Spouses Christine* and André*, both 49 years old and parents of a 14-year-old teenager, are planning to retire at 55 from their respective jobs. They would therefore have another six years of employment income to prepare adequate funding for this early retirement, with the intention of maintaining the lifestyle of a couple of newly active retirees with a child at the start of university studies.
The situation
“My wife and I have good incomes – $230,000 a year in all – and savings habits that focus on fully contributing our registered accounts [épargne-retraite REER, épargne libre d’impôt CELI et épargne-études REEE]says André during a conversation with The Press.
“Nevertheless, we are wondering about our financial capacity for retirement at age 55, or in six years. Among other things, is our pace of retirement savings so far expected to be sufficient to support a family lifestyle at its current level? »
This lifestyle amounts to approximately $90,000 per year, before the disbursement of contributions in registered savings accounts.
For the moment, the family balance sheet seems rather well stocked. It includes some $855,000 in financial assets in savings accounts (RRSP, TFSA, RRSP and current accounts), to which is added an amount of approximately $600,000 in net worth of the residential triplex (land value of $922,000 minus the mortgage liability of $320,000).
On the other hand, it is with regard to the family income during the first years of retirement of Christine and André, before the start of their retirement plan annuities, that the situation looks more complicated.
In fact, considering that their employment pension plan benefits will begin at age 58, i.e. their third year of retirement, and that their public plan pensions (provincial QPP and federal PSV) would begin at age 65, i.e. their 10e retirement year, Christine and André are looking for advice on how to best use their RRSP and TFSA assets as their primary sources of income during their early retirement years.
This, while taking into account the short-term tax implications, as well as the needs for “financial longevity” until old age, after many years of retirement.
The situation of Christine and André was submitted for an advisory analysis to Louis Morneau, who is a financial planner and financial security advisor at the firm Aisance Gestion de patrimoine, established in Brossard, in the suburbs of Montreal.
Numbers
André*, 49 years old
Income (from gross employment and net rent): $117,500
RRSP assets: $248,000
TFSA assets: $138,000
Non-registered investment savings account assets: $30,000
Defined benefit pension plans: $2,800 per month at age 58
Christina*, 49 years old
Income (from gross employment and net rent): $112,500
RRSP assets: $200,000
TFSA assets: $140,000
Assets in employment retirement accounts (CRI, cd): $92,000
On the family record:
Value of the family residential triplex: $922,000
Active in RESP (child age 14): $37,000
Pooled cash account assets: $30,000
Triplex mortgage liability: $320,000
In the family budget:
Total income (before taxes): $230,000 per year
Lifestyle expenses: approx. $90,000 per year
(residence and lifestyle costs, before contributions to registered savings accounts)
Advice
“Here we have a typical case of a family benefiting from attractive income from various sources, but whose spouses and parents are concerned about optimizing their personal finances in view of a retirement project in a few years, at 55 years”, notes first Louis Morneau in his analysis-consulting report.
But before presenting his advice to Christine and André, he would like to point out to them the already foreseeable budgetary effects of retiring from their gainful employment some ten years before the usual age of 65.
Firstly, says Mr. Morneau, they must consider the impact of stopping their employment contributions to the Régie des rentes du Québec (RRQ) at age 55 on the amount of life annuities to which they would be eligible at age 65. years.
PHOTO ROBERT SKINNER, THE PRESS
Louis Morneau is a financial planner and financial security advisor at the firm Aisance Gestion de patrimoine, based in Brossard, a suburb of Montreal.
“According to the pension calculators offered by the RRQ and the Institut québécois de la planification financière (IQPF), André will receive $1,044 per month and Christine will receive $827 per month from age 65, taking into account the fact that ‘they stop contributing at the age of 55,’ explains Louis Morneau.
“This means that they will suffer a shortfall of around $434 per month or $5,208 per year for André, and $474 per month or $5,688 per year for Christine. In total, their retirement project at age 55 means that they will have to find a solution to compensate for this shortfall of around $10,900 per year. And that could become more and more significant in their budget towards old age. »
On the positive side, Louis Morneau notes that André will be eligible at age 58 for a defined benefit pension plan that promises a minimum retirement income (about $33,000 per year before tax) and reliable until the end of his life. .
Three strategies
After his basic considerations, Louis Morneau has developed for André and Christine three financial planning and tax optimization strategies for their next years of end of employment and early retirement.
These strategies are based on three common parameters: a net return of 4% per year on retirement savings assets, an average inflation rate of 2.1% per year, and a life expectancy of up to 95 years.
The first strategy proposed? “To maintain their lifestyle at around $90,000 a year at the start of retirement, André and Christine could start by tapping into their tax-free savings account (TFSA) during the first two years of retirement, before spending then to their registered retirement savings plans (RRSP), suggests Louis Morneau.
However, he points out, “this strategy would involve selling the triplex before their 76e birthday, i.e. on their 20e year of retirement, because their autonomous retirement savings assets will have been exhausted by then.
The second strategy to consider? “If André and Christine wish to keep their triplex until a later age, while avoiding a shortage of funds before their death, financial planning estimates suggest that they should be prepared to reduce their lifestyle to around 78 $000 per year from the start of their retirement, says Louis Morneau.
“Here again, their TFSAs will be used as sources of income in early retirement at age 55, before their RRSPs take over afterwards. »
Finally, as a third financial strategy for André and Christine, Louis Morneau suggests that they consider postponing their work retirement plan for a few years if they wish to maintain their current lifestyle during their retirement, and without having to sell their residential triplex to avoid lack of funds in old age.
“For example, by shifting their retirement by only two years, from 55 to 57, André and Christine could postpone their financial need to sell the triplex from 75 to 90,” said Louis Morneau.
* Although the case highlighted in this section is real, the first names used are fictitious.
Calling all
Are you planning a project that requires a wise use of your money? Do you have financial problems?