At age 52, Barry and Beth are enjoying their prime earning years, bringing in more than $450,000 a year together. He works in education, she is an executive at an investment firm. They have two children at the university.
Beth and Barry have a $2 million home in Toronto with a mortgage of about $150,000 and a $115,000 line of credit.
In the near term, her goals are to keep her children educated, build their retirement savings and embark on a “meaningful journey,” Beth wrote in an email. Barry has a defined benefit plan that is partially adjusted for inflation, while Beth has a defined contribution plan. She may also receive significant bonuses depending on her firm’s performance, but she has requested that these not be included in the financial forecast as they are not guaranteed.
In the longer term, they hope to help their children with down payments on their first home. Her goal is to retire from work at age 62 on a budget of $12,000 a month or $144,000 a year.
“Are we saving enough for retirement?” Beth asks. “If so, are we able to retire before age 65?”
We asked Matthew Sears, a board-certified financial planner at TE Wealth in Toronto, to look at Beth and Barry’s situation. Mr. Sears is also a Chartered Financial Analyst (CFA).
What the expert says
Until recently, Beth and Barry had tucked as much as they could into their mortgages and lines of credit, Mr. Sears says. However, given the recent rise in interest rates, they have decided to redirect cash flow from the mortgages to savings to fully pay off the loans when they mature in late 2024 and early 2025. The balances at maturity will be approximately $57,000 and $60,000.
Your line of credit is scheduled to be paid off over the next two years. “I wouldn’t advise them to do anything risky with these funds if they want them to be available in 2024 and 2025.” Some sort of guaranteed investment would be appropriate.
Mr. Sears suggests that they focus on paying off the line of credit first before investing or reallocating funds to savings. You pay 4.2 percent on the line of credit. Beth is in a marginal tax bracket of 53.53 percent and Barry is in a 43.41 percent. That means they would have to generate pre-tax returns of 9 percent for Beth and 7.4 percent for Barry to be any further than repaying the 4.2 percent line of credit, he says. That assumes they would earn interest or foreign dividend income.
If they earned Canadian dividend income, which is taxed more favorably, Beth would have to earn 6.19 percent and Barry 5.62 percent, the planner says.
Interest rates could also rise, which would further increase the cost of the line of credit.
“By diverting the monthly surplus, the LOC would have paid for itself in 12 months,” says the planner. To cash it out sooner, they could sell the $32,000 in stock they own in their taxable account, which holds a large capital loss. “They could recognize the loss and forward the proceeds of the sale to the LOC.”
Alternatively, this could be used to maximize their TFSAs, but they would need to be aware of the superficial loss rule, he says.
“Since they have a loss, they shouldn’t just transfer the tangible assets to a TFSA. They should sell the money and donate it to the TFSA,” says Mr. Sears. “Once the TFSA deposit is made, they shouldn’t repurchase the shares within 30 days, otherwise the loss would be considered a shallow loss.” It wouldn’t be a problem if they put the money elsewhere.
After the mortgages and line of credit are paid off, Barry and Beth could divert the amount they paid ($1,300 for the mortgages and $5,000 for the LOC) plus their monthly surplus of about $4,600 to retirement savings beginning in March 2025. said Mr., says Sears. “The goal of retiring at 62 has only been 95 percent achieved,” says the planner. To fully meet their goal, they would need to save an additional $3,700 per month from 2025 to 2032.
To summarize the savings plan, Barry and Beth are directing $9,600 into the line of credit through July 2023. As of August 2024, they are funneling the $9,600 into either risk-free investments like GICs or into the mortgages. If they set the funds aside in GICs, they would then use the money to pay off the mortgages in full in 2024 and 2025. Then, beginning in 2025, they would receive both the $1,300 a month that had gone towards the mortgages and the $9,600 that had gone towards the retirement line of credit instead.
“Another way of looking at it is that they need about $2,947,000 in investable assets to sustain their retirement spending goal,” Sears says. In the forecast above, her maximum sustainable spend is $11,500 per month, which is very close to her monthly spending goal for retirement.
The forecast assumes that Beth and Barry will retire in January 2033, begin receiving Canada’s pension fund and pension plan at age 65, and live to be 95. Barry will receive a monthly pension of $5,090 from age 62. Your investments average 5.45 percent and inflation is 2.2 percent.
Beth contributes 4 percent of her salary to her 100 percent employer match defined contribution plan.
A lower yield would change things up a bit. “If we lowered their expected rate of return in retirement by one percentage point, they would only meet 85 percent of their spending target,” says Sears. “Maximum sustainable expenses would be $10,000 per month. Instead of $2,947,000 to meet their $12,000 a month spending goal, they would need $3.25 million in fixed assets.”
One thing that isn’t considered is Beth’s annual voluntary bonuses, which Mr. Sears notes they prefer not to rely on in their planning.
“Having the bonuses paid out and added to savings each year would make up the shortfall required to meet the retirement spending target.”
Once debt is paid off and savings eliminated, Barry and Beth’s current lifestyle expenses will be about $8,275 per month, which is about 70 percent of their retirement spending goal, Mr. Sears notes.
The human: Barry and Beth, both 52, and their children, 19 and 21
The problem: Are you saving enough to retire at age 62 on $12,000 a month?
The plan: Pay off the line of credit, then the mortgages, and divert the cash flow plus any excess to your long-term retirement plan. If they’re a bit tight, saving on bonuses that Beth might get would sideline them.
The Payout: A clear path to the desired retirement goals.
Monthly Net Income: $24,715
Financial assets: shares $32,000; residency $2 million; her TFSA $53,000; his TFSA $43,000; her RRSP $457,000; his RRSP $112,000; her suspended retirement account from previous employer $202,000; her DC retirement plan $134,000; estimated present value of his DB retirement plan $375,000; registered education savings plan $70,000. Total: $3.48 million
Monthly expenses: mortgage $1,300; property tax $675; water, sewage, garbage $150; home insurance $175; electricity, heat $350; Security $35; Maintenance $300; garden $100; Transportation $875; groceries $1,000; Tuition $1,500; clothing $500; Credit Line $5,000; Gifts, Charities $850; vacation, trip $250; Food, drinks, entertainment $1,100; Personal Care $100; Pets $200; Sports, Hobbies $200; Doctors, Dentists, Pharmacy $125; Medical, dental insurance $505; life insurance $785; communications $500; MSRP $500; TFSA’s $1,000; Retirement Plan Contributions $1,980. Total: $20,055. Surplus $4,660
Liabilities: Mortgage $72,995 at 1.62 percent; mortgage $78,185 at 1.67 percent; Line of credit $115,000 at 4.2 percent. Total: $266,180
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