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, Oct. 14, 2016
At age 39, Barbara and John are mortgage-free with money in the bank, good professional jobs, a young child and a strong desire to see the world.
John earns about $97,000 a year, while Barbara brings in $39,120, on average, working part-time. They wonder whether she can continue to work part-time until John semi-retires at age 55, and then spend the next 15 years travelling the world together and working part-time.
“We think the world is going to change and travel will become an extreme luxury item,” Barbara writes in an e-mail, adding, “international travel will not be a valid option after 70.”
The Ontario couple have already given in to their wanderlust, travelling extensively over the past two years, but they realize they have to pare back a bit. They need to do some work on their house and save for their daughter’s postsecondary education.
“Are we okay if Barbara works part-time from now until full retirement at age 70?”
We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Barbara and John’s situation. Mr. Ardrey holds the certified financial planner (CFP) designation.
What the expert says
First, Mr. Ardrey looked at the couple’s short-term financial goals. They want to spend $18,000 in 2017, $6,000 in 2018 and $6,000 in 2019 on travel, plus $10,000 for new floors in 2018 and $10,000 for a new furnace and air conditioning unit in 2019. They show a surplus of $20,700 a year, more than enough to cover these expenses. “So there is no need for Barbara to work more hours to cover their short-term spending needs.”
When they semi-retire at age 55, they plan to spend $60,000 a year after tax in today’s dollars, close to what they are spending today after savings are removed, Mr. Ardrey says, plus an additional $20,000 a year in today’s dollars on travel.
John is saving 4 per cent of his income, plus a 4-per-cent matching contribution from his employer, to his defined-contribution pension plan, adding $2,400 a year to his tax-free savings account and $7,200 a year to his registered retirement savings plan. Barbara is contributing $6,000 to her TFSA and $1,200 to her RRSP. The planner assumes all savings end when they semi-retire.
They will both receive Old Age Security at age 65 and Canada Pension Plan benefits at age 70. John will get full CPP, but the planner assumes Barbara will get 70 per cent of the maximum. He further assumes a rate of return on their investments of 5 per cent, an inflation rate of 2 per cent and that they will both live until the age of 95.
Based on these assumptions, the couple will be able to meet their retirement goals, Mr. Ardrey says. They would leave an estate of about $800,000 on top of their real estate and personal effects.
But a couple of items need to be addressed, the planner says. The first is budgeting and saving. After the large expenses are addressed in the next few years, they will have a budget surplus of $30,000 a year.
“They should take a good look at their budget to ensure this surplus is really there because their ability to make large expenditures without taking on additional debt depends upon it,” Mr. Ardrey says.
If they do have a big surplus, “it would be good to save at least half of it to their TFSAs and RRSPs.”
The second item concerns the investment costs they’re paying. For their assets outside of John’s defined-contribution plan, they are investing in mutual funds, which can come with high fees. “Depending on the level of service and planning this couple is receiving, those costs may or may not be justified,” Mr. Ardrey says.
To illustrate how these suggestions could make a big difference, the planner ran a second retirement plan. In it, John and Barbara increased their savings by $15,000 a year until they semi-retired and lowered their cost of investing by half a percentage point a year. It could make a big difference. “Their estate, excluding real estate, would more than double to about $1.98-million.”
Meanwhile, to fully cover their daughter’s postsecondary education costs, assumed to be $20,000 a year in today’s dollars, John and Barbara will need to increase their education savings by $175 a month from now until their daughter is 18. As it is, they will only cover about 70 per cent of this cost. Finally, he suggests they both take out disability insurance.
The people: Barbara and John, both 39, and their daughter, 6.
The problem: Can Barbara continue to work part-time without jeopardizing their long-term travel plans?
The plan: Once short-term expenses are paid, review spending to get a firm handle on surplus. Consider saving half of it to RRSPs and TFSAs. Review investment fees.
The payoff: A clear road map to their financial destination.
Monthly net income: $8,445
Assets: Cash $7,160; her TFSA $5,090; his TFSA $31,440; her RRSP $154,185; his RRSP $107,440; his DC pension plan $51,220; RESP $22,960; residence $350,000. Total: $729,495.
Property tax $310; utilities $180; home insurance $70; maintenance, garden $190; transportation $485; groceries $750; child care $250; clothing $360; gifts $220; charitable $130; vacation, travel $325; other discretionary $500; dining, drinks, entertainment $365; grooming $50; pet $100; sports, hobbies $250; doctors, dentists $150; life insurance $45; cellphone $17; Internet $60. RRSPs $700; RESP $210; TFSAs $700; his pension plan contributions $300. Total: $6,717. Monthly surplus: $1,728.
Want a free financial facelift? E-mail firstname.lastname@example.org.
Some details may be changed to protect the privacy of the persons profiled.