Mark and Margaret want to secure financial freedom by age 55 and give each of their two children a $250,000 inheritance when they turn 30.Tijana Martin/The Globe and Mail
Mark and Margaret landed in Canada 20 years ago with a suitcase each and enough money to cover their expenses for a few months.
Today, they are well-established financially. “I believe we are on a good track towards our goal of being financially independent by the time we are in our mid-50s,” Mark writes in an e-mail. They are both 45 years old with two children, 10 and 14.
They were lucky in that their parents gave them an early inheritance to buy a condo in pricey Vancouver in 2008. A few years later, they bought a townhouse, which they later sold, and bought a detached house, where they currently live.
Mark works in human resources earning $225,000 a year, plus substantial short- and long-term incentive bonuses. Margaret is between jobs but plans to return to the work force earning somewhere from $60,000 to $80,000 a year.
Kurt and Eloise want to help their daughter buy a home. How can they free up cash?
They also share about $4,500 a year in net rental income from their condo, after mortgage and all other expenses are calculated. Both the condo and their detached main residence are mortgaged.
If they retire from full-time employment in a decade or so, they plan to continue to work part-time consulting.
“We would also like to provide the same kind of support to our children that we had from my in-laws,” Mark writes. They plan to give each child $250,000 when they turn 30.
The couple’s retirement spending goal is $120,000 a year after tax.
We asked Debbie Saleem, a certified financial planner at RGF Integrated Wealth Management in Vancouver, to look at Mark and Margaret’s situation.
What the expert says
Mark and Margaret are on track to achieve all their financial goals, Ms. Saleem says. She assumes Mark goes part time at 56 and Margaret at 55.
Mark has a defined-contribution pension plan to which both he and his employer contribute a combined $2,818 a month. As a DIY investor, he contributes $584 a month to a tax-free savings account and $417 to the children’s registered education savings plan.
They plan to pay down the $1,178,000 mortgage on their primary home aggressively, selling the rental condo in 2035 to retire the mortgage debt on both properties, the planner says.
Short term, they plan a $50,000 landscaping project and a $50,000 bathroom renovation that will be financed with bonuses. They want to give $250,000 to one child in 2037 and the other in 2041.
In preparing her forecast, Ms. Saleem assumes a real or inflation-adjusted rate of return of 5 per cent – a nominal rate of 7 per cent – and an inflation rate of 2 per cent, and that they both live to be 95.
Their combined consulting and part-time work income is forecast to be about $225,000 a year in 2035, gradually reducing over time as they transition to full retirement at age 65, she says.
How much should Jodi, 74, spend in retirement without leaving a big estate?
In their first full year of retirement, at 65, their income will be as follows: combined Canada Pension Plan benefits; withdrawals from each of their RRSP accounts; and withdrawals from Mark’s DC pension plan.
“Even with $500,000 in planned gifts to their children, the portfolio remains sufficient to sustain the target income of $120,000 a year after tax until at least age 95,” Ms. Saleem says. The gifts are to come from their TFSAs.
The couple would also like to fully finance their children’s postsecondary education. Each child is forecasted to attend a four-year program with annual costs of $20,000 each in today’s dollars.
The RESP is $134,336 and earns a real rate of return of 5 per cent, or a nominal rate of 7 per cent. The parents will continue to contribute until the children are 17.
“The RESP savings will be sufficient for $20,000 a year for each child,” the planner says.
Mark and Margaret’s investments break down as follows: 75.64 per cent in stock exchange-traded funds, diversified among Canada, U.S. and international; 16.06 per cent in fixed-income ETFs; and 8.3 per cent in a multi-asset growth ETF portfolio.
“Setting aside four years of income in guaranteed investments, such as a high-interest savings account and GICs, will help protect their retirement funds during market downturns,” Ms. Saleem says. This can be done by setting up a three-tier approach.
Tier 1 would be earmarked for the coming year’s income and would be invested in a high-interest savings account. Tier 2 would hold three years or more of income. This tranche would be divided into three and invested in three GICs, a one year, a two year and a three year.
The balance of the portfolio would be invested in Tier 3 and would hold a combination of stocks and fixed-income assets. “Each year, it would be determined if the Tier 3 assets grew,” the planner says.
“If so, the upcoming year’s income would be withdrawn from the growth that occurred, and the maturing GIC would be reinvested in a three-year GIC. If not, the maturing GIC would fund the upcoming year’s income, and Tier 3 would be left to recover.”
As for the RESP: “I would recommend that they start moving a portion of the account’s holdings to a high-interest savings account as their children approach postsecondary school age,” Ms. Saleem says. If a withdrawal occurs during a strong market, a portion of the ETF can be sold to free up the cash needed.
At 44 years old, can Taye retire from his government job as early as next year?
However, if a withdrawal occurs during a market downturn, the high-interest savings account can be used. “It will provide a cushion and protect the account’s value so it can continue to fund their children’s postsecondary costs for years to come.”
Finally, Mark and Margaret want to make sure they have enough insurance coverage to pay their debt and provide capital for the surviving spouse. Mark has $1,580,000 of insurance and Margaret has $650,000. The planner recommends that Mark add another $750,000 of 20-year term life insurance and that Margaret add another $1.65-million.
That would cover their $1,408,690 in existing mortgages and provide $300,000 for the surviving spouse and each of the two children, for total coverage of $2.3-million.
“Over all, Mark and Margaret have worked very hard building their family’s assets and have been successful with their investment choices.”
Client Situation
The People: Mark and Margaret, both 45, and their two children, 10 and 14.
The Problem: Can they achieve financial freedom by age 55 and still meet their other goals?
The Plan: Continue saving and contributing to registered plans. Sell condo to pay off mortgages. Do part-time consulting for age 55 to 65. Set aside some cash reserves to guard against stock-market downturns.
The Payoff: Goal achieved.
Monthly after-tax income: $27,063.
Assets: Principal residence $2,500,000; rental condo $700,000; his TFSA $81,475; her TFSA $52,876; his RRSP $220,753; her RRSP $311,712; his DC pension plan $177,586; RESP $134,336. Total: $4,178,738.
Monthly outlays: Mortgage (residence only) $7,500; property tax $785; home insurance $295; electricity, heating $150; security $30; maintenance $850; transportation $354; groceries $1,750; clothing $250; gifts, charity $210; vacation, travel $417; dining, drinks, entertainment $875; pets $667; sports, hobbies $500; other personal $750; doctors, dentists $83; life insurance $443; disability insurance $307; communications $175; RESP $417; TFSAs $584; pension-plan contributions $2,818. Total: $20,207.
Liabilities: Residence mortgage $1,178,000 at 3.75-per-cent variable; rental mortgage $230,690 at 3.99-per-cent fixed. Total: $1,408,690.
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