This couple in their thirties with a net worth of $390,000 has decades to save

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Personal Finance Family Finance

Instead of retiring at what they think age 60 could be, they should include a lot of leeway in their financial plan

Publication date:

Jan 28, 2022 • Jan 28, 2022 • Read 5 minutes • Join the conversation The challenge and opportunity in making financial forecasts three decades before retirement is uncertainty.  But this couple has a solid foundation to build on. The challenge and opportunity in making financial forecasts three decades before retirement is uncertainty. But this couple has a solid foundation to build on. Photo by Gigi Suhanic/National Post photo illustration

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A couple we’ll call Tyler and Ellie, both 33, live in BC. Tyler is under construction, Ellie in the grocery store. Together, they earn $13,000 a month from their jobs before taxes and withholdings for benefits. Their net after deduction is $7,268 per month. They have a $650,000 home, $65,700 in financial assets, and $360,000 in debt. Their net worth is $390,700. Looking ahead, Ellie just received a promotion and will earn $102,000 a year before taxes. They rent out a basement apartment for as much as $1,700 a month or $20,400 a year.

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Rather than retiring at what they believe could be age 60, they weigh the merits of paying off debt 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 predictions three decades before retirement is, of course, uncertainty. However, he notes, “they have built a strong foundation to build wealth.”

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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 divided equally and a $350,000 mortgage with 2.01 percent interest. They have an outstanding student loan of $10,000.

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A savings strategy

Their problem is how to save tax-efficiently. Ellie is the main breadwinner. Her monthly income, basic $8,580 plus bonuses, averages $9,413.

A quick tax-saving option would be to move the $10,700 in her TFSA to her RRSP. Investing capital doesn’t have to change, but she gets a 28.2 percent tax refund — the marginal tax bracket she falls into — times $10,700. That equals $3,017. The savings can be reinvested or used to pay off debt.

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

Tyler has an outstanding student loan of $10,000. He now pays six percent, but could lower that rate to half, three percent, through a secured Home Equity Line of Credit loan. The student loan is eligible for a tax credit equivalent to a fifth discount on the interest it pays, but the HELOC would still be cheaper.

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The pair’s RRSPs are currently $46,000. If they roll in the TFSA balance, $10,700, it becomes $56,700. Ellie’s new year income, $102,000, supports RRSP contributions of 18 percent of her base gross, or $18,360. If she’s added to the RRSP and if the amount grows three percent above inflation for 27 years to her 60th, it becomes $895,800. That amount, spent over the next 30 years until Ellie’s age 90, would support an income of $44,375 in current dollars. We share the income for tax purposes.

We assume that the couple is not accumulating any taxable investments. Any money that exceeds the daily cost of living is stored in RRSPs or used to pay off student loans and the mortgage.

Tyler and Ellie will have to wait three decades to qualify for CPP. We assume that Ellie is eligible for 90 percent of CPP benefits, currently $14,445, and thus receives $13,000 per year at 65. We assume that Tyler is eligible for 80 percent of CPP at age 65 and thus receives $11,556 per year.

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At age 65, each is eligible for maximum age protection, currently $7,707 per year.

Adding together retirement income at age 60 and taking qualifying income splits, they would have two RRSP payouts totaling $22,187 each for a total income of $44,375 plus $10,200 per rent. of an apartment in their basement, totaling $64,775 before tax. After splitting qualifying income and 12 percent average tax, they would have $4,750 per month to spend. Assuming their current 22-year mortgage has been paid off and they have no other debts, their current cost of living, $7,268 per month, and all RRSP 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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pension

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

This projection of a retirement that could begin in three decades’ time is more speculative than definitive. Neither partner has a job pension. One or both may die or become disabled in the 30-year period. It would be helpful for Tyler and Ellie to shop for $500,000 of the simplest term life insurance they can find. It can cover outstanding debts and help a survivor until he or she is back on their feet. At their age, Tyler could have covered $242 a year and Ellie $185.

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A thirty-year projection to the beginning of retirement needs leeway. They plan to have children and Ellie considers taking more than a year off work to spend time with the child. That could result in a six-figure loss of income — something that would seriously strain their financial plan. It would be better for Tyler, who is on a lower income, to stay home with the child so Ellie can go back to work if possible. Better, Moran suggests, hire a nanny. The nanny could use their basement apartment as part of her compensation. Ellie’s income from work and potential promotions would be preserved, Moran suggests.

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the unknowns

These forecasts have some value, even if they are distant and subject to change as tax rates, CPP payments, OAS payments, and many other government tax and benefit programs change. At best, once their house has been paid off and the kids have grown up and gone, the couple will be able to meet our pre- and post-65 income estimates.

There are unmentioned and unknown variations in income: costs of a child or 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, children’s 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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