Ashley Hutcheson
Jerry and Peggy live in suburban Toronto, have two young children and earn $177,000 between them.
Although they are only in their mid-30s, they have their eyes fixed firmly on retirement.
"We are planning to retire when we are 50," Jerry writes in an e-mail. "We have good incomes and, we think, a plan that will get us to our goal."
"However, we have never consulted with a financial planner and thought it would be wise to get a professional opinion."
We asked Warren Baldwin, regional vice-president of T.E. Wealth in Toronto, to look at Jerry and Peggy's situation.
What the expert says
Peggy and Jerry wonder whether they can continue to pay down their mortgage, save for their children's education, renovate their bathroom and buy new vehicles over the next few years and still be able to retire comfortably at age 50, Mr. Baldwin notes.
"The short answer is yes they can do it."
Because they have kept their spending low - $40,000 a year not including the mortgage - they have been able to pay down their mortgage quickly and still save about $14,000 a year. Once the mortgage is paid off (which they hope will be in 2012), the bathroom has been renovated at a cost of $15,000 and a new car has been bought, they will be able to save an additional $30,000 a year, Mr. Baldwin estimates.
"In an environment that assumes a 7-per-cent return on investment and a 3-per-cent rate of inflation, they will have enough assets by the time they are age 50 to retire and carry themselves over until their pensions begin."
By the time Jerry is 50, he will have about $150,000 in his taxable portfolio and almost $400,000 in his registered retirement savings plans and tax-free savings account.
Peggy will have about $300,000 of non-registered savings and $170,000 in her RRSP.
By then their expenses of $40,000 a year, indexed for inflation at 3 per cent, will have risen to slightly more than $62,000.
Clearly, their non-registered investments will not provide enough cash flow so they will have to draw on their capital to the tune of $220,000 from age 50 to 55, when their company pensions start.
For simplicity, Mr. Baldwin has assumed that neither of their pensions is indexed for inflation.
At age 55, Jerry will begin collecting a pension of $26,400 a year and Peggy $31,200 a year. Meanwhile, their expenses with inflation will have risen to about $72,000.
Their after-tax income (pensions and investment income) at age 55 would be $62,000, a shortfall of about $10,000, Mr. Baldwin notes.
This gap will close by the time they turn 60 and start to receive Canada Pension Plan payments of slightly more than $16,000 a year each. Their expenses will have risen to $84,000 a year and their after-tax income will be $81,000, a shortfall of only $3,000.
At age 65, they will begin getting Old Age Security payments of slightly more than $15,000 a year each. Their expenses, with inflation, will have risen to about $97,000 and their after-tax income will be $104,000, a surplus of about $7,000 a year.
They still would not have withdrawn any money from their RRSPs, which will have swelled in value to about $1-million for his and slightly less than $500,000 for hers.
"Plus they are living in a fully-paid house."
Based on Mr. Baldwin's projections, Jerry and Peggy could afford to spend $50,000 a year after tax in today's dollars from age 50 to age 90 - "an increase of 25 per cent in their after-tax living expenses."
Where Peggy and Jerry's planning falls woefully short is in preparing for the unexpected: They have no wills or powers of attorney to provide for their children, aged 2 and 5.
"I would urge them to review the situation as soon as possible and make sure that at least something is put in place to protect their assets as well as their family," Mr. Baldwin says. "If they were both to die intestate, the cost and inconvenience for the family would be quite severe."
Client situation
The people: Jerry and Peggy, both in their mid-30s, and their children, 5 and 2.
The problem: How to become debt-free, pay off the mortgage, save for the children's education and sock money away for a very early retirement - all in about 15 years.
The plan: Keep expenses low and build savings to complement company pensions.
The payoff: A good chance for life on easy street based on an estimated average return on investment of 7 per cent a year.
Monthly after-tax income: $8,456.
Assets: Jerry's RRSP $103,325; RPP $21,545; company stock $3,986; TFSA $13,345; chequing account $2,560; Peggy's RRSP $27,586; savings account $4,725; TFSA $3,583; chequing account $3,110; children's RESPs $16,220; home $350,100; proceeds from sale of cottage lot $20,000. Total: $570,085.
Monthly disbursements: Child care $1,160; personal allowance (dry cleaning, pocket money) $450; mortgage payments $2,700; property taxes $280; house insurance $30; heat, hydro, water, telephone, cable $420; painting, repairs, maintenance $50; vacations $250; entertainment, music, books $220; auto expenses $560; life insurance $100; RRSP contributions $500; employer savings plan (stock purchase) $200; employer defined benefit pension plans $500; food and eating out $800; clothing $200; medical, drugs, dental $100. Total: $8,520.
Liabilities: Mortgage $105,000; credit cards $2,000. Total: $107,000.