Mike and Molly endured a lot of financial hardship before righting the ship. But today they are meticulous planners -- even creating a spreadsheet to calculate their income in retirement that's more than 10 years away.
"We went through some very lean years," says Mike, a government worker in his mid-50s.
"It was like going through the Dirty 30s. You had to keep track of where everything went."
And they've certainly turned things around: They have no debt. They have more than $275,000 in savings and they can expect a combined monthly pension of $2,800 a month at age 65.
Mike plans to retire at 65 while Molly, in her mid-40s and also a public servant, is aiming for 62.
They believe they're on track, based on their calculations, which account for tax brackets and even OAS clawbacks to maximize tax efficiency.
"We'd like to be able to draw $5,000 net a month, inflation-adjusted, throughout retirement," Mike says, adding a financially comfortable retirement boils down to being realistic about spending and saving.
"You hear about needing a million dollars, but you don't."
Of course, another set of eyes -- expert ones -- wouldn't hurt either, he adds.
Certified financial planner Karen Diamond with Diamond Retirement Planning in Winnipeg says the couple's attention to detail is admirable.
"They seem to have done some research into retirement-income planning strategies, such as topping up to bracket, which involves using the federal and provincial marginal tax brackets as guidelines to limit withdrawals of fully taxable income to those taxed at the lowest tax rates," she says.
"This is good, because with a solid understanding of such strategies, they can enjoy a level of confidence and discipline with their income plan that others with only a vague understanding may not have."
But Diamond has noticed a few problems.
Mike and Molly both have locked-in retirement accounts, or LIRAs, which they plan to strategically draw upon early -- $2,000 a year before age 65 -- to qualify for the federal and provincial pension credit, giving them $2,000 each a year tax-free they could deposit to their TFSAs.
"But the only type of income that qualifies for the pension credit before age 65 is true annuity-type pension income from a pension plan," Diamond says. "So, unless they are receiving that type of income before 65, they won't be able to claim the credit."
Another potential problem has to do with Mike's RRSP contribution room. At present, he has enough room to contribute substantial amounts to their RRSPs. Mike is able to contribute about $13,000 annually to a spousal RRSP, and Molly is contributing about $3,900 to her own RRSP.
"They have only been working for their current employer for a few years, and perhaps their pension adjustment was not as large with previous employers, which allowed them to accumulate contribution room," Diamond says.
"But by the time Mike is about 58, I estimate he will have caught up with his contribution room carried forward and be reduced to annual contribution room of about $2,000 per year, due to the pension adjustment from his participation in his current employer's defined-benefit plan."
This will reduce the amount they can save in their RRSPs, which may in turn affect their retirement-income projections.
More importantly, Diamond says they may want to rethink their RRSP-savings strategy, which directs contributions into Molly's RRSP and a spousal account in her name. Although Mike and Molly are well aware of Canada's graduated tax system and have built in a tax-efficient RRSP-withdrawal scheme into their plan, their current RRSP contributions could work against Molly in the long run.
While contributing to an RRSP offers bang for the higher-income-earner's bucks -- Mike -- lower-income earners -- Molly -- receive less benefit.
"Ideally, you want to deduct at a higher rate and withdraw at a lower rate, which Mike is projected to do, but for Molly, it is projected to be the same rate," she says. "So, aside from tax-sheltered growth, she is not getting that additional benefit from her deposit/withdrawal strategy."
A better strategy may be contributing after-tax money to their TFSAs, which won't result in tax deductions for either earner.
"But future earnings and capital will be tax-free withdrawals, which won't affect her net income in retirement the way withdrawals from an RIF will."
And allowing a little unused RRSP contribution room to build up before retiring might not be a bad idea, considering the couple will be eligible for several weeks of retirement allowance. This income would likely bump them up to higher tax brackets, but they could reduce the effect if they can contribute the additional income to their RRSP if they have contribution room.
"This would be especially true for Mike if he receives a lump-sum payment in the year he turns 65, when he would otherwise be eligible for the age-amount tax credit," she says.
This credit gets clawed back with income higher than $34,873 of net income, reduced by 15 per cent of income over that amount, until it's completely lost when income reaches $80,985. (As a side note: Mike and Molly have omitted this clawback in their spreadsheet calculations, Diamond adds.)
"The ultimate income plan would be to take fully taxable income up the age-amount zone, and then take tax-effective non-registered income after that to meet their lifestyle needs."
Yet all these potential problems don't amount to much more than loose ends that can be tied up well before retirement -- a retirement they appear well on their way to achieving, Diamond says.
"Mike and Molly are doing a lot of things right to get ready to retire," she says. "Most importantly, they are thinking about their retirement income plan in great detail, and well in advance of their target retirement date."