Winnipeg Free Press - PRINT EDITION

The $2-million question

Byron and Shelley are doing everything right, but still worry if they can save enough for retirement

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Shelley and Byron are the poster couple for responsible financial management.

They save when they can and invest their savings on their own in low-cost exchange-traded funds. They have no debt other than their mortgage, which they hope to pay off within nine years so they can focus on retirement and saving for their child's -- or possibly children's -- education.

Shelley's and Byron's finances

INCOME:

Byron: $80,000 ($4,000 a month net)

Shelley: $51,000 ($1,900 a month net)

Universal child-care benefit: $100 a month

MONTHLY EXPENSES: $5,428

DEBTS:

Mortgage: $214,000 owing at 3.78 per cent interest

ASSETS:

Home: $400,000

Byron RRSP: $40,000

Shelley RRSP: $36,000

Shelley work pension: $5,000

Byron work pension: $29,000

U.S. savings account: $2,000

NET WORTH: $298,000

"We'd like to have another one in the next year and a half, and that will certainly affect whether I go back to work or not," says Shelley, 31, who works almost full-time in marketing now.

Byron, 40, works in trades, earning at least $80,000 a year. Together, their annual gross income is more than $131,000, and they take home at least $6,000 a month.

After all their costs -- including $560 for daycare and $2,340 on the mortgage -- they generally have about $570 a month for savings.

Yet, most of their $540,000 in assets is tied up in their home worth $400,000, on which they owe $214,000. About $76,000 is invested in RRSPs and another $1,000 in an RESP, opened in the last few months.

In addition, Byron and Shelley are also members of pension plans through their respective employers, and Byron frequently works overtime throughout the year to earn extra money that goes toward RRSPs and the mortgage.

"We mostly put every free dollar against the mortgage and borrow against it if there's an emergency, but that hasn't come up yet," she says.

Even though they plan to save as much as possible once the mortgage is paid in full, Shelley is concerned they're not on track for Byron to retire at 55.

"I hope we can, but it seems so unrealistic because you need so much money," she says.

"In my mind, I have this goal of $2 million."

Certified financial planner Uri Kraut says Byron and Shelley won't need as much money as they think to retire comfortably.

"They won't need $2 million but rather, $1.2 million after inflation is factored in," says the senior wealth consultant with Assiniboine Credit Union, adding that amount is more like $700,000 today.

But early retirement for both of them will be a challenge.

"I am concerned this is not realistic because their child and possibly second child will still be teenagers, and this will have many side-effects."

Post-secondary education for their children will likely cost them tens of thousands of dollars and then there are the possible wedding costs to consider, too. Not to mention Byron and Shelley may also be helping their adult kids with down payments on their first homes. All of these financial outlays will likely coincide with the twilight of Byron and Shelley's careers or their early retirement. Either way, the cost of raising 'adult' children will likely be a strain on their savings early in retirement, leaving less for the long-term.

Here is how the numbers play out.

If everything goes as planned in the next nine years -- barring major emergencies -- and they pay off the mortgage, they can then redirect that cash flow into their TFSAs, RRSPs and other investments. By the time Byron turns 55 and Shelley is 46, their savings will be worth about $725,000.

If they don't work another day from that point on, they would likely run out of savings by the time Byron is in his mid-70s.

To achieve a pile of savings to sustain this plan, Byron and Shelley would need 10 per cent annualized returns on their money for the next 15 years, which is a long shot.

"Age 60 for his retirement is a safer bet, as I am assuming very conservative return estimates for their portfolio both during their savings period -- 5.3 per cent -- and during their retirement at 4.5 per cent," he says, adding Shelley retires at 51 in this scenario.

Going with plan B, they will have amassed retirement assets exceeding $1 million, which should allow them to maintain their current lifestyle -- even with inflation. And they would have plenty of savings left for helping out their child, or children, in early adulthood.

Most importantly, they won't run out of money. Instead of their assets shrinking over the course of retirement, the five-year postponement will allow their assets to grow over time. By the time Shelley reaches age 90, they will still have about $1.2 million in the bank (minus the aforementioned adult child expenses).

The kink in this plan is if they have another child and Shelley stays home for a few years. Based on their budget today, they would have a $700 deficit every month, which would make paying off the mortgage within the decade a near impossible feat.

"This would defer the savings strategy, adding two to five years to the time frame for Byron and Shelley's retirement, depending on how much time she chooses to stay at home with the kids," he says. "So, there are very material consequences, which are somewhat amplified due to their age differential, goals and aggressive debt payment and savings strategy."

That doesn't mean she can't remain at home without pushing Byron's retirement past 60.

If she is prepared to work until age 60, they'd still be on course financially to have a comfortable retirement with ample savings for their needs.

They would have a mortgage for about 41/2 years longer than planned and, essentially, Byron's retirement in the first few years would be funded largely by Shelley's income.

Yet, they also have to consider that by leaving the workforce for an extended period of time, Shelley may not find work that pays the required income to suit their needs.

Fortunately, they have plenty of time to adjust financially to whatever direction they choose.

"The estimate I used for their retirement-income need is based on the assumption their net income needs -- minus their mortgage, savings and daycare -- are reasonably reflective of what they like to do later in life," Kraut says.

As an added twist, if Shelley continued to work until age 51, instead of remaining at home, Byron could retire at age 55.

"There really are a dozen different scenarios for them."

Regardless of what they choose to do, the linchpin to their financial success will be ensuring they update their plan annually.

"Their income needs for retirement can then be refined as they go through various stages of life," he says. "So as retirement approaches, the picture will become all the more accurate."

giganticsmile@gmail.com

Republished from the Winnipeg Free Press print edition June 1, 2013 B15

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