Einar, 48, earns $170,000 a year in a technical field, while Jamila, also 48, earns $52,000 in health care.Todd Korol/The Globe and Mail
As 48 year olds, Einar and Jamila have a double load when it comes to future planning. First, they must save enough for their retirement and second, provide for the lifelong care of their disabled son, who is 9.
Einar earns $170,000 a year in a technical field, while Jamila earns $52,000 in health care. Jamila has a defined benefit pension that will pay about $28,000 a year, indexed to inflation, at age 65. Einar has a defined contribution pension plan at work of $360,000, some of which is in a group RRSP and some in a traditional defined contribution pension plan.
They have a home in Alberta valued at $400,000 with an $80,000 mortgage. Short term, their goals are to pay off the mortgage and do some renovations on their house. Long term, they want to ensure their child is “well taken care of when we pass away or when we are unable to look after him properly,” Jamila writes in an e-mail.
Einar plans to retire from work at 60 and Jamila at 65. Their retirement spending goal is $80,000 a year after tax, indexed to inflation.
We asked Matthew Ardrey, a portfolio manager and senior financial planner at TriDelta Private Wealth in Toronto, to look at Einar and Jamila’s situation.
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What the expert says
Einar and Jamila have built up a significant amount of assets for their future, Mr. Ardrey says. In addition to the savings they have for their child, they have about $1.75-million of assets. They continue to make substantial contributions as well.
Einar has a personal RRSP, plus a defined contribution pension plan, which he and his employer pay into. He also puts savings in a non-registered plan, with a 25 per cent employer match, and maximizes his annual TFSA savings. In addition to her $28,000 a year defined benefit pension plan, Jamila saves about $3,100 per year to a group RRSP, which is matched at a rate of one-third by her employer.
Einar and Jamila save regularly to their son’s registered education savings plan (RESP) and registered disability savings plan (RDSP).
Both Jamila and Einar plan to delay their Canada Pension Plan and Old Age Security benefits until age 70.
In preparing his forecast, Mr. Ardrey uses a rate of return preretirement of 6 per cent, falling to 5 per cent postretirement. “This represents having a growth asset mix preretirement and a balanced mix postretirement,” the planner says.
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The inflation rate is assumed to average 3 per cent. Both Jamila and Einar are expected to live until age 95, he adds.
Their retirement spending goal of $80,000 a year, rising with inflation, is about 90 per cent of current spending, ignoring savings and debt repayment.
“Based on these assumptions, Einar and Jamila will meet their goal with ease,” Mr. Ardrey says.
“To truly understand the risk in this plan, we need to move beyond the straight-line projection because investments rarely ever move in a straight line,” the planner says. To ensure the viability of this plan, he stress tested it by using a Monte Carlo simulation, which introduces randomness to a number of factors, including returns, to assess the success of a retirement plan.
“In this plan, we have run 1,000 iterations with the financial planning software to get the results,” Mr. Ardrey says. “We look at the 75 per cent and 50 per cent levels to determine where risk due to return-rate variance may affect the success of the plan,” he says. “In their volatility stress test, the results are positive with an 100 per cent success rate.”
Regarding their child, they wanted to ensure that he would be taken care of after they die. They asked Mr. Ardrey to use a life expectancy of 70 to 80 years to be conservative with care costs estimated at $6,000 to $10,000 a month.
The planner used the age of 80 with costs of $10,000 per month, or $120,000 a year, and assumed these would have to be covered for 30 years from their son’s age of 50. At that point, the couple would be 89 years old.
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This plan accounts for $120,000 of annual expenses in today’s dollars, which would be valued at about $291,300 in 2067, Mr. Ardrey says. “To fund these expenses with a portfolio of assets earning 5 per cent per year, around $7-million would be needed,” he estimates. Jamila and Einar will have an expected net worth of $14.8-million at age 89, so they will have sufficient assets to cover the expected future needs of their child.
Einar and Jamila also asked about the RESP. It can be transferred into a RDSP if a child is over 21, the account was open for more than 10 years and their condition will make it unlikely that they attend school. “Only the investment earnings may be transferred,” he notes. The contributions can be withdrawn tax free, and will count toward the $200,000 RDSP lifetime contribution limit, but would not attract government grants.
As a final note in terms of investment tax efficiency, Jamila should be contributing the maximum to her TFSA and using up her unused TFSA room, Mr. Ardrey says. Also, all of the non-registered investments are in Einar’s name. He is the higher income earner, so taxes on investment income are higher in his name than they would be in Jamila’s.
“Equalizing non-registered assets between the spouses will be beneficial for tax efficiency in retirement,” the planner says. “Einar and Jamila have set themselves up well for both their retirement and legacy planning goals,” he says. “Now they need to remain on track to continue toward the future they have been planning for themselves.”
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Client situation
(Income, expenses, assets and liabilities are provided by the applicants.)
The people: Einar and Jamila, both 48, and their son, 9.
The problem: Are they saving enough for their retirement and to provide for their disabled child?
The plan: While they can achieve their goals, a few tweaks would make their plans more tax-effective.
The payoff: Peace of mind.
Monthly after-tax income: $10,945.
Assets: His non-registered stock portfolio $600,000; registered disability savings plan $40,000; his locked-in retirement account $200,000; his TFSA $170,000; her TFSA $20,400; his RRSP $300,000; her RRSP $76,000; his defined contribution pension plan $360,000; her group plan at work $28,000; registered education savings plan $50,000; residence $400,000. Total: $2.2-million.
Estimated present value of her DB pension using 5-per-cent discount rate: $452,000. This is what someone with no pension would have to save to generate the same retirement income.
Monthly outlays: Mortgage $1,705; condo fee $350; property tax $265; water, sewer, garbage $50; home insurance $40; electricity $200; heating $50; maintenance $50; vehicle insurance $275; fuel $200; other transportation $220; groceries $1,200; child care $350; clothing $50; charity $500; vacation, travel $585; club memberships $60; dining, drinks, entertainment $820; subscriptions $35; other personal $500; health, dental $350; life insurance $400; disability insurance $525; communications $290; RRSPs $755; RESP $210; TFSAs $585; pension plan contributions $320. Total: $10,940.
Liabilities: Mortgage $80,000 at 4.9 per cent.
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