This 30-something couple with a net worth of $390,000 has decades to save

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Far from retiring at what they think is age 60, they need to build plenty of wiggle room into their financial plan.

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A couple we’ll call Tyler and Ellie, both 33, live in British Columbia. Tyler is in construction, Ellie in the grocery business. Together, they earn $13,000 a month from their jobs before taxes and employee benefit deductions. Their net after deductions is $7,268 per month. They have a $650,000 house, $65,700 in financial assets and $360,000 in debt. Their net worth is $390,700. Looking ahead, Ellie just got promoted and will be earning $102,000 a year before taxes. They rent a basement apartment for up to $1,700 per month or $20,400 per year.

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Far from retiring at what they think is age 60, they are weighing the merits of paying down their debts and investing in RRSPs and TFSAs.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. from Kelowna, BC to work with Tyler and Ellie. The challenge and opportunity of making financial forecasts three decades before retirement is, of course, uncertainty. However, he notes, “they have created a solid foundation to build net worth.”

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Email andrew.allentuck@gmail.com for a free family finance analysis.

They have $46,000 in Ellie’s RRSP, $10,700 in her TFSA, $9,000 in cash split evenly, and a $350,000 mortgage with an interest rate of 2.01%. They have an outstanding student loan of $10,000.

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A savings strategy

Their problem is how to save in a tax-efficient way. Ellie is the main breadwinner. His monthly income, base $8,580 plus bonuses, averages $9,413.

A quick option to save tax would be to transfer the $10,700 from his TFSA to his RRSP. The investment assets don’t need to change, but she’ll get a tax refund of 28.2% — the marginal tax bracket she falls in — multiplied by $10,700. This equals $3,017. Savings can be reinvested or used to pay down debt.

We’ll assume she does and they use the RRSP as their main retirement savings vehicle, due to Ellie’s relatively high income, which will likely increase over time.

Tyler has an outstanding student loan of $10,000. He now pays six per cent, but could cut that rate to half, three per cent, with a secured home equity line of credit loan. The student loan is eligible for a tax credit that’s equivalent to a one-fifth discount on the interest it pays, but the HELOC would still be cheaper.

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The couple’s RRSPs currently total $46,000. If it rolls into the TFSA balance, $10,700, it will become $56,700. Ellie’s new annual income, $102,000, will support RRSP contributions of 18% of her basic gross amount or $18,360. If added to the RRSP and the amount grows 3% above inflation for 27 years until age 60, it will become $895,800. This amount, spent over the next 30 years until Ellie turns 90, would support an income of $44,375 in current dollars. We will split income for tax purposes.

We will assume that the couple accumulates no taxable investment. Any money over and above daily living expenses will be saved in RRSPs or used to pay off student loans and the mortgage.

Tyler and Ellie will have to wait three decades to become eligible for CPP. We will assume that Ellie qualifies for 90% of CPP benefits, currently $14,445, and therefore receives $13,000 per year at age 65. We’ll assume that Tyler qualifies for 80% CPP benefits at age 65 and therefore receives $11,556 per year.

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At age 65, everyone will be eligible for the maximum Old Age Security, currently $7,707 per year.

Adding retirement income at age 60 and assuming eligible income is split, they would have two RRSP payments totaling $22,187 each for a total income of $44,375 plus $10,200 each for rent for a apartment in their basement, totaling $64,775 before taxes. After qualifying income splitting and average tax of 12%, they would have $4,750 a month to spend. Assuming their current 22-year mortgage is paid off and they have no other debts, their current cost of living is $7,268 per month, and all RRSPs and other savings have ended, their cost of living would drop to $4,253 per month. They would have $500 a month or $6,000 a year to spare.

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Retirement

At age 65, they would have two annual RRSP payments of $22,187 each, rent of $10,200 each from their basement apartment, CPP benefits of $13,000 and $11,556 per year, and two the OAS of $7,707 each. Their total income would be $89,330. After qualifying income splitting and average tax of 14%, they would have $6,400 a month to spend. Once the RRSPs and other savings were finished and all the loans paid off, they would have $2,147 a month to spend.

This projection of a retirement that could begin in three decades is more speculative than definitive. Neither partner receives a retirement pension. One or both can die or become disabled during the 30 year period. It would help for Tyler and Ellie to shop around for $500,000 of the simplest term insurance they could find. She could cover an unpaid debt and help a survivor until they get back on their feet. At their age, term coverage could be purchased for $242 a year for Tyler and $185 for Ellie.

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A 30-year projection to the start of retirement requires some leeway. They plan to have children and Ellie plans to take over a year off to spend time with the child. This could result in a six-figure loss of income, which would seriously strain their financial plan. It would be best if Tyler, who has a lower income, stayed home with the child so Ellie could get back to work as soon as possible. Better, suggests Moran, to hire a nanny. The nanny could use their basement apartment as part of her pay. Ellie’s employment income and potential promotions would be preserved, Moran suggests.

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The unknowns

These projections have some value, although they are far off and subject to change if tax rates, CPP payments, OAS payments and many other government tax and benefit programs change. Ideally, with their house paid off and the kids grown and gone, the couple will be able to meet our income estimates before and after age 65.

There are variations in income not mentioned and unknown: costs of one or more future children, medical costs not covered by insurance, the list of possibilities is long. We’re assuming all the extra money will go to Tyler’s RRSP, kids’ RESPs, TFSAs, and the mortgage.

Retirement Stars: 3*** out of 5

Email andrew.allentuck@gmail.com for a free family finance analysis

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