Although they are only 29 years old, Rose and Rusty are already thinking about retiring. They'd like to hang up their hats at the age of 60.
Before that distant event, they plan to have a child soon (Rose would take an extended maternity leave), give their child a private-school education, pay off their mortgage and indulge "their love for travelling."
Both work two jobs, bringing in a combined $212,000 a year. Rose has a defined benefit pension plan that will pay her about $63,240 a year at the age of 65. Rusty has a defined contribution pension plan to which both he and his employer contribute.
They have a house in a Toronto suburb with a big mortgage.
"I am having a difficult time determining how much my husband and I will need for our retirement," Rose writes in an e-mail. She is concerned about striking a balance between savings and paying down the mortgage. They hope to leave their child a substantial inheritance.
"Are we on track to meet our retirement goals?" Rose asks.
We asked Michael Cherney, a Toronto-based financial planner, to look at Rose and Rusty's situation.
What the expert says
After all deductions, including both of their pension plan contributions, they take home about $12,000 a month. "But they spend only $9,500 per month, leaving $2,500 per month, or more than 20 per cent of their income, for saving (including a tax-free savings account)," Mr. Cherney says in an e-mail. "This is an excellent ratio."
But by far the best thing that these two have going for them, besides their excellent earnings potential, is their young age of 29, he says. "The fact that they are planning this early bodes very well for them."
Thus far, the couple has been putting $1,000 a month into a TFSA to fund the buyout of a car lease. "This will end shortly." Their goals, in no particular order, include retiring at the age of 60 with a joint income of $150,000 before-tax; funding a private-school education for their future child or children; paying off their mortgage; and leaving an inheritance.
Mr. Cherney starts with their retirement plan. In addition to Rose's DB plan, Rusty has a combined DPSP (deferred profit sharing plan) and RRSP. His employer contributes 3 per cent of his salary to the DPSP as well as matching up to 3 per cent of his RRSP contribution.
Rose has $17,000 in her TFSA, which is earmarked to exercise the purchase option on their leased car. Once that goal is reached, they can devote their TFSA contributions to their retirement plan.
"An early hitch is that Rose plans to take 18 months off work to have their first child," the planner says. Between EI and her work mat leave coverage, they will be able to pay their bills, but they will not be able to save anything.
When Rose returns to work in January, 2020, they should start saving aggressively, putting the majority into Rusty's RRSP to use up his $35,000 in unused contribution room. He should contribute the maximum amount each year thereafter. There will still be $4,000 available each year to contribute to each of their TFSAs.
Continuing along this route and assuming a rate of return of 4.5 per cent and inflation at 2.5 per cent, they will be able to retire at the age of 65 with before-tax income of $160,000 (current dollars), indexed to inflation, to the age of 95. The planner has adjusted TFSA withdrawals to their before-tax equivalent amounts in order to put all sources of income on an equal footing.
If they retire at the age of 60, they will not be able to meet their spending goal without further belt-tightening and "at this point I don't think it is particularly realistic," Mr. Cherney says.
However, with this projection as a starting point, they can make adjustments from time to time. One of them might be promoted, for example. Their mortgage is scheduled to be paid off in about 22 years, freeing up about $47,000 a year. "If they decide to devote some or all of that to their retirement goals, they could advance their retirement dates," the planner says. On the other hand, the money they are saving will be reduced once they have a child. Finally, they could downsize their house in time, "freeing up lots of cash for their spending goals."
The people: Rose and Rusty, both 29
The problem: Finding a balance between paying off the mortgage and saving for retirement while planning to have a child.
The plan: Devote their $2,500 a month in savings to their retirement plan, realizing they will have to suspend savings for the time Rose is on mat leave. Catch up with Rusty's unused RRSP contribution room. Considering lowering their retirement spending target.
The payoff: A clear road map to get them through the next several years.
Monthly net income: $12,415
Assets: Bank accounts $21,000; her TFSA $17,000; her RRSP $8,000; market value of defined contribution pension $8,000; estim. present value of DB pension $65,000; residence $1,700,000. Total: $1.8-million
Monthly outlays: Mortgage $3,900; property tax $585; water, sewer $30; home insurance $70; heat, hydro $220; security $45; maintenance, garden $155; lease payment $440; insurance $290; fuel, maintenance $310; parking, transit $230; grocery store $250; clothing $100; gifts $265; vacation, travel $420; other discretionary $40; dining, drinks, entertainment $700; grooming $100; hobbies $700; life insurance $50; disability insurance $25; Internet $70; TFSA $1,000; pension plan contributions $920. Total: $10,915 Surplus: $1,500
Liabilities: Mortgage $830,000 at 2.09 per cent. Total: $830,000
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