Putting their $580,000 in cash to work is key to this Alberta couple's retirement
Because they have no debts, they can accumulate more savings, which can bloom as productive investments
In Alberta, a couple we’ll call Mel, 54, and Mary, 48, are raising three kids — two approaching their teens and one aged seven. Their family net monthly income is $6,740. Their present $550,000 home doesn’t seem large enough and they want to move up to a $700,000 house. “What will that do to our $6,500 monthly retirement goal?” Mary asks. She works for a government in administration; Mel is a management consultant. They have been diligent savers but not well focused on investing their savings.
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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Mel and Mary. His view — they can accumulate more savings because they have no debts to pay. Those savings can bloom as productive investments.
Present financesThe couple’s balance sheet shows net worth of about $1.73 million of which $582,000 is non-registered cash. If they were to sell their present house less five per cent for commissions and primping, they would have $522,500. If they were to add another $177,500, they would have the price of their $700,000 move-up house. The cost in reduced income would be perhaps three per cent of the capital or $5,325 before tax each year, assuming a three-per-cent annual return after inflation. They can cover that by using their abundant cash for RRSP deposits. The tax savings would more than cover the lost income.
Mel earns $95,000 a year before tax. That income generates RRSP space of about $17,000 per year. He should use some of his cash to invest in a spousal RRSP for Mary. For tax purposes to bring his tax and bracket down, he could invest $47,000. His refunds would be between 36 per cent at the top and 30.5 per cent as his tax bracket declines, Moran estimates. Taking the average, 33.25 per cent, the $47,000 saving would produce an initial tax reduction or income retention of $15,628 per year. That would more than cover the income loss generated by diverting capital to a bigger house, Moran explains.
The family RESP is underfunded. The parents have put $7,500 into the RESP. Potential contributions for total child years to date at $2,500 per child per year, $70,000 total, plus potential Canada Education Savings Grants of the lesser of 20 per cent of annual contributions or $500 per child per year, $14,000 total, leave space of $76,500. This is a large space and ought to be filled. After all, a $2,500 annual contribution for each child or $7,500 total generates a $1,500 instant “profit” just for the paperwork, Moran notes.
For three kids, $625 per month would provide the maximum $2,500 per child base for the CESG, but they can double up to $1,250 per month and get two years worth of RESP bonuses, total $15,000 per year plus the $3,000 CESG. The CESG maximum is $7,200 per beneficiary.
Child one can get $38,300 by age 17, child two can get $44,460 by 17 and the youngest child can get $48,500 by age 15 when he will hit the CESG beneficiary limit. The three ongoing contributions, if averaged by the parents, will give each child about $43,750 for post-secondary studies.
Raising savingsThe couple’s TFSAs should be topped up. Their totals are now $121,717 based on contributions to date plus growth. Mary has $12,000 of room and Mel $15,800 of room. Topped up, they would have $149,517. If they continue to add $12,000 per year and if the accounts grow at three per cent after inflation and fees, the total will rise to $256,150 in six years at Mel’s age 60. If it continues to grow and is spent over the following 36 years to Mary’s age 90, it would support tax-free annual income of $11,390 in 2021 dollars.
Mary’s present RRSP balance is $117,000. Mel will have $332,664. He has $49,697 room to fill. If this is done via a spousal plan, Mel, with the higher income, gets the deduction.
Then his RRSP with a total of $332,664, plus $49,697 put into Mary’s spousal RRSP and her existing $86,370 after the buyback, will rise to $468,731. Mel generates $19,000 annual RRSP space. If they add that sum to his RRSP for six years to his age 60 and if the account grows at three per cent per year after inflation, it will become $682,589 in 2021 dollars. If annuitized for the 36 years to Mary’s age 90, it would pay $30,354 per year.
Adding up retirement incomeOnce RESPs, TFSAs and RRSPs are topped up, and assuming the couple does not buy a more expensive house, they will have $464,700 left. If this money is invested in dividend growth stocks for the dividend tax credit for 42 years, they could easily generate payouts of $19,606 per year to Mary’s age 90 with the assumption of three per cent growth. (If they do buy the house, they will only have $287,200 in cash left, enough to generate about $11,700 per year with similar growth assumptions. For the ensuing calculations then, they would have to make due with about $670 less per month).
Assuming Mary retires in six years when Mel retires at his age 60, they will have her $24,255 work pension, RRSP income of $30,354, and taxable income of $19,606 for total annual income of $74,215. After splits of eligible income and average 12 per cent income tax, they would have $65,309. Adding TFSA cash flow, $11,390, they would have $76,700 per year to spend. That’s about $6,390 per month, $350 per month less than what they spend now. But it would go further with the elimination of RRSP, TFSA and two thirds of their RESP savings.
At 65, Mel could add his $12,470 Canada Pension Plan benefit and his $7,380 Old Age Security benefit to bring totals to $94,065. After splits of eligible income and 17 per cent average tax on all but TFSA cash flow, then addition of TFSA cash flow to the tally, they would have $7,455 to spend each month. When she is 65, Mary’s $11,084 CPP and $7,380 OAS would push total income to $112,530. After 18 per cent average tax and added $11,400 TFSA income, they would have $103,663 per year to spend or $8,638 per month, far more than present $6,740 monthly allocations including $3,194 retirement saving.
“With our adjustments, they will have more income with no more risk,” Moran explains “It’s a conservative estimation and more than Mel and Mary expected.”
Retirement stars: Four **** out of five
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