The situation
Dave* and Isabelle* have such different career paths that they fear not reaching retirement at the same time.
“I would like to submit to your team our family’s financial epic! », Isabelle writes to us.
While this 43-year-old mother has had a job for ages with a defined benefit pension plan, Dave, 50, has not sailed on a long, quiet river.
After working as a self-employed information technology consultant, he decided to become an entrepreneur by creating his own business with two business partners. The company has grown to around ten employees and has achieved good turnover.
“What had to happen happened,” recounts Isabelle, “after several excellent years, poor financial planning as well as several disputes between shareholders forced the closure and bankruptcy of the company. »
The family relied on a single salary, that of Isabelle. “My partner was not able to contribute to his retirement for several years. »
Dave ended up finding contracts. He continued his career as an information technology consultant, then was employed for a while before losing his job and becoming self-employed again with an incorporated company.
The couple has been contributing to their 13-year-old child’s Registered Education Savings Plan (RESP) for three years. As for the mortgage, it should be paid off in 11 years.
“I am fortunate to have a job with a defined benefit pension plan and I also have savings in my RRSP and TFSA. I wonder if it is necessary to continue contributing to my RRSP and my TFSA given the advantageous pension plan,” asks Isabelle, who wants to retire at 60.
Dave has less savings than his partner, but has a nice sum sitting in his consulting business account.
“He was able to accumulate a good amount of money, but doesn’t know how to invest it,” explains Isabelle, “which is a big problem. He would like to retire at 60. »
The couple needs a specific plan. How could Dave accumulate the additional money needed for his retirement?
Numbers
Dave, 50 years old
- Salary: $150,000
- Retirement fund: none
- QPP: $1,232 at age 65
- RRSP: $192,800
- TFSA: none
- Incorporated business: $358,000
Isabelle, 43 years old
- Salary: $115,000 + 12% (target bonus)
- Defined benefit retirement fund: $36,750/year at age 60
- QPP: $1,506 at age 65
- RRSP: $167,257
- TFSA: $4,583
- RESP: $18,321
Family assessment
- Mortgage loan: $256,600
- Cost of living: $140,000
Analysis
Chantal Matos, financial planner and senior financial advisor at MD Financial Management, looked into the case of Isabelle and Dave.
First, the planner encourages the couple to continue depositing into the RESP. As the child is 13 years old, there are four years left to make up for the years not contributed. The rules allow you to contribute up to a maximum of $5,000 per year, which corresponds to two years of maximum contributions.
Isabelle and Dave can invest $5,000 per year until the child turns 17 in order to obtain the maximum amount of subsidies from both governments.
The couple estimates their annual living cost at $140,000. When he finishes repaying the mortgage, in 11 years, this cost of living will drop to around $100,000, calculates Chantal Matos.
Take or not take RRSPs and TFSAs
Isabelle is hesitant about her RRSP and TFSA contributions given her employer’s generous pension plan. Should she continue? The financial planner is categorical.
“Yes, because her pension plan will allow her to obtain an annual income of $36,750, which is not sufficient for the cost of living she wants,” says Chantal Matos. If she works until age 65, her pension plan will be more attractive. She could receive a sum of $70,000 per year.
PHOTO ALAIN ROBERGE, LA PRESSE ARCHIVES
Chantal Matos, financial planner and senior financial advisor at MD Financial Management
I suggest he take his annual bonus of $13,800 and add $1,800 to obtain a contribution of $20,000 per year. This way, she will be able to recover her unused RRSP rights of $51,800. Other contribution rights will be added each year.
Chantal Matos, financial planner and senior financial advisor at MD Financial Management
Isabelle will receive her pension from age 60 and will be able to fill the gap with her TFSA. At age 65, she will receive the Quebec Pension Plan (QPP) pension and the Old Age Security (OAS) pension. RRSPs converted to RRIFs will follow from age 71.
Create your own retirement fund
On Dave’s side, his accountant advised him to pay himself a business income in dividends of $150,000 per year. The financial planner disagrees.
“I advise him to see with his accountant how he can earn an income, because he has no pension fund,” explains Chantal Matos.
“I even advise him to pay himself the maximum eligible earnings in salary each year, i.e. $66,600 in 2023, to contribute the maximum to the QPP. »
By paying himself a salary, he will also be able to obtain RRSP contribution room corresponding to 18% of this salary. The remaining $83,000 can then be paid to him as dividends.
Dave wanted to know how to create his own retirement fund.
Firstly, Chantal Matos recommends that she contribute as much as possible to her RRSP. Hence the importance of paying yourself a salary from your company in order to have contribution rights.
“I recommend that he contribute $40,000 per year to recover his unused contribution room of $214,000. Contribution rights will be added each year. »
His business generates $250,000 in annual revenue and Dave expects to take in $150,000 in revenue each year. After taxes paid, Chantal Matos calculates that he could invest $20,000 to $30,000 in the company’s investment portfolio.
She suggests he meet an investment advisor. The accumulated $358,000 sitting in his business account will then be able to grow.
Depending on his risk tolerance, he could easily invest in a balanced portfolio given that he does not need to withdraw money from this fund until his retirement, which is nine years away.
Chantal Matos, financial planner and senior financial advisor at MD Financial Management
When he retires at age 60, Dave will pay himself dividends. The planner calculates that he will be able to pay himself $70,000 per year until he is 70 years old. The company account will then be empty. Subsequently, Dave will be able to count on his RRSPs converted into RRIFs.
As for the Quebec pension and the Canada pension, she advises him to postpone them until age 70 in order to obtain the maximum amount.
If the family respects the cost of living of $100,000, the annual savings of $40,000 for Dave, $20,000 for Isabelle in addition to the $5,000 in the RESP, each person can hope to retire at age 60.