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A couple we’ll call Martin, 52, and his wife, Maria, 55, live in Manitoba. Martin works as a technician for the federal government, Maria as an administrative assistant for a private company. They bring home $7,135 per month. They have five children: four live on their own and one is at home while paying off some student debt. They have combined RRSP savings of $51,206 and TFSA savings of $33,506.
Maria has a $30,000 payment due from her employer at retirement. They estimate their 2018 pickup truck is worth $46,000. Finally, their home has an estimated value of $350,000. Their assets add up to $510,712. They have no debts other than a $15,000 balance on their vehicle loan. That leaves net worth at $495,712. The challenge is to design a plan that balances expected cash flows with spending and to have it work dependably for decades.
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Family Finance asked Eliott Einarson, a financial planner w ho heads the Winnipeg office of Ottawa-based portfolio management firm Exponent Investment Management Inc., to work with Martin and Maria. On their side in planning retirement is that they have no debt.
Martin has worked for his present employer for seven years. If he works to 65, adding 13 years, his total tenure will be 20 years and his pension approximately $31,000 per year. Maria has no company pension plan.
The present plan — Maria expects to retire in five years at 60. Martin would work another 13 years to age 65. Their retirement cash goal is $5,000 after tax. That is attainable, but they’ll need to manage savings closely.
If Maria retires at age 60, she would be eligible for 80 per cent of the present $15,048 maximum age-65 CPP pension amount. Early application would cost her 36 per cent of that, leaving her approximately $7,700 of annual taxable income.
At 65, she could add Old Age Security at a present rate of $8,004 per year.
Her RRSP, valued at $31,200 and with $3,900 of annual additions over the next five years will allow the account to grow to a new total of $57,496 at her age 60, assuming an average annual return of three per cent after inflation. The RRSP would then be able to sustain a maximum income of $2,688 per year over 33 years to her age 93. The sum of CPP, RRSP and OAS income totals $18,392 per year. After eight per cent average tax, she would have $16,920 per year or $1,410 per month.
Maria’s TFSA, currently valued at $23,506, would with annual contributions of $4,800 grow to a new total of $53,491 in five years with the same assumptions. She could put her $30,000 retirement payment into the TFSA, boosting the balance to $83,491. The TFSA would then add $3,900 per year or $325 per month of tax-free annual income for the following 33 years to her age 93. Her total income after tax would then be $20,820 per year.
Martin will have CPP income at age 65, estimated to be 90 per cent of the current maximum or $13,543 per year. He will be eligible for his full OAS adding another $8,004 of annual taxable income. That’s a total of $21,547.
Martin will have his work pension of $2,583 per month or $31,000 per year at age 65. His RRSP valued at $20,000 today and with $2,604 annual contributions over the next five years and then left to grow at three per cent per year after inflation another eight years to his age 65 will become $47,418 and that amount with the same assumptions as Maria’s account can provide an annual income of $210 per month or $2,520 per year to his age 90.
Finally, Martin has a TFSA with $10,000 current balance and $2,400 annual contributions when if made for another five years and left to grow to age 65 would present a new value of $31,318. Although the TFSA could provide income, we will leave it out of the calculation as that is approximately the amount that Martin predicts he will need at retirement to replace his truck.
At Martin’s age 65, excluding TFSA payouts but adding up his pension, RRSP and government benefits, he would have total taxable income of $55,067 per year or $4,588 per month. After an average tax rate of about 20 per cent after splits and deductions this would leave him with $44,050 annual after-tax income. That’s $3,670 per month.
If we add Maria’s $1,735 after-tax monthly income to Martin’s $3,670 after tax income, combined after-tax family income will total $5,405 per month. This would be enough to cover their budget requirement of $5,000 per month.
Retirement at 60 for Maria is possible if Martin keeps working to his age 65. Assuming an age 65 retirement for Martin, they will have their home equity intact as an emergency asset later in life.
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Reverse mortgage option
A reverse mortgage could be a solution to any long-term cash crunch, Einarson suggests. With a typical loan of 55 per cent of estimated market value, they could add $192,500 to investment capital. On a straight-line basis, for we do not know when they might take this step, at three per cent after inflation, the reverse mortgage would provide $5,775 per year in 2022 dollars. Finally, any overtime pay Martin generates can go to his RRSP, adding potential income and reducing tax payable.
“This is a retirement plan built on steady savings, modest growth and well-controlled spending,” Einarson suggests. “Our calculations show that Martin and Maria can achieve and sustain their $5,000 monthly goal by keeping pre-retirement spending within budget. “
3 Retirement Stars *** out of 5
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