JENNIFER ROBERTS/The Globe and Mail
Yvonne and Murray live in a modest home in downtown Toronto that will be paid off in a few years.
He is 49, she is 45. Both have managerial jobs, with Yvonne making $96,000 a year and Murray $65,000. Neither has a company pension.
Their investment returns have been poor over the past few years so they worry about whether they will have enough money to retire.
"I fear that we will fall short," Yvonne writes in an e-mail. They have some money to spare in their budget and wonder whether they should add to their registered investment portfolios or perhaps trade up to a larger home with a rental unit to supplement their retirement expenses.
"But that will involve more debt," Yvonne writes. While she is concerned about investing so much of their savings in the stock market, she is worried as well about the alternatives. "With the financial crises all around the world, I'm not sure if now is a good time to buy real estate," she says. Their goal is to retire in 16 years when Murray is 65 and Yvonne 61.
We asked Warren Baldwin and Matthew Ardrey of T.E. Wealth in Toronto to look at Yvonne and Murray's situation. Mr. Baldwin is regional vice-president, Mr. Ardrey is manager of financial planning. T.E. Wealth is a fee-only financial planning firm.
What the experts say
Murray and Yvonne are at a "watershed" age in that they will have to pay close attention to expenses, asset accumulation and retirement savings for the next 16 years, the planners note.
The planners assume the couple buys a larger house with a rental unit. Doing so will raise their mortgage debt by at least $150,000. They also have unused contribution room in their registered retirement savings plans. The planners assume that Yvonne and Murray use much of their non-registered savings to pay for the house move and bring their RRSP contributions up to date.
Yvonne could start to use some of her capital to pay Murray's part of the household bills and therefore enable Murray to allocate his cash flow to contributing to a spousal RRSP in Yvonne's name to take advantage of his significant level of unused contribution room and save them some taxes this year.
In their calculations, the planners start with Murray having $2,500 in taxable assets, $6,200 in his tax-free savings account and $116,300 in his RRSP. Once Yvonne has topped up her RRSP and made a spousal contribution for Murray, she would be left with $22,400 in taxable assets, $15,300 in her TFSA and $205,000 in her RRSP.
From here, the planners assume that Murray's RRSP contribution of $11,700 a year and Yvonne's of $17,300 (both indexed for inflation) continue for the remainder of their working lives. They assume an average annual return on investment of 5 per cent a year and an inflation rate of 2 per cent a year. Key to achieving their investment returns is switching from an array of high-cost mutual funds to well-diversified exchange-traded funds. All of the couple's debt should be paid off by the time they quit working.
"In retirement, we expect that they will be living off the same level of after-tax expenses as they are today, $50,650 per year," the planners write in their report. They begin collecting the maximum Canada Pension Plan benefits at age 65 and Old Age Security payments at age 67.
But they have choices they would not have had otherwise. Now that their tenants have helped pay off the mortgage on the larger house, Yvonne and Murray can enhance their cash flow by continuing to rent or stop renting and just enjoy the larger living space. The planners do not include the income from the rental unit in their retirement calculations. Yvonne and Murray look to be headed for a comfortable retirement. Their expenses will have risen to $69,532 a year by the time they retire because of inflation but their assets will have climbed as well.
"At Murray's age 71, when they are both collecting Old Age Security as well as CPP payments, their total income after tax is $91,662 for the year, while their indexed expenses now run along at $78,304 per year," the planners calculate. Their total assets, excluding the value of the house, would be $1,768,932.
"The bottom line is that even with indexation of their expenses, their capital base remains strong up to Yvonne's age 90, when her investment assets total $1,792,405." And she would still have her house. If they wanted to exhaust their investment portfolios by the time Yvonne was 90, they could raise their retirement spending to $67,160 in 2012 dollars.
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The people
Yvonne, 45, and Murray, 49.
The problem
How best to build their own personal pension plans – invest surplus funds in the stock market or buy a house with a rental unit.
The plan
Top up RRSPs, buy the bigger house, pay off debt by the time they retire and keep a close eye on the cost and performance of their investments.
The payoff
A secure and comfortable retirement on target in 16 years.
Monthly net income
$9,240
Assets
Bank accounts $12,100; GICs, term deposits $48,000; stocks $38,000; TFSAs $21,500; her RRSP $163,000; his RRSP $116,300; home $540,000. Total: $938,900
Monthly disbursements
Mortgage $1,515; other housing costs $771; transportation $670; groceries, clothing $920; line of credit $40; gifts, charitable $135; vacation, travel $420; entertainment $350; dining out $225; club membership $126; personal discretionary $180; drugs, dentists, disability insurance $129; telecom, cable, Internet $255; RRSPs $1,742; TFSAs $200. Total: $7,678
Liabilities
Mortgage $56,433; line of credit $9,800. Total: $66,233
Editor's note: The original newspaper version of this article and an earlier online version misstated the planners' strategy for the couple to take advantage of unused RRSP contribution room.
Special to The Globe and Mail
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