Luke and Lori ‘run a pretty tight ship when it comes to spending,’ says Luke, managing to pay off their mortgage and save for their children’s education.Jennifer Roberts/The Globe and Mail
Luke is 56 years old and earns $107,000 a year working in education. He is planning to retire imminently and start collecting his $62,000-a-year defined benefit pension.
His wife Lori, 55, works part-time, earning about $10,000 a year in a job she enjoys. They have a mortgage-free house in the Greater Toronto Area and three children, two who are in university and one at home in high school.
Their family registered education savings plan has been well-funded over the years because Luke and his wife made regular contributions and took full advantage of the Canada Education Savings Grant, he writes in an e-mail.
In addition to Luke’s pension, the family has substantial savings and investments.
“We run a pretty tight ship when it comes to spending,” Luke writes. “We’ve always lived well below our means.” He adds that they’ve had to be careful about money since his wife stopped working to take care of the kids.
Can Diego, 71, and Monique, 68, spend $130,000 a year in retirement and still give to charity?
On Luke’s income, they managed to pay off the mortgage, put away money for the kids’ education, and max out their tax-free savings accounts and registered retirement savings plans, Luke writes.
“We sacrificed things like vacations abroad and instead spent time together as a family camping and visiting friends in other towns, drove older cars until they died, cooked meals at home, shopped at thrift stores and bought items used, whenever possible,” Luke adds.
“Our goal in retirement is also modest,” he writes. “We would like to travel a little, support our children as they navigate the beginning of their careers, and perhaps even help them financially, if need be.”
They would like advice on how to minimize taxes, as well as when to convert their RRSPs to registered retirement income funds (RRIFs). Their retirement spending goal is $75,000 a year, after tax.
We asked Justine Kelly, a certified financial planner at Modern Cents in Toronto, an advice-only financial-planning firm, to look at Luke and Lori’s situation.
What the expert says
Luke and Lori’s retirement plan is “more than feasible,” Ms. Kelly says. “With conservative return assumptions of 4.48 per cent and inflation at 2.1 per cent, their retirement plan is fully funded with a projected 333 per cent funding surplus,” the planner says. Their estate is expected to grow to more than $8.9-million by the time they are 95.
Their goal of $75,000 a year, after tax, is well-supported by their investment portfolio, Luke’s pension and government benefits. “Even if inflation exceeds expectations or markets underperform, their plan remains solid thanks to their low spending and substantial assets.”
Luke and Lori can start withdrawing from their RRSPs strategically before the mandated age of 71, when they must convert those savings plans to RRIFs. Beginning the withdrawals in 2027 (when Luke is 58 and Lori is 57) will help reduce future taxes and smooth out income.
Lori is projected to withdraw $22,600 a year from her RRSP between 2027 and 2040, while Luke should withdraw $6,100 a year between 2027 and 2039, the planner says.
Both are advised to delay Canada Pension Plan and Old Age Security Pension benefits until age 70 to maximize guaranteed income, Ms. Kelly says. Based on their long life expectancy and financial capacity, deferring these benefits will increase their total after-tax retirement income by more than $2.4-million.
How can Seth, 53, and Maeve, 54, reach their goal of spending $120,000 a year in retirement?
With a family RESP of $235,000, there is more than enough to fund tuition for all three children, the planner says. Lori and Luke can also consider using their tax-free savings accounts (TFSAs) or non-registered investments to help with future home down payments for the children. “As their estate continues to grow, they can also think about tax-efficient gifting strategies later in retirement.”
They should designate each other as beneficiaries on RRSPs and TFSAs to avoid probate, Ms. Kelly says. Their wills and powers of attorney are more than 16 years old and should be updated, she recommends. “Estate leakage due to taxes and probate fees is projected to be only $250,785 – well within their means.”
“Luke and Lori are prime examples of how modest living, early planning and disciplined saving can lead to financial freedom,” Ms. Kelly says, adding that the couple has earned their peace of mind.
“The numbers show that they can enjoy retirement without sacrificing their values or lifestyle – and continue giving back to the family they’ve built together.”
Client situation
The people: Luke, 56, Lori, 55, and their three children, 17, 21 and 23.
The problem: Can they afford for Luke to retire soon? How can they withdraw from their savings in a tax-efficient manner?
The plan: Go ahead and retire. Make strategic withdrawals from RRSPs/RRIFs early on to smooth out taxes over the years. Defer government benefits to age 70.
The payoff: Peace of mind.
Monthly net income: $7,300.
Assets: Bank account $21,000; non-registered accounts $147,000; his RRSP $75,000; his TFSA $212,000; her RRSP $313,000; her TFSA $199,000; RESP $235,000; residence $1,200,000. Total: $2.4-million.
Estimated present value of his defined benefit pension: $1.4-million. This is what someone with no pension would have to save to generate the same income.
Monthly outlays: Property tax $435; water, sewer, garbage $70; home insurance $50; electricity $90; heating $75; maintenance, garden $260; transportation $660; groceries $1,070; clothing $90; gifts, charity $265; vacation, travel $85; other discretionary $585; personal care $165; dining, entertainment $300; golf $85; sports, hobbies $100; subscriptions $35; health care $30; disability, critical illness insurance $140; phones, TV, internet $155; RRSPs $250; TFSAs $1,165; his pension plan contributions $1,000. Total: $7,160.
Liabilities: None.
Want a free financial facelift? E-mail finfacelift@gmail.com.
Some details may be changed to protect the privacy of the persons profiled.