Ten years goes by quickly when you’re getting ready to retire. Especially if you want to stop working around age 55, like Patricia Guilbault and her spouse, Steeve St-Arnaud. While it is in their best interest to provide enough funds to live to about 95 years of age, have they forgotten any important elements?
Posted at 8:00 a.m.
Steve takes care of the couple’s retirement planning. Personally, he maximizes his Registered Retirement Savings Plan (RRSP) each year through systematic savings and contributions from his employer. Patricia has also invested in her RRSP and her tax-free savings account (TFSA) in recent years. She now has a pension fund that takes a big chunk out of her paycheck. Steve manages their savings in a growth portfolio. The couple have two children and each has a Maximized Registered Education Savings Plan.
Patricia and Steve will have finished paying for their house next year. They also bought just before the recent price hike a condominium now inhabited by a family member. It will be sold, just like the house, within 10 or 15 years. The couple also own a cottage where they plan to live in retirement. Apart from the mortgages, he has no debts.
The couple estimate their monthly expenses at $5,000 if they exclude mortgages. “We think we’ll need the same amount in retirement,” says Patricia. Our children will be grown up and we will no longer have work-related expenses. This will allow us to spend a little more on trips that we always do on a low budget. »
All the same, she wonders if they forgot important elements and if their project is realistic. “Should we start saving more, or consider postponing our retirement for a few years, or working part-time? »
Reaping the Benefits of Frugality
Many people live beyond their means, but this couple lives rather under theirs, notes Sébastien St-Hilaire, portfolio manager in the Leblanc Martineau St-Hilaire team at Desjardins Securities.
“Their frugal behaviors have put them in a comfortable position, with very good assets, very little debt and on top of that, they seem very happy with their choices. »
make a budget
However, the couple would benefit from making a detailed budget. “They need to know as accurately as possible how much they need now and when they retire,” says Hadi Ajab, independent financial planner and mutual fund representative with PEAK Investment Services.
They need to think about expenses that could become significant, such as property renovations and health care, without neglecting inflation.
PHOTO MARTIN TREMBLAY, PRESS ARCHIVES
Hadi Ajab
If the couple underestimates their spending by $100 a week in retirement, it will make a net difference of more than $200,000 in 40 years. If they take that money out of their RRSPs with a tax rate of about 30%, that’s $300,000.
Hadi Ajab, independent financial planner and mutual fund representative with PEAK Investment Services
Provide for government pensions
The couple will also have to think about the Quebec Pension Plan (QPP) and the Old Age Security pension (PSV).
“It is certain that a person who retires at 55 will be penalized because he will not have been able to contribute for the 40 years which enter into the calculation of these plans, specifies Hadi Ajab. To increase their pensions, Patricia and Steve could apply for them later than age 65: if they defer them for five years, they will each increase by 36%. But, during those years, they should touch other assets, so you have to see what is the most advantageous. »
Have cash
Finding the best way to finance the couple’s first years of retirement is an important element.
PHOTO EDOUARD PLANTE-FRÉCHETTE, LA PRESSE ARCHIVES
Sebastien St-Hilaire
Dipping into savings when you’re young costs more than when you’re old, because the money withdrawn won’t earn compound interest for years to come.
Sébastien St-Hilaire, portfolio manager in the Leblanc Martineau St-Hilaire team at Desjardins Securities
The couple could, for example, transform a portion of their savings into cash or fixed income investments, or even buy an annuity.
“We talked less about annuities in recent years because of anemic interest rates, but now that rates are on the rise, they are becoming more attractive again,” notes Hadi Ajab.
think about taxes
The couple must also think about taxation. The profits from the sale of the principal residence will not be taxed, but those of the other properties will be.
“Normally, we designate the property that has gained the most value as the principal residence, which will certainly be the house in their case,” says Hadi Ajab. They will then designate another property as their primary residence, but at the time of sale they will pay tax on the profits made in the years it was their secondary residence. »
They will then have to see when the best time to sell will be by looking at the evolution of the real estate market. “For second homes, they will also have to think about selling a year when they will have little taxable income,” says Sébastien St-Hilaire.
“To plan for their retirement, which will take into account financial and fiscal elements and their insurance needs, the couple needs detailed financial planning,” says Hadi Ajab. This is how he can make the best decisions for his retirement. »