Louis, 62, is forced to look for another job after his $75,000-a-year contract ends in a few months. His wife, Jackie, 59, has a steady job and earns more than $100,000 a year. She also participates in an indexed defined benefit pension plan that pays her about $47,000 a year for six years.
“I want to retire, but I don’t have enough savings,” Louis wrote in an email. Jackie is eligible to retire at age 65, but because he started his current career late, he will not receive a full pension.
“Our most important financial asset is our home, which we paid off several years ago,” Louis wrote. “The reality is, we don’t have a financial plan. We could definitely use some guidance.” Their daughter is 22 years old, and while they’re still supporting her through college, “we probably won’t have all four years. You won’t be able to cover it,” he added.
“Both Jackie and I are prepared to continue working part-time until our late 60s or early 70s, if financial necessity and health permitting,” Louis wrote. “If needed, we are open to other avenues to generate income, such as renting out our Toronto home or renting in low-cost communities.”
Can Louis retire now, or should he wait until Jackie retires at age 65? Their retirement spending goal is $80,000 per year after taxes.
We asked Jason Heath, an advisory-only financial planner at Markham, Ont.-based Objective Financial Partners, to look into Lewis and Jackie’s situation.
Heath said Louis and Jackie aim to retire by the summer of 2029, when Louis will be 68 and Jackie 65. “Louis’ contract ends in 2024, so I assumed a similar income in his next role.”
They spend about $100,000 a year on basic living expenses. My daughter lives with me, so food, utilities, and miscellaneous expenses are expensive, but they will be cheaper if she moves out.
“They hope that by the time they retire, their expenses will be 20 percent lower, to $80,000 a year in today’s dollars, but I’m not that optimistic,” says the planner. “So, to be conservative, we made a more conservative forecast assuming a 10% reduction of $90,000.” He assumed an average inflation rate of 2% over the next 30 years.
Mr Heath said Jackie and Lewis expected to have many extraordinary expenses in the future. “You need to consider these expenses as you get closer to retirement so you don’t underestimate future costs.” I hope it becomes. They are planning an $18,000 home improvement next year, but expect the water heater rebate to be $8,000.
“Then we added in a regular renovation and repair budget of $5,000 every three years.” They hope to go on a $10,000 trip for their 25th anniversary next year. “We agreed to cover incremental travel expenses of $10,000 per year for his two months of affordable winter vacation for his first 10 years after retirement.”
Over the next few years, Louis and Jackie should have additional cash flow that they can add to their RRSP and tax-free savings account based on their income and expenses, planners say. Because Jackie has a pension, she won’t get much new RRSP room, but since her tax rate is slightly higher than Lewis, Heath says they should contribute to Jackie’s RRSP first. .
“They are now in a higher tax bracket than expected in retirement, so it seems advantageous to contribute to an RRSP to lower their taxable income to about $55,000,” he notes. do. “Now that you are debt-free, we recommend leveraging your unregistered savings and extra cash flow to increase the tax efficiency of your savings by contributing first to an RRSP account and then to a TFSA account.”
Heath says he currently has about $130,000 in cash and investments, and with accumulated savings of about $125,000 and investment growth of just 4%, he could grow to more than $300,000 by the time he retires. “Based on our assumptions, we predict this could drop to zero by the time Louis is 80 and Jackie is 77.”
At that point, their cash flow shortfall was not significant, thanks to Jackie’s indexed government pension and indexed Canada Pension Plan and Old Age Security benefits. Planners say their expenses can be $1,500 to $2,000 a month more than their after-tax income. With a reverse mortgage, you can borrow against the value of your home.
“Assuming a 6% borrowing rate and a 3% home value growth rate, by the time Lewis is 95 he may have more than $400,000 in debt on an estimated home value of $3 million. If real life evolves as the model predicts, modest home downsizing in your 70s or 80s could replenish your investment, he says.
Lewis and Jackie have mentioned the possibility of working part-time or living in a lower-cost area and renting out their home after they retire, but if the next six years play out the way they hope, that won’t be necessary. Maybe. They appear to have enough money to fund their retirement, even if they have to use some of their home equity to finance it once they reach their 80s and 90s.
“Rather than assuming that retirement spending will be significantly lower or ignoring unexpected expenses that retirees will need to budget for in the future, I’m looking at realistic spending scenarios for retirement. “I tried to show that,” he says.
“The risks for Louis and Jackie include that Louis will not be able to replace his current income at the end of his contract and that he will not be able to work until the ages of 68 and 65 respectively due to health issues and financial circumstances,” Heath said. says.
If Louis were to retire now, his retirement budget would be limited. Once they reach their 70s, they will need to borrow against home values or face the possibility of downsizing early.
“I’d like to track their spending over the next year or two and see if they’re actively contributing additional cash flow to their RRSP and TFSA accounts to increase their retirement savings.” says the planner.
“Retirement planning is just a point-in-time calculation that provides a snapshot of a retiree’s trajectory. Circumstances change, so you should take time to reconsider your retirement plan.”
Subjects: Lewis (62 years old), Jackie (59 years old), and their daughter (22 years old).
The question is, how can he best prepare for retirement in a few years? Can Louis afford to retire now, or will he have to keep working until Jackie retires at age 65? Don’t you?
The plan is to continue working and increasing your savings. He will retire when Jackie starts receiving her pension. They may decide to downsize their business or take out a reverse mortgage later in life.
Results: You’ll have a clear understanding of what you need to do now to prepare for the retirement lifestyle you want.
Monthly net income: $11,470.
Assets: $30,370 in cash and equivalents. The inheritance balance is $30,000. Her TFSA is $50,000. His RRSP is $22,345. Registered Education Savings Plan $22,150. Housing costs are $1.1 million. Total: $1.25 million.
The estimated present value of Jackie’s pension is $600,000. This is the amount someone without a pension would have to save to generate the same cash flow.
Monthly expenses: Property taxes $395. Water, sewer and trash $120; home insurance $115. Electricity and heat are $165. Maintenance and decoration $1,000. Garden is $60. Transportation fee: $595. Groceries cost $2,100. Clothes cost $510. $55 gift. Charity $300. Vacation, Travel $400. Food, Drinks, and Entertainment $1,425; Personal Care $480. Club membership is $65. Pets are $70. Book, subscription $95. Healthcare $100. Life insurance $55. Phone, TV, and Internet $225. Jackie’s pension plan contributions are his $1,025. Total: $9,355.
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