This Five-Star Retirement Plan Comes with a $100,000 Home Renovation and Lots Left Over for Peace of Mind
This career woman has done a terrific job of saving and making good investments, but there are gaps to be fixed so she can enjoy the retirement she deserves
Situation: Career woman, 53, has made the right savings moves, wants to quit at 55 but may have to wait to 60
Solution: Add up income sources and compare to expenses, weigh plans for sustainability and security
At the age of 53, a woman we’ll call Laura is in mid-life and mid-career. She lives in Ontario and is employed by an information processing company. In middle management, she pulls down $7,720 a month before taxes and deductions that reduce her disposable income to $5,400 a month. She wants out in two years but is prepared to wait if she must.
Laura’s accounts are groomed to digital perfection. She knows her pension payouts to the dollar at ages 55, 60 and 65. With all that noted, she has a question that all her diligent calculations have not answered: when is the best time to retire in order to balance taking money in from work and investments, doing a $100,000 renovation on her house, buying a new car within the next five years, and having remaining funds to enjoy the life she has earned.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Laura. His view — she has done a terrific job of saving and making good investments, but there are gaps in her planning which need to be fixed.
Laura estimates that her house is worth $1 million, which amounts to 61 per cent of her $1.64 million net worth. That’s high in terms of portfolio allocation, but it’s in Ontario in a prosperous community and moving to something cheaper and investing the difference would be costly and unnecessary. Appreciation of a primary residence is not taxable.
Assuming that Laura spends $100,000 on the reno including all of the $68,342 cash she has set aside for it, she can come up with the balance by selling stock in a taxable account with a recent value of $62,719 and paying off a $14,711 loan, leaving $48,008. That would leave $38,281 for the balance of the loan and just under $10,000 she could put into cash savings. The renovation will be paid, the house value presumably enhanced by a similar amount, and a good asset made a little better.
Assuming that Laura continues to work for her employer, she can expect a $7,800 annual pension at 55, $14,000 at 60 and $21,400 at 65. Those figures represent the foundation of her retirement. On top of that, she can count on $59,985 in a locked in retirement account, $537,826 in her RRSP, $13,550 in her TFSA, and the $10,000 or so cash she will have left after the reno (or not, given the tendency for renos to go over budget).
With the numbers noted, Laura’s problem will be to maintain her present spending of $5,400 per month. In that sum are a mortgage which will be paid off in full in four years, leaving $1,636 present payment for other things. She will no longer make $426 monthly RRSP contributions and will have paid off a stock loan that now costs her $205 per month. Taking those three items off her allocations, her spending will drop to $3,134 or $37,608 per year.
Laura can raise her future retirement income by adding $11,100 to her RRSP and increasing her Tax-Free Savings Account balance, now $13,650, with an injection of cash to raise the account to a 2018 limit of $57,500. The renovations will eat up most of her cash on hand, but she can use the $10,000 she has left after the reno for the TFSA and top it up over the next few years as her limit grows by the regulatory limit of $5,500 per year.
When to retire is Laura’s fundamental question. She would have a spending gap at age 55, just two years from now, which is two years before her mortgage is paid in full. Her deficit would reflect a whopping $64,800 in annual spending less the after-tax amount of her $7,800 gross annual company pension. What might be $600,000 of RRSPs could be drained with grave future consequences. It’s possible but a very bad idea in terms of what Laura would give up and the fundamental problem of all early retirement plans — stretching resources for many more years.
Retirement at 60 will work well, Moran says. Laura wants to quit as soon as possible, so we’ll focus on the earliest workable date. Her company pension, though not indexed to inflation, would provide $14,000 per year. Her RRSP and Locked In Retirement account, a total of $597,811 with the RRSP growing with contributions of $11,000 per year, would increase in seven years to $820,000 assuming a 3 per cent rate of growth after inflation. That sum, generating 3 per cent per year, would provide $41,850 per year in 2018 dollars.
Laura’s Tax-Free Savings Account, with a present value of $13,550 with additions of $5,500 per year for seven years would rise to $58,800 with the same assumptions and, still earning 3 per cent after inflation, produce $3,000 per year. Laura could find cash for annual TFSA injections in her annual $14,000 bonus, Moran notes. The bonus is not part of her regular income, he adds.
Thus at age 60, her income would consist of the $14,000 annual company pension, $41,850 RRSP and LIRA payments, and $3,000 TFSA payments for a total of $58,850. After 18 per cent average tax but no tax on the TFSA payout, she would have $48,800 per year to spend. With the mortgage paid, the investment loan paid, and no further RRSP or TFSA savings, her budget would decline to $37,608 per year. This would work and there would be ample money for a new or newer car.
At 65, Laura could add $7,160 of Old Age Security and $13,610 in Canada Pension Plan benefits, bringing her total pre-tax income to $79,620. With the same tax rate to recognize age 65 tax preferences such as pension credit and no tax on TFSA payouts, Laura would have $65,827 to spend each year in 2018 dollars. That is slightly more than she spends now with a mortgage, investment loan, RRSP and TFSA savings to support. Laura would have a surplus for travel or other pleasures, a renovated house, a new car if she wishes, and leisure.”
“She has done everything right and a secure retirement starting at 60 with a surplus for more travel, good deeds or good causes, or just peace of mind will be hers.”
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