmacy $ 50; life insurance $ 140; communications $ 250; RRSP $ 1,475; RESP $ 420. Total: $ 9,715. The excess of $ 2,500 goes to unallocated expenses or savings.
Liabilities: Mortgage loans $ 320,000; line of credit $ 9,340; car loan $ 8,625 Total: $ 337,965
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