When You have Eight Kids, Can You Ever Retire? This Couple Can — and Before 65, Too
Jack wants to retire at age 60 while there are still kids at home, and with the family's frugal ways and a shuffling of savings, it looks like he can do it
Andrew Allentuck
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Situation: Couple with five of eight children still living under their roof wonder if they can retire
Solution: Maximize private savings, continue frugal ways and eventually they’ll get there
A couple we’ll call Jack, 60, and Susan, 52, live in Ontario. They have eight kids, three of which are independent and five of which live at home, including three still in primary school. Jack, a civil servant, has a pre-tax income of $96,000 per year and adds almost $14,000 per year from the Canada Child Benefit, a sum which will plummet as the children approach the cutoff at 17. Susan is a homemaker. A basement suite adds rent of $10,800 per year. Their take-home income works out to about $7,300 per month including rent and the untaxed CCB. Despite the large family, Jack and Susan are frugal and are able to save $3,400 per month for retirement and rainy days.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C. to work with Jack and Susan. “This is as traditional a family as one can find,” he explains. “The issue is whether they can retire this year or next with children in primary school still at home.”
Budget Management
Their income is not large considering the size of their household. However, their $750,000 house is paid in full. There is a $30,000 Registered Education Savings Plan that the older kids have funded with part time jobs. The parents buy second-hand clothing for themselves and the children, who get no allowances. They earn their own spending money by cutting grass, shoveling snow and other chores.
The problem Jack and Susan face is when to retire and how to finance it. Jack would like to pull the plug on his job as early as this year, 2018, or as late as mid-2023. That entails the question of when to start Canada Pension Plan benefits, when to start taking money out of his $100,000 RRSP and/or the couple’s Tax-Free Savings Plans that add up to $61,300. Next year, three older children will leave home to start their post-secondary educations that they will continue to finance in part with summer jobs.
Retirement Income
For now, the couple covers their expenses with no problems, no line of credit debt or other overhangs. But if they retire late this or early next year, Jack’s job income will decline to $57,216 a year before tax including a $10,000 annual pension bridge which vanishes at 65. The Canada Child Benefit are in theory for the children, so we’ll exclude them from retirement income calculations even though the benefits replace other expenses that might be paid out of earned income.
Retirement on this reduced budget with at least two kids still at home will be a challenge.
Jack can do a lot right now to lower his income tax payable. One step would be to move as much as $31,500 fro m their $52,300 TFSA balances to Jack’s RRSP. The withdrawal has no penalty and the tax savings at Jack’s 43 per cent marginal rate would be about $13,545, which can go back into the TFSA.
Pension income from the RRSP when paid out as a RRIF can be split, so the effective rate would be about 13 per cent.
At age 65, Jack can expect full Canada Pension Plan benefits, currently $13,610 per year. Susan, who worked full time for only two full years and a decade further part time, can expect about 25 per cent of full benefits at 65, $3,400 per year. Both will have full Old Age Security benefits, currently $7,040 at 65.
The couple’s TFSA accounts currently total $61,300. If they take out $31,500, $29,800 would be left. They can add the $13,545 tax refund and have $43,345. If the $43,345 is annuitized at 3 per cent for 30 years, it would yield $2,150 each year.
Benefits By Age
Retirement at 60 will work. If the present $100,000 RRSP balance plus $31,500 from the TFSAs is added immediately, then with the same 3 per cent real return for 30 years, it would generate $6,709 per year. Thus from Jack’s age 60 to his age 65, he would have $47,216 pension plus the $10,000 bridge, RRSP income of $6,709, TFSA income of $2,150 and $10,800 annual rental income for total income of $78,875 before tax. With appropriate splits of eligible income and no tax on TFSA income, they would pay tax at an average rate of 12 per cent and have $5,640 to spend each month. Lower income would maintain the untaxed Canada Child Benefit, boosting spendable income to about $6,000 per month until the last child to reach home is 18 in about a decade.
When Jack is 65, Susan will be 57. He will lose the $10,000 job pension bridge but gain $13,610 CPP and $7,040 OAS. His total income including rental income will be about $78,670 per year before tax and about $5,700 after 13 per cent tax and no tax on the TFSA payouts for total income after tax of $6,600 per month.
Finally, when Susan is 65, the couple’s income would rise with her OAS, $7,040 and her estimated $3,400 CPP to a total of $89,110. Allowing for 14 per cent tax on all income other than the TFSA zero tax payouts, the couple would have $6,500 to spend each month. Their present frugal spending of $5,400 per month when RRSP and, TFSA savings are removed would be supported at every stage. Though CCB payments would have ended by Jack’s mid-70s, they would have a surplus for travel or aid to their brood.
Jack can afford to retire at 60 if he wishes. The family’s retirement income, with two kids still at home will amply cover their costs. When the last kids leave home in no more than 15 years, Jack and Susan will have even more discretionary income.
Jack and Susan will have to cover dental expenses in retirement. If they prefer to self-insure those expenses rather than buy extended medical and dental benefits, they will have the income and/or savings to do it. They will have no life insurance for it’s very costly to buy at their ages. Nevertheless, it’s going to be a financially solid retirement, Moran concludes.
(C) 2018, The Financial Post, Used by Permission