In Calgary, a couple we'll call Karl, a 40-year-old airline pilot, and his wife, Heidi, 42, a civil servant, live modestly and save furiously. Though they have a $7,600 monthly income after tax, they choose to live with their two children, ages 8 and 11, in a housing co-operative for rent of $800 a month. Renters own shares in the co-op but, on leaving, can only take out the capital, equal to a rent deposit, that they made when buying in.
"We decided early on that we would not incur debt," Karl explains. "That is why we live in a housing co-op. The rent is so low that we could live here even if we lost our permanent jobs. It also permits us to save for our future, but can we retire at age 60?"
What our expert says
Facelift asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Karl and Heidi.
"Karl's job is vulnerable to the airline industry's problems," the planner says. "Heidi has a secure job, but her salary is a third of Karl's. Apprehensive of loss of income, they have saved for a rainy day and retirement, but made two choices with serious future consequences. One, they not saved much for their children's postsecondary education. Two, they have given up capturing capital gains on a home of their own."
Karl and Heidi's first goal should be to increase registered education savings plan (RESP) balances, which currently total $4,514 or $2,257 a child. They should take $417 a month ($5,000 a year) from the sums they already contribute to taxable investments to receive the Canada Education Savings Grant maximum payment of the lesser of 20 per cent of RESP contributions or $500 per child per year. Then when their daughter, 11, and son, 8, begin university, the elder child would have $23,363, and the younger child, having three more years of contributions, would have $34,337, provided the plan achieves a 3-per-cent real annual rate of return. If sums are averaged, each child would have about $30,000 for university or $7,500 a year for tuition and some expenses, Mr. Moran estimates.
Karl can elect to take less salary now and more in future through stock options that are part of his pay. If airline shares appreciate, then options would add to retirement income. He has chosen to take a relatively light load of options in his company's stock. Options increase Karl's dependence on the health of his employer's business. For more security he should diversify his assets, Mr. Moran suggests. To do that he can sell company stock after he exercises options and use the cash to buy other assets, the planner adds.
Karl has two decades to go before he reaches age 60. At that time, he will have earned an estimated 80 per cent of CPP credits that max out at $10,905 a year, or $8,724. Heidi will have 81 per cent of credits, or $8,833 a year. Each will qualify for Old Age Security of $6,204 a year.
Currently, the couple has $113,710 in their registered retirement savings plans. If they continue to add $1,750 a month and if the accounts grow at 3 per cent a year after accounting for inflation, they will have $786,600 when Karl is 60, the planner says.
Their taxable investments total $32,500. They have been putting $1,750 a month into this account, but should reduce the sum to $500 a month. The difference, $1,250 a month, should fund the family RESP and their Tax-Free Savings Accounts, Mr. Moran suggests.
If they continue saving $500 a month in the taxable account and manage to generate just a 2-per-cent annual return after inflation and taxes, they will have $197,100 in 20 years, he says.
Their TFSAs, which have a present balance of $9,500, will grow to $293,900 in 20 years, assuming that they each add $5,000 a year and that balances grow at a real rate of 3 per cent a year. TFSAs will shelter part of their non-registered savings.
By the time Karl reaches age 60 they will have $786,600 in RRSPs, $197,100 in non-registered investments and $293,900 in their TFSAs for a total of $1,277,600. If this money is spent evenly over the 28 years from Karl's age 60 to Heidi's assumed death at age 90, it will provide annual income of $66,073 a year in 2009 dollars, Mr. Moran estimates.
Heidi's defined benefit employment pension will add a further $12,400 for a total of $78,473. Once they each turn 65 they'll begin to draw Old Age Security (OAS) of $6,204 each per year and Canada Pension Plan benefits that total $17,557. At this point, total family income will be $108,438 a year. They will be well off, though the OAS clawback that currently begins at $66,335 a year could be an issue if they do not split pensions, he says.
Inflation is the unknown in this plan, Mr. Moran warns. "If you own a house, you gain as its price rises. You lose when inflation drives up rents. This couple can afford a home and should consider a purchase using their RRSPs for a down payment and their high savings rate for paying off a mortgage."
Couple 40 and 42 planning retirement
Inadequate savings for kids' university education; no home of their own
Increase RESP avings; buy a home as an inflation cushion
More secure retirement
Monthly after-tax income: $7,600
Assets: RRSPs $113,710; Non-reg $32,500; TFSA $9,500; RESP $4,514; Personal prop. $30,000; Cash $4,000; Total: $194,224
Monthly disbursements: Co-op rent $792; Food $960; Restaurant $130; Entertainment $160; Clothing $450; RRSP (Karl) $1,750; Non-reg investments $1,750; Car fuel, repairs $205;
Car & home ins. $100; Life insurance $45; Travel $1,000; Misc. $258;
Liabilities: Credit card balance $1,500, paid at end of month
© The Globe and Mail, used by Permission