Couple's retirement plans are well in hand

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Marvin and Gloria want to retire early, and they're making all the right financial moves to do so. (RUTH BONNEVILLE / WINNIPEG FREE PRESS) Photo Store

Marvin and Gloria can't wait until retirement. The problem is it's almost two decades away. Still, that doesn't stop them from dreaming of the day they reach age 60 and kiss the work world goodbye.

"We don't want to work until 65," says Gloria, who is about two years older than Marvin. "I will have to work until 60, but Marvin would like to retire early. It'd be nice to see what the possibility is of him retiring before age 60."

Right now, they're focused on becoming debt-free, paying off their mortgage as fast as they can so they can bear down on saving for the golden years. Still, they question this strategy and wonder whether they're better off diverting any free money they have toward RRSPs -- or even TFSAs -- instead of putting it into a savings account they use to make extra payments on the mortgage or to pad their home-renovation and vacation budgets.

Marvin also contributes $250 a month to his personal RRSP, and he has a group RRSP through work. He contributes the maximum of six per cent of his income to his work plan, which his employer matches. Gloria contributes $100 a month to her RRSP and, as a civil servant, she is also a member of a defined-benefit pension plan.

As a plan member, she has the option to withdraw the commuted value of her pension at age 50 and invest it on her own -- a strategy they are considering.

"If we took the pension out and put it into a self-directed RRSP, can we grow it faster than the government could?" Marvin wonders.

Overall, they believe they're on the right track, but Gloria says they have little experience in retirement planning and could use a little guidance.

"I wouldn't mind getting a second opinion on what we should be doing," she says.

Uri Kraut, a certified financial planner with Assiniboine Credit Union, says Gloria and Marvin are in the uncommonly good position where they're poised to fully fund their retirement if they plan for it prudently.

"This is a phenomenal planning opportunity where you can actually turn a mediocre outcome into an excellent retirement outcome," he says.

With any long-term planning exercise, however, any estimates are subject to a number of variables such as interest rate hikes, and a good plan must be updated regularly to adjust to those fluctuating conditions.

Still, they are taking the right initial steps. For one, choosing to make mortgage repayment a priority is a sound strategy.

Although they are paying a very low interest rate -- 2.9 per cent -- it is variable.

"This means that their good financial prognosis worsens as interest rates rise," Kraut says.

And rates eventually will increase, extending the amount of time to pay off the debt, because more of their money will go toward interest than paying down the principal.

But Kraut says they should have little problem finding more money to make accelerated payments on their mortgage, because they're already setting aside $650 a month for the option of doing just that.

Kraut says they're already setting aside funds for home renovations and vacations -- $445 and $220, respectively, every month -- so most of that $650 could easily go toward their mortgage. These extra payments would go directly against the principal, which in turn would reduce their overall interest costs.

Furthermore, he figures they could probably cut back on their holiday and renovation contributions to find another $100 for the mortgage.

"In total, this equals about $750, or an additional $173 weekly -- about a 60 per cent increase in their payments," he says.

"This shaves about five years off their time frame, so the mortgage is paid off in 7.3 years, not 12.5 years."

In the meantime, they might find money a little tight. But Kraut says they can cease RRSP contributions, except for Marvin's contributions through his work, until the mortgage is paid in full.

"They should completely discontinue contributions to their RRSPs for now, as Marvin has a six per cent match with his employer and Gloria has a great pension plan with the federal government."

On a related point, Gloria should not choose to withdraw the commuted value of her pension at age 50.

"The federal government pension is one of the best pensions in Canada, and the government is on the hook for market underperformance for Gloria's pension, not her," Kraut says. "Generally, it is not advisable to commute a pension from the government for this reason."

Her pension statement indicates she will receive only about $931 a month when she retires at 60, but this figure will increase with her salary and years of service. Gloria's employment pension payment will likely work out to almost $2,400 a month at age 60, and it will make up a substantial portion of their retirement income.

The other large chunk of money in retirement will come from their personal savings and Marvin's work RRSP. Once their home is paid off, if they can divert the weekly mortgage payments of $473 to RRSP and TFSA savings, they may be able to save about $1.1 million by the time Gloria turns 60. That's based on a 6.5 per cent annual return on a portfolio comprising 60 per cent equities and 40 per cent bonds. After inflation, this sum works out to about $730,000 in today's dollars.

"This could conservatively finance about $33,000 a year, and with Gloria's pension likely to be about $28,000 a year by 60, they would have a very strong family income stream," Kraut says.

They should be able to create a combined net income of about $55,000 a year. This estimate is conservative and includes income-splitting and CPP payments, but it is highly subject to market returns, their work income and interest rate hikes.

For this reason, it's important they evaluate their plan at least once a year to make sure they're still on track.

Still, based on their current income and savings rates, they should easily be able to reach their retirement-date goals. After removing expenses such as the mortgage and retirement savings from their budget, their estimated, after-tax retirement incomes will fully fund their current spending habits. And that doesn't even include OAS income they will be eligible to receive at age 67.

"The key point is that they're at a place where they're going to be able to achieve a fully funded retirement, which is rare at this stage in their lives," he says.

"But that's not going to be achieved by picking the right investments. It will be done by having the right plan."

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Gloria and Marvin's finances

ñü INCOME

Marvin: $86,750 ($4,202 net a month)

Gloria: $43,992 ($2,178 net a month)

ñü EXPENSES

Monthly: $6,379 (includes $650 savings contributions)

ñü DEBTS

Mortgage: $158,000 owing at 2.9 per cent interest rate

ñü ASSETS

Home: $285,000

Marvin personal and group RRSP combined: $143,797

Gloria RRSP: $22,051

Joint savings: $13,889

Gloria work pension: $2,358 a month at age 60

Total assets: $464,737

ñü NET WORTH: $306,737

Republished from the Winnipeg Free Press print edition May 12, 2012 B13