Below you will find a real life case study of a couple who are looking for financial advice on when they can retire and how best to arrange their financial affairs. The names and details of their personal lives have been changed to protect their identities. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.
Written by: DIANNE MALEY
Special to The Globe and Mail
Published Friday, Dec.30, 2016
After nearly a decade in grad school toiling as a research assistant, Chris has reached his big earning years. He is 39 and grosses about $180,000 annually as a self-employed medical consultant.
“I began my private practice one year ago,” Chris writes in an e-mail. It has taken off and is generating a lot of money, he adds – so much that his wife, Rachel, stepped away from her job “and is now trying to forge a career as an author,” Chris writes. Rachel, who is 40, is also taking care of their three children, whose ages range from 10 to 13.
In the fall, after a generous gift from their parents, they bought a house large enough to accommodate a family of five and a writer. Over the next few months, they want to buy a new car, renovate their bathroom and put in a gas fireplace. They have not yet begun to save for retirement in any meaningful way and are concerned about that. They’d also like to travel.
“How much should we allocate to our RRSPs and tax-free savings accounts to make up for the years when we didn’t contribute?” Chris asks. “How aggressively should we pay down our mortgage, and how do we balance this against our dream of purchasing a cottage within the next 10 years?”
We asked Matthew Ardrey, vice-president at TriDelta Financial in Toronto, to look at Chris and Rachel’s situation. Mr. Ardrey holds the certified financial planner (CFP) designation.
What the expert says
Chris and Rachel want to renovate their bathroom and put in a gas fireplace at a combined cost of $35,000. Mr. Ardrey assumes they will use part of their $83,000 in savings to pay for this. As for the car, they could finance the purchase at or near zero interest and pay the loan off over five years.
Because they live in Quebec, their children’s tuition fees for postsecondary education will be much lower than in other provinces. Rachel and Chris are saving $2,500 a child a year to their registered education savings plan, which has a balance of $51,000. Mr. Ardrey assumes a cost of $10,000 for each child a year to cover additional costs such as textbooks and the like. So their savings should be enough to cover the majority of the costs of four-year undergraduate degrees for each of their children, the planner says. They will fall a little short in the final year of schooling for the youngest child and will need to add about $8,500 of their own money.
To meet the couple’s travel goal, Mr. Ardrey doubled their travel budget to $14,000 a year starting in 2018 when the home renovations are complete.
So far, Rachel and Chris have almost no retirement savings. Chris has $34,000 of unused RRSP contribution room and Rachel has $61,000. Both have the maximum TFSA contribution room available.
Given their cash holdings and surplus of income over expenses, Chris should be able to make up his unused RRSP contribution room in the coming year as well as make the maximum contribution for 2017 and ensuing years. No RRSP contributions are factored in for Rachel because she has no income at the moment.
For the TFSAs, they can catch up on past contribution room by 2021. From 2021 onward, the planner assumes they make the maximum TFSA contribution every year. Both contributions will be made from Chris’s income. Because the money is going to a TFSA, the investment income from her TFSA will not be attributed back to him.
In preparing his forecast, the planner assumes it will take five years before Rachel starts earning an income from her writing equivalent to $20,000 in today’s dollars. Because Chris will be making substantially more than Rachel, Mr. Ardrey assumes that she saves all of her gross earnings to her non-registered investment account. The resulting investment income will be taxed at her lower marginal tax rate. In addition, Chris can pay any income tax Rachel might owe to allow her to save more.
Starting in 2021, Chris and Rachel will have some additional cash flow because they will have caught up on their TFSA contributions. Mr. Ardrey assumes they direct $1,100 a month to paying down their mortgage from 2021 to when they buy the cottage. He assumes they buy a cottage in 2028 for $400,000 in today’s dollars, adjusted for inflation. The make a down payment of 10 per cent from Rachel’s non-registered savings. The remainder of the purchase price is financed by a mortgage at 5 per cent. In 2037, when the mortgage on the principal residence is fully retired, they can increase the principal repayment on the cottage mortgage by $30,000 a year to retire the debt in 2043, in advance of their retirement in 2047.
Chris and Rachel plan to retire at the age of 70. Their savings and government benefits will be more than enough to meet their $55,000 a year after-tax spending goal, Mr. Ardrey says. He has factored in $20,000 a year for travelling until Chris is age 85. The planner’s forecast assumes a 5.4-per-cent rate of return on their investments, falling to 4 per cent once they have retired, an inflation rate of 2 per cent, and that they both live to the age of 90.
The people: Chris, 39, Rachel, 40, and their three children.
The problem: How to allocate the income from Chris’s growing consulting business. Can they buy a cottage?
The plan: Catch up on unused RRSP and TFSA contribution room, then shift to repaying the mortgage. Once the mortgage on their principal residence is paid off, they can shift the money to the cottage mortgage and have it paid off before they retire.
The payoff: A clear road map to a financially comfortable retirement with all their goals achieved.
Monthly net income: $9,380
Assets: Cash in bank $83,000; his RRSP $1,200; her RRSP $1,200; RESP $51,000; residence $765,000. Total: $901,400
Monthly disbursements: Mortgage $1,850; property tax $140; home insurance $140; utilities $175; transportation $335; grocery store $1,150; clothing $100; gifts $50; vacation, travel $585; dining, drinks, entertainment $260; grooming $60; pets $50; subscriptions $135; doctors, dentists $50; life insurance $75; disability insurance $20; cellphones $90; Internet $150. Total: $5,415. Surplus available for saving and investing: $3,965
Liabilities: Mortgage $417,000
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