When it comes to retiring Beth and Craig have been engaged in a planning tug-of-war.
Beth, in her early 60s, wants to retire in two years. Craig, in his mid-50s, wants to work at least eight more years, and he worries they can't afford Beth's early retirement plan.
"I just find that I don't like what I do anymore, and I don't know how much longer I can keep at it," says Beth, a health-care worker.
"I had intended to retire at 60, but with the kids in university, it's kind of hard."
The couple are paying for their children's tuition.
All told, their children's education costs them about $8,500 a year -- a cost they can easily absorb while working.
Beth earns about $55,000 a year while Craig, a partner in a company, can earn as much as $210,000 a year, made up of his salary, bonuses and equity in the firm.
Despite the high income, they're very worried about saving enough for retirement and, occasionally, they can have spirited debates about the best investment strategy, including what to do with $100,000 sitting in savings. Beth wants to invest in RRPS. They certainly have the contribution room. Craig could contribute $65,000 while Beth has $35,000 of available room this year.
In contrast, Craig says they need more steady income in retirement and wants to buy a rental property.
"My worry with an investment property is taking a mortgage out for the balance of whatever we bought," Beth says. "I'm unsure of going into retirement with that kind of a debt."
At the moment the couple still owe $20,000 on a home worth $470,000, and another $20,000 on a car loan.
They also own a cabin worth $120,000 and have almost $300,000 in RRSPs, in addition to the $100,000 in savings. Beth will also receive work pension worth $700 a month. Craig has no pension but does have $150,000 in equity in his firm.
Once retired, they want to spend more time at the cottage and take an annual vacation. In the meantime, the debate continues.
"Let's just say we both have different ideas of what to do," Beth says.
Certified financial planner Doreen Sigurdson says Beth and Craig shouldn't fuss too much about their retirement plan. They net about $180,000 a year, and Craig has plenty of opportunity to build up his savings in the next decade.
If Beth so chooses, she can retire in two years with little impact on their financial situation. At that point, their mortgage would be paid -- with a small amount remaining on the car loan.
"I'm estimating annual income for her of about $14,000 per year -- assuming $700 per month from her employee pension and about $460 per month from CPP," says Sigurdson with Edmond Financial Group in Winnipeg. "Combined with Craig's after-tax income, they'd still have about $150,000 net income."
Currently, the couple spends about $133,000 a year, including loan payments, savings and expenses on their children.
"If their total expense figure is accurate, they could continue with their savings plans as they are now, and live comfortably until Craig's retirement, sometimes between his age 62 and 66."
While Beth can retire in two years, the answer to the question concerning whether to invest in a rental property or RRSPs is less cut and dried.
"Ultimately, you can't know whether a rental property or maximizing RRSP contributions will give you a better return over time," she says. "It all depends on the profit you can realize from the rental and which asset experiences better growth."
Real estate in Winnipeg has been a great investment over the last decade, but future growth isn't guaranteed. Beth and Craig should consider the risks associated with borrowing money in retirement, and how they would feel about a possible downturn in the real estate market that could see prices remain flat for a long time, or even in decline. Furthermore, they already have more than $600,000 invested in real estate, so adding another property would further concentrate their wealth in one asset class.
They also have to consider the cost of running a property: utilities, taxes and maintenance.
There's the time component to think about too.
"Beth and Craig would have to be ready to take on the time and challenges that can come with being landlords," she says. "Dealing with tenants can be challenging, especially if they don't pay their rent on time or neglect the upkeep."
Investing the money in RRSPs, in contrast, involves less time on their part, but it is just as much of a risk/reward proposition. Their money could be invested in the stock market, which has been performing well, particularly in the U.S. But that growth isn't guaranteed.
Still, one benefit they would be able to reap is significant tax savings on contributions made to Craig's RRSP.
"Craig's considerable employment income is placing him in Manitoba's highest marginal tax bracket of 46.4 per cent," he says. "If he were to maximize his RRSP contribution this year, and use up his $65,000 limit, he would reduce his income tax payable by over $30,000."
The refund could then be invested in a TFSA. At moment, the couple have almost $50,000 in unused TFSA contribution room.
"For any of their non-RSP savings, whether emergency, travel, car fund or long term retirement savings, use TFSA's wherever possible."
But for the time being, it's Craig's RRSP that offers the greatest tax savings because once he retires and turns 65, they can split his RRSP income so both their marginal tax rates would be about 28 per cent, and would likely never exceed 35 per cent.
"So, RRSP usage by Craig now is not only deferring tax to a later date, it makes for a permanent reduction in tax."
Sigurdson says maximizing Craig's RRSPs over the next eight years will help provide them with a net monthly income of about $5,300 in retirement, based on three per cent inflation and six per cent market return before retiring and five per cent while retired. If he retires in 10 years, their after-tax income will grow to $6,300 a month.
Beth can continue to contribute $200 bi-weekly to her RRSP until retirement as she has been doing, or she can contribution instead to her TFSA if they're concerned their RRSPs, which are fully taxable, may grow too large.
Ultimately, the couple can retire and enjoy the lifestyle they do today, but they need to be mindful of their spending, Sigurdson says. As previously mentioned, they're netting about $180,000 a year with only $133,000 of it accounted for in expenses, so about $47,000 is going somewhere.
"To satisfy themselves that they are on the right track, I'd suggest they look a little more carefully at their household cash flow to understand where they are spending the unaccounted funds," she says. "If they do determine the projected monthly retirement income is not going to provide them with the income they want in retirement, they would want to look at saving more now, or Beth may decide to stay in the workforce longer."