This couple wants to retire at 60, but needs to accelerate their savings to make it happen

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‘This is a case of steady income, moderate spending and moderate need,’ says expert

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A couple we’ll call Marty and Eve, both 40, are raising three children — two preschoolers and a seven-year-old — in Alberta. They take home a combined $10,200 a month from their jobs in construction and health care, respectively. They have $359,950 in financial assets, including their $62,800 family RESP, plus an $825,000 house and $77,000 cottage. Their mortgage is paid off and their only debt is a $135,000 home equity line of credit. Financially, they have a solid foundation for the future.

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They fear that their preparations for retirement in 20 years and for their children’s post-secondary education will not be sufficient. In fact, they are slow to build retirement savings. Their concerns are understandable.

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Family Finance asked Eliott Einarson, Winnipeg office manager of Exponent Investment Management Inc. of Ottawa, to work with Marty and Eve.

Retirement goals

An annual work pension of $76,000 from Eve’s work should form the basis of their retirement, but their financial assets are relatively modest.

Their low debt loads and the fact that their children will be out of the house by then, perhaps even with their own careers or the end of their post-secondary education, work in their favor when it comes to their 20-year timeline. The factors working against them are Marty’s decision to pay himself dividends rather than a salary, thereby avoiding Canada Pension Plan contributions. This means that he will receive a very modest CPP benefit and OAS will not begin until age 65.

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Expenses and Savings

Currently, Eve earns $60,000 per year before taxes or $3,200 per month after taxes and deductions. Marty earns $7,000 a month after business expenses and taxes. Their $10,200 a month allows them to use $2,400 to repay their $135,000 line of credit. At this rate, it will be gone in about five years.

Other expenses include $1,200 per month for child care. This will be gone in five years when their youngest is in primary school. They also save $627 per month in the children’s RESP, $400 per month in Eve’s RRSP and $1,000 in their TFSA. The expense balance supports day-to-day expenses.

The current family RESP balance, $62,800, increases with contributions of $7,524 plus the Canada Education Savings Grant of the lesser of $500 or 20% of contributions per beneficiary, $2,508 in this case multiplied by three, totaling $9,029 — let’s call it $9,000 a year — will grow to $190,668 in a decade when the eldest child is ready for post-secondary education. The youngest, aged five and two, will have longer accumulation periods, so the amounts available would be $63,555, $73,698 and $90,100 from oldest to youngest. Parents could easily average the amounts so that each child would have $75,784. That’s more than enough per child for a first degree if living at home and even a deferral for graduate school.

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Retirement goals

Their retirement goal is $5,000 a month after tax, but $6,000 in 2022 dollars is more realistic, suggests Einarson. Their RRSPs have a balance of $275,625, their TFSAs hold $21,150, and the children’s RESPs have a balance of $62,800. In total, they have a net worth of $1,156,950, of which RRSPs and TFSAs, totaling $297,775, are their dedicated retirement funds.

In five years, when their HELOC is paid off, Marty and Eve can start adding $3,000 a month to a non-registered investment account. If they maintain this savings rate for 15 years and generate 3% after inflation, they will be able to accumulate $689,650 in non-registered assets by age 60. It would net them $31,160 after tax for ages 35 through their 96th birthday.

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Eve has $169,000 in RRSPs. She adds $400 per month and her employer adds $450 per month. This adds up to $10,200 per year. Added to existing RRSP assets, RRSPs will reach $579,300 in 20 years. This amount would support taxable annual payments of $26,630 for ages 35 through age 95 with all income and capital paid in. Marty has $106,000 in his RRSP. Without further contributions, this balance will grow to $191,448 in 20 years assuming a 3% return after inflation. This amount will generate $8,650 of annual taxable income with the same assumptions.

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Adding up the income components at age 60, they would have annual RRSP income of $26,630 and $8,650, and $31,160 from non-registered investments. That’s a total of $66,440. After qualifying income splitting and average tax of 10%, they would have $59,796 per year. Their TFSA with current balances of $21,150 and $6,000 each in annual contributions will grow to $371,500 in 20 years. This balance would generate $16,785 in tax-free retirement income for the next 35 years. Added to their other retirement income, they would have an annual net income of $76,581. That’s $6,380 per month, just over their adjusted monthly retirement income goal.

At age 65, they can add $7,850 each of Old Age Security plus Canada Pension Plan benefits of $11,000 a year for Eve and $1,450 a year for Marty. This would bring their annual income to $94,590 not including TFSA income. After an average tax of 15%, they would have $80,401 and $16,785 of their TFSA would total $97,185. That’s $8,100 a month. Qualifying income splitting would avoid the clawback of OAS. The couple’s retirement income would exceed their expectations — with one concern.

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Marty and Eve have no life insurance other than a one-year salary benefit for Eve through her employer. They would do well to discuss life insurance with independent agents for an insurance policy for Marty and possibly additional life insurance coverage for Eve. Given their growing surplus, they could cover their needs until the children leave home in up to 20 years, or incorporate life insurance into their investment planning for retirement. The costs would be manageable as the needs of the family diminish. It’s worth investigating, says Einarson.

“This is a case of steady income, moderate spending, and moderate need,” Einarson says. “Eve and Marty can have financial security, a comfortable retirement and provide their children with the means to pursue post-secondary education.

4 Retirement stars**** out of 5

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