This & That: Retirement Edition

O Wrote: I’ve just become a fan of yours! I need some expert advice. My question is this: My wife and I have just paid off our mortgage and I am turning 47 this month and my wife is 46. We both have company pensions, mine will be $1300.00 per month at age 55 and my wife’s $1100 per month at age 48 with her magic 80 from the hospital. We roughly have a combination of $220,000 in RRSP’s, TFSA’s, and RESP’s. We are also currently saving $7,200 a year. Do you think it will be possible for us to retire at age 55 on our current savings plan or do we need to increase our savings in order to achieve our goal? Any advice would be greatly appreciated!!

Gail Says: You’ve paid off your mortgage — great work! — so that expense is gone. But home ownership comes with many other costs and you need to figure out what your carrying costs are so you can figure out a budget for retirement. My home is paid for, but costs me about $1200 a month to carry, with insurance, taxes, utilities and maintenance (I currently have a bathtub sized hole in my basement ceiling…it’s always frickin’ something).

You have $220,000 saved (though you shouldn’t be counting the RESP money because you have a specific purpose for that) and are saving $7,200 a year. If you retire at 55 at your current rate, you’ll have added another $57,600 to your stash to bring it up to about $277,000.

You’ll get a combined income of $2400 a month from your pensions. But you currently have a joint after-tax income for about $6,500 a month, give or take. With $277,000 in savings, assuming you live 30 years in retirement and spend the principal as you go, that savings will give you another $770 a month. I know you now have the money from your mortgage payment, and the money you’re saving, but I have a feeling you’re still going to fall short if you don’t save more or retire later.

You don’t say how old your kid(s) is and how long you’re going to be providing support, but that’s another figure you have to work into your equation.

Okay, so in your current situation, you’ll have an income from pension and savings of about $3170. Your job is to go through your budget and decide what you will live without during retirement so that the $3170 works. (Remember, it has to work for 30 years, so you have to take cost of living increases into account too.) If you can’t make that work, then you can:

a) work longer, so you have less time living on your fixed income,
b) save more money (if you saved half your old mortgage payment until 55, how much more would you have?)
c) a combination of the 2…you might find that working until 60 and saving that extra money puts you in a much more stable position for retirement. If this also coincides with the kid(s) becoming independent, it’s a win-win-win.

 

S Wrote: My Husband and I are both recently retired with moderate company pensions; we make a little over 60% of our past income which is now approximately a little over $43,000 combined. We purchased a new vehicle three months before we retired, not our brightest idea. Thankfully this is our only debt.

The interest is 4.24% over 7 years, we have 6 1/2 years to go. The payment is $540.00 a month. The balance is $36,500. In order to free up cash flow we are thinking about paying most of it off intermittently using our RRSP’s that total $25 000 combined; he has $19,000 and I have $6,000. We were considering this in the New Year withdrawing $5,000 from his and $5,000 from mine until it is depleted. We would do this so we only have to pay 10% withholding tax??

In the meantime before we do this we are considering switching it to a secured line of credit which would be 2.70 prime plus .50% while trying our best to keep the payments the same. Are we nuts on both counts?

Gail Says: It doesn’t matter if the withholding is only 10%, at the end of the day you’ll owe tax at your marginal tax rate. We don’t work on combined income in Canada, (it’s an individual tax system) so I can’t tell you how high your marginal tax rate will go up if you make those withdrawals from your RRSP. But you will lose a whack of that money to taxes. Moving the loan to a line of credit will save you money, so that’s a good idea. But hauling hunks of money out of your RRSPs, not so much. I suggest you figure out what you’re real tax bill will be before you take the step of pulling money from your RRSP.

 

E Wrote: I’ve been watching your shows for years and am always astonished with the amount you’re able to predict a couple/individual will have when they’re ready to retire by putting a few hundred dollars away each month. I can recall a few episodes where you instructed the participants to put away $400/month and by the time they retire they’ll have over 1 million dollars. I’m 26 years old, currently renting but saving for a down payment, have no debt, and make a modest income (30K’s) which I’d like to think I budget well. I’m currently putting away over $300 into an RRSP (no pension plan through my employer) and wondering what I can do to even come to close to the 1 million mark at retirement.

Gail Says: The amount you have at retirement depends on three things:

How much you put away each month,
How much you earn on your investments, and
How long you have to let that money grow.

You have heaps of time on your side. At 26 you’ve got 39 years of growth. If you consistently put away $300 a month and earn a return of 4%, you’ll have about $337,000 when you’re ready to retire. So you will have put in $140,400 into your RRSP and the rest will come from the return you earned by investing.

If you want to have more you can:

a) invest to earn more than 4%, and/or
b) increase your monthly contributions.

If you were to increase your monthly contributions to $400, at 65 you would have about $450,000. You will have put in $187,200 into your RRSP and the rest will come from the compounding return.

If you were to increase the return on your investment from 4% to 6%, at 65 you would have about $746,000. So you can see how important the return you earn will be to the end result you achieve.

Having said that, you need to make sure you understand what you’re investing in. If you can’t explain it to a 12 year old, you can’t buy it. And if it makes you deeply uncomfortable to think you might lose your money, well, you need to think about that too.

I’m not sure why you’ve chose $1million as your benchmark since it’s an arbitrary number. It’s more important that you start early and invest consistently. That’s what will get you to where you want to be. And you’re doing that. As your income goes up, so too should your monthly savings. And as you learn about investing you’ll be more comfortable using options that have the opportunity to give you more return.

Slow and steady chick.