Reviews and recommendations are unbiased and products are independently selected. Postmedia may earn an affiliate commission from purchases made through links on this page.
By Julie Cazzin with Brenda Hiscock
Q: I’m 40 years old and want to retire at age 65 with an after-tax net income of $70,000 annually. I currently earn $120,000 as an engineer. I recently did a quick calculation, and assuming I live until age 100, I will need to save close to $2 million to afford this retirement plan. That’s a lot of money for me to save. Right now, I save $25,000 a year for retirement, and have about $350,000 between my registered retirement savings plan (RRSP) and tax-free savings account (TFSA), invested in a mix of exchange-traded funds (ETFs), government bonds and employer-sponsored funds in a group RRSP.
My investment mix is 60/40 equity/fixed income and my annual investment returns have been good, averaging a net six per cent annually for the past few years. I also own a $750,000 condo with my partner, and we have a four-year old for whom we save in a registered education savings plan (RESP). Our mortgage will be paid off in 10 years. My partner and I are not married, and we don’t plan to marry, so I prefer to plan retirement savings as if I were single. Am I on track to retire at 65? — Ava in British Columbia
FP Answers: Ava, you have put some serious thought into retirement and have a long time horizon ahead of you to get it right. Your goal of an annual $70,000 after-tax income suggests spending of $70,000 per year. If this is $70,000 in today’s dollars, that could be nearly $115,000 per year by the time you are 65, assuming two-per-cent annual inflation. Inflation is currently a hot topic, but we’ll project inflation in the long run at about the Bank of Canada’s two-per-cent inflation target.
If we assume you are entitled to the maximum Canada Pension Plan (CPP) and Old Age Security (OAS) benefits, that will provide about $38,000 of pre-tax income for you at age 65. CPP and OAS are indexed to inflation, which will help keep up with your increasing expenses throughout retirement. You could also delay these to age 70 to get a higher benefit, which could work well in your situation. It will be important to review the timing closer to retirement.
If you continue to contribute a total of $25,000 per year to your RRSP and TFSA accounts, you could have far more than $2 million saved by age 65, assuming these contributions keep pace with inflation. But the six-per-cent annual return you have historically earned on your balanced investment portfolio may be tougher to achieve going forward. Assuming a more conservative 4.5-per-cent net return on a relatively low-cost portfolio of ETFs and a group retirement plan, $25,000 of indexed contributions could result in nearly $2.5 million saved by the time you turn 65.
Between minimum registered retirement income fund (RRIF) withdrawals starting at age 65 — the age I’ve used for you to start your RRIF withdrawals at the scheduled rate of four per cent of your RRIF value annually at that time and supplementing this income with tax-free TFSA withdrawals — the numbers show that your investments could last well past age 100. Remember, you don’t have to wait until age 71 to withdraw from a RRIF. Indeed, earlier withdrawals coupled with starting CPP and OAS at age 71 often makes sense because most of the time it provides a higher estate value if you live past age 83.
But there are other things to consider. Your mortgage will be paid off in 10 years. This will result in extra cash flow that could go towards retirement savings as well. Your RESP contributions will be done in 13 years. You could have extra cash flow then as well.
Still, you also need to consider if your expenses may increase or decrease as your four-year-old gets older. Maybe those expenses will decrease if you have been paying for daycare, providing even more opportunity to increase your savings. Future gifting to your child may be something you want to consider in your planning, since more and more parents are helping their kids get started with down payments on a first home, buying a car and wedding costs.
FP Answers: Does it ever make sense to take CPP at age 65?
FP Answers: Should we take money from our RRSPs, TFSAs or both to make a down payment on our first home?
FP Answers: What’s the most tax efficient way to draw down my $5-million investment portfolio?
Do you plan to downsize in retirement? Will you receive an inheritance? If so, then you may be saving more than you need to. It could be helpful for you to examine your financial roadmap and re-evaluate your retirement saving target.
If you are saving too aggressively and could otherwise have more room in your budget for vacations, charitable donations or activities for your four-year-old, a retirement planning exercise done with a fee-only financial planner could help you identify those options.
I respect that you and your partner do things separately, but there could be opportunities to focus your tax-deductible retirement savings in the higher-income spouse’s name, or to take advantage of other good options such as company savings plan matches. Regardless, it sounds like you are on a good trajectory.
As the parent of a young child and a family breadwinner, you should also review your life and disability insurance. Your biggest asset is your ability to earn income, so it’s important to ensure adequate coverage is in place to secure your family’s financial security in the event of an unexpected illness or death.
Running projections with a planner can open people’s eyes to what is possible in their lives. In a situation such as yours, Ava, where you exceed your retirement goals on your current trajectory, you may consider other options such as retiring earlier, spending more, gifting and travelling. The possibilities are endless. You are well on your way to a comfortable retirement.
Brenda Hiscock is a fee-only, advice-only certified financial planner with Objective Financial Partners Inc. in Toronto.
For more stories like this one, sign up for the FP Investor newsletter.