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, July 7, 2017
Mark and Marianne moved to Canada in 2003 “at an advanced stage of their careers.” He was in his late 30s, she in her early 40s. This posed a challenge faced by many immigrants, Mark writes in an e-mail.
“By the time you get professionally established, you are already late to the game of financial and retirement planning.”
Today, both have good jobs in higher education, earning a combined income of $250,000. Mark has a work pension plan but Marianne, who works on contract, has none.
“Now that we are in our early 50s, we feel we are not well prepared for retirement,” Mark writes. They have been focusing on paying off their mortgage.
They have questions about how pension entitlements earned in their home countries can be combined with Canadian pension benefits and Old Age Security. As well, their teenage daughter will be off to university next year and they have not yet saved enough to cover the cost of her education.
We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Mark and Marianne’s situation.
What the expert says
Mark and Marianne are concerned that they are behind the “Joneses” when it comes to their retirement planning, Mr. Ardrey says. They want a better understanding of where they are today and how best to meet their goals for tomorrow.
They show a substantial surplus, but that has only come about in the past year as Marianne’s salary has increased. Their next project is to renovate their two bathrooms, estimated to cost $20,000. By allocating some surplus funds to their savings account, in addition to the $17,400 already saved, they will have enough to complete the renovation next year, the planner says.
They have been saving $5,000 a year toward their daughter’s education to take advantage of the Canada Education Savings Grant. Because their daughter plans to live at home and attend a local university, Mr. Ardrey assumes education costs of $10,000 a year for four years. That would leave a shortfall in their registered education savings plan of $21,400. The shortfall in the third and fourth year can be made up by the couple’s cash-flow surplus and savings.
“It is important to note that the key assumption under which the short-term goals are met is that the monthly surplus of $3,600 is correct,” Mr. Ardrey says. If their budgeting is out by much, “it will have a significant impact on their plan.”
Mark and Marianne will be mortgage-free by the end of 2020, so they will have an additional $3,770 a month in their pocket starting in 2021. The plan assumes they will save half of this amount, with the other half going to increased lifestyle spending. The planner assumes they both take full advantage of their tax-free savings accounts, catching up on unused contribution room.
Marianne has about $33,800 in unused RRSP contribution room. With her salary of $46,800, she will generate an additional $8,435 in contribution room annually. Mr. Ardrey assumes she averages out the prior year’s contribution room over her remaining working years, as well as making her annual RRSP contribution, for a total annual RRSP contribution of $11,820. Mark has no contribution room because of his pension adjustment.
Starting in 2021, Marianne and Mark will be able to start saving money in a non-registered investment account. With their current surplus, minus RRSP and TFSA savings, they will add almost $20,375 a year to the non-registered account. In addition, they will have $22,260 (50 per cent of the mortgage payments), for total savings of $42,995 a year.
Mark has a defined-benefit pension plan that will pay him about $7,725 a month when he retires at 65. The pension is not indexed to inflation, but has a 60-per-cent survivor benefit. He also has registered savings overseas toward which his parents have been contributing. The overseas plan will pay out an estimated lump sum of $230,000 when he turns 65. The planner assumes this will be fully taxable. Mark will also get a foreign government pension of $530 a month starting at 67, indexed to inflation. Both Mark and Marianne will be entitled to reduced Canada Pension Plan and Old Age Security benefits when they retire.
In looking at the couple’s investments, Mr. Ardrey used the couple’s actual rate of return and asset mix. The underlying asset classes of the mutual funds in which they are invested show a historical return of 4.54 per cent with a 2.38-per-cent management expense ratio.
“By the time we account for the 2 per cent assumed inflation rate, the real rate of return on their portfolio is almost zero!” Mr. Ardrey said. Even so, Marianne and Mark can achieve their retirement spending goal of $90,000 a year, in current year dollars, inflation adjusted, and have an additional $10,000 a year in travel spending until Mark turns 80, the planner says.
When Mark turns 90, they will have an investment portfolio worth $1,065,000, plus their real estate and personal effects, he notes. “Alternatively, if they spent all of their investment assets, they could increase their lifestyle spending by $22,800 per year.”
Mark and Marianne could greatly improve their situation by reviewing their investment strategy and cutting costs. With some portfolio rejigging, they should be able to increase their rate of return to 6.5 per cent and reduce their fees to 1.5 per cent, for a net return of 5 per cent a year.
Mark, 52, Marianne, 55, and their daughter, 16
Are they on track to meet their retirement goals?
Continue paying off the mortgage, then shift the extra money to retirement savings. Use up unused TFSA contribution room. Look to lower investment-management fees and improve returns.
Financial security with all their goals met.
Monthly net income
Bank accounts $17,410; current value of overseas registered-savings plan $71,305; his TFSA $49,900; her TFSA $31,465; his RRSP $3,865; her RRSP $17,620; estimated present value of Mark’s DB plan $338,195; RESP $21,390; residence $800,000. Total: $1.35-million
Mortgage $3,770; property tax $235; water, sewer $60; home insurance $90; heat, electricity $190; maintenance, garden $350; car lease $265; parking, transit $295; other auto $360; grocery store $1,300; clothing $340; vehicle loan $265; gifts, charitable $155; vacation, travel $500; house cleaning $240; dining, drinks, entertainment $410; grooming $150; clubs $95; sports, hobbies $60; subscriptions $15; child’s activities $165; doctors, dentists $30; vitamins, supplements $250; life insurance $145; telecom, TV, Internet $295; RESP $415; TFSAs $400; pension-plan contribution $1,085. Total: $11,930. Surplus $3,625
Mortgage $154,330; Home Buyers Plan loan $8,570; car loan $47,420 at zero per cent. Total: $210,320
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Some details may be changed to protect the privacy of the persons profiled.