After doing volunteer work overseas for the last five years, the couple has some catching up to do with their finances and to prepare for retirement.Christopher Katsarov/The Globe and Mail
Spending five years overseas doing volunteer work “getting by on a shoestring” has set Kai and Sandra back financially. Now they wonder if they can catch up with their savings, help their two children financially, pay off the two mortgages on their principal residence and retire in comfort.
Kai is 54, Sandra 56. He works two jobs in the sports field earning $125,000 a year while she works in education earning $110,000 a year. Their children, both in their early 20s, are living at home.
“We’re back in Canada, our retirement savings are well behind, we have one daughter in university and one entering the work force – along with a mortgage we’re still managing,” Kai writes in an e-mail.
“We need to save, pay down our mortgage and get things back on track so we can retire, or semi-retire, soon,” Kai writes. They’d like to spend more time at “our humble cottage in northern Ontario,” which needs winterizing. They’d like to spend winters in the Caribbean.
Sandra asks if she should buy back the years of pension she lost while she was on leave. They ask as well if they can afford to “hand off the house” – and their mortgage debt – to their children at some point.
Their retirement spending goal is $96,000 a year after tax.
We asked Jeff Ryall, an investment counsellor with Cardinal Capital Management in Winnipeg, to look at Kai and Sandra’s situation. Mr. Ryall holds both the certified financial planner and the chartered financial analyst designations.
What the Expert Says
Now that they are back at work, Kai and Sandra ask whether they should use their surplus cash flow to save for retirement or pay off their mortgages, Mr. Ryall says. They also ask how to fund Sandra’s pension buyback and whether they can help their children by giving them the $1.2-million family home.
The first thing to look at is the couple’s retirement income, Mr. Ryall says. Time spent abroad and Sandra’s plan to retire in two years will reduce their Canada Pension Plan benefits. Sandra’s pension, which has a bridge benefit, will pay $51,000 a year until the age of 65, if she buys back the lost years. After that, it drops to $45,000 a year. It has a limited guarantee of inflation-protection and a 60-per-cent survivor benefit.
In preparing his forecast, Mr. Ryall assumes Sandra retires in two years at the age of 58 and Kai reduces his workload in four years, at 58. Kai lives to be 95 and Sandra 97. He also assumes that the inflation rate averages 2.1 per cent and the rate of return on their investments averages 4.5 per cent, in line with FP Canada guidelines. Their asset allocation is 70-per-cent equities and 30-per-cent fixed income. They begin getting Canada Pension Plan and Old Age Security benefits at the age of 65.
Can they give their house to their children and still meet their retirement lifestyle goals? The answer is no, not unless they are willing to work a few more years. A better alternative would be to sell the house, keep part of the proceeds for themselves and give their children money for a down payment.
“Kai and Sandra can achieve their planned retirement lifestyle goal but will need to access some of the equity built up in their home,” Mr. Ryall says.
“The single most impactful decision they face is deciding on what level of support they wish to provide to their young adult children to help them with a first home,” he says. “Currently, the only way they could afford to do this is by selling the house and using the equity in their home.”
Before finalizing their retirement plans, they need to specify the timing, amount, and how helping the children financially could affect their monthly lifestyle costs, Mr. Ryall says. Suppose they winterize their cottage, live there nine months of the year and spend winters down south. Suppose, too, that their living costs stay about the same. In a decade or so they could sell the house, pay off the mortgages, take enough of the proceeds to supplement their savings and still be able to gift up to $500,000, or $250,000 to each child, the planner says.
Alternatively, they may decide to work longer or hold off reducing their workloads.
“All of the factors identified above will have an impact on how much assets they need to retire with, including a cushion to allow for flexibility if their goals change in the future,” Mr. Ryall says.
Buying back Sandra’s pensionable service years will cost roughly $50,000. She would complete a direct transfer form T2033; the investments would be liquidated and the cash balance transferred to her pension-plan manager. Doing so will increase her benefit by $3,900 annually. Sandra has insufficient contribution room or cash flow to immediately buy back her entire past service years. The planner recommends transferring all her RRSP money ($32,000) to her pension provider, plus a cash contribution of $18,000, for a total of $50,000. Her cash contribution of $18,000 will be considered an RRSP contribution and will generate estimated tax savings of $5,968.
With their surplus cash flow, Kai should make RRSP contributions to the extent possible, Mr. Ryall says.
With an available RRSP contribution limit of $135,000, there is no concern of him overcontributing. At his current annual income of $125,000, this will generate tax savings of $13,300, the planner says. Assuming he can do this for at least two years, this could generate enough savings to fund the expense of winterizing their cottage.
A large portion of their retirement income after turning 65 will come from government benefits and Sandra’s pension. Pensions and government benefits range between 85 to 90 per cent of their retirement income, the planner says.
The bulk of their current investment savings will be used to fund their retirement lifestyle until government benefits kick in at the age of 65, Mr. Ryall says. This would change if they maintained part-time jobs, slowly reducing their workload between the ages of 58 to 65. That would reduce their need to draw down assets.
If the couple wished to maintain their home and gift it outright to their children they would both need to work six more years, the planner says.
“A working arrangement that would allow them to continue contributing to Kai’s RRSP ($36,000 a year for six years) and reinvesting the tax savings from RRSP contributions in a TFSA ($13,300 a year for six years),” would be required, Mr. Ryall says. This would remove the need to tap the equity built up in their home to help fund retirement.
Upon retirement in six years, there would still be an overall outstanding mortgage balance of about $400,000. “If the children could help with the mortgage sooner, it may allow the parents to increase their retirement lifestyle,” the planner says.
Working an additional six years would also increase their estimated CPP benefits. Sandra’s work pension could increase by as much as $1,000 a year of additional work, assuming her income continues to rise with inflation.
“However, I think it would be tough for their two children to eventually have their own families under the same roof. So selling the home and gifting funds to each child is probably the more prudent option,” Mr. Ryall says.
Client Situation
The People: Kai, 54, Sandra, 56, and their two children, 21 and 23.
The Problem: Can they save enough for retirement, pay off their two mortgages, winterize their cottage, help their children with a first home, and retire with $96,000 a year after tax?
The Plan: Depending on how – and how much – they want to help their children, they may have to work a few more years. Alternatively, they could sell the house, keep some of the proceeds for themselves and gift their children $250,000 each.
The Payoff: Putting some solid numbers to their aspirations.
Monthly after-tax income: $13,000.
Assets: Cash $42,000; his locked in retirement account $38,000; Kai’s tax-free savings account $74,500; Kai’s RRSP $55,000; Sandra’s RRSP $32,000; registered education savings plan $9,000; half ownership in cottage $125,000; residence $1,200,000. Total: $1.58-million.
Estimated present value of Sandra’s DB pension is $930,000.
Monthly outlays: Mortgage payments $2,595; property tax $425; water, sewer, garbage $75; home insurance $150; electricity $100; heating $100; transportation $750; groceries $750; clothing $450; gifts, charity $400; vacation, travel $1,000; dining, drinks, entertainment $950; personal care $250; sports, hobbies $200; subscriptions $150; Uber $125; health care $100; permanent insurance $400; cellphones $300; TV, internet $280; RRSP $150. Total: $9,700.
Liabilities: Mortgage $321,000 at 5.22 per cent; mortgage $166,000 at 2.1 per cent. Total: $487,000.
