Lifestyle | Can we travel or should we improve the savings?

Spouses Linda *, 71, and Germain *, 69, are retirees in good health and of a reasonable lifestyle who wish to relaunch their travel plans, after the break forced by the pandemic.

The situation

However, with the addition of years, Linda and Germain are concerned about the budgetary impact of these travel plans on their long-term financial security, when they will have to resort more and more to support and maintenance services. home.

“We want to get back to traveling while we still have the health and ability to do so. However, instead of traveling independently as before, we are going to travel in a more supervised and organized way, and therefore more expensive”, explains Germain during a discussion with The Press.

For the moment, Linda and Germain are considering a travel budget of approximately $20,000 per year which would be financed from their current budget surplus of around $30,000 per year.

This is the balance between Linda and Germain’s net annuity income (after taxes), which total $78,000, and their current expenses, in the order of $48,000 per year.

At first glance, Linda and Germain would therefore have the budgetary means to relaunch their travel plans. In return, they wonder about the low level of their retirement savings accounts (RRSP, RRIF, TFSA) which are independent of Germain’s pension plan – the couple’s only one – and of their government pensions (PSV federal and provincial QPP).

“My personal RRSP and RRIF [ancien REER converti] from my wife, from where she begins the required minimum withdrawals, total about $190,000 in assets, Germain explains.

“But our TFSA accounts, which we just started contributing to, total about $57,000. It seems to us very little like a stand-alone retirement savings reserve in the event that we have to face costly contingencies, medical or residential, as we get older. »

Furthermore, Germain points out, he and his wife have no intention of reselling their house, which has a net value of approximately $530,000 (mortgage-free) and “in very good condition”, as long as they will be able to live there, even with home help services.

In addition, Linda and Germain have no inheritance plans for their two children, preferring instead to help them financially during their lifetime with their current expenses as young families.

In this context, Germain asks: “Before relaunching travel spending, should we rather prioritize the use of our budget surplus to quickly fill the contribution amounts available in our TFSAs, and thus enhance our financial security in aging? »

“And in this case, could we still modulate these contributions in TFSA without having to make too many cuts in our travel plans? If so, what sharing of these amounts would be advisable, on both sides? »

Linda and Germain’s situation and questions were submitted for analysis and advice to Mathieu Huot, who is a financial planner and tax specialist at IG Wealth Management in Terrebonne.

Advice

First, Mathieu Huot says he is a little surprised by the significant difference between the gross income (approximately $104,000) and the net income after taxes (approximately $78,000) of spouses Linda and Germain.

At the same time, he notes the significant difference between Germain’s gross pension income ($86,900) and that of his wife Linda ($17,500).

“The difference of $26,000 between their gross income and their net income suggests that Linda and Germain pay a lot of taxes compared to their situation as independent seniors,” says Mathieu Huot.

“And when you consider the considerable difference in the amounts of individual gross income of Germain and Linda, everything indicates that they have not yet availed themselves of the tax mechanism of “income splitting” between senior spouses to reduce their bill. total taxes,” notes Mr. Huot.

According to his estimates, Germain and Linda could achieve tax savings of around $4,000 to $5,000 per year, which would increase their budget for travel plans by the same amount.

Consequently, insists Mathieu Huot, “it should be their priority in terms of tax optimization to be put in place this year. In preparation for their upcoming tax returns [2023] on their pension income [régime de retraite, PSV fédéral, retraits de REER/FEER]but also in specific request to Retraite Québec regarding the splitting of benefits from the provincial QPP”.

Travel and savings?

Secondly, regarding Linda and Germain’s concern to carry out travel plans “while they are able” without compromising the financial security of their advanced age, Mathieu Huot can reassure them of their ability to pursue these two objectives by parallel.

How to do it ? “Considering that their budget is complete, Linda and Germain already have the advantage of a budget surplus of around $30,000, to which could be added a few thousand dollars next year with savings from taxes resulting from the implementation of their income splitting, underlines Mr. Huot.

“In addition, Linda and Germain anticipate an annual travel budget of around $20,000. If they manage to stick to this budget, while maintaining their current expenses at their current level, they should then have about $10,000 per year available for contributions to their TFSA, as a bonus to their retirement savings. »

At this rate, while taking into account an average annual return of 3.75% on their capital in TFSAs and RRSPs/RRIFs, as well as an inflation indexation of 2% per year on their daily living expenses and their retirement pensions, Mathieu Huot estimates that Linda and Germain could still have capital in the order of $800,000 in twenty years, or at the dawn of their 90th birthday.

In addition, the net value of the eventual resale of their home – estimated at $530,000 – is excluded from this retirement savings capital estimate.

“According to their current budget, Linda and Germain can be sure of carrying out their travel plans while continuing to improve their retirement savings,” says Mathieu Huot.

No travel or savings?

Also, what if there is a major change in Linda and Germain’s budget priorities over the next few years?

To answer this question, Mathieu Huot contrasted two budgetary hypotheses: the first where the $30,000 in budget surplus would go entirely to retirement savings, with no travel expenses; and a second where the $30,000 available would go entirely to travel expenses, with no additional contribution to retirement savings.

The results of these two hypotheses?

“With the first, Linda and Germain could have accumulated some 1.4 million in retirement savings capital at the start of their 90s, and nearly 1.9 million by adding the net resale value of their home, summarizes Mathieu. Huot.

“It strikes me as much more than their foreseeable needs, unless they have inheritance intentions for their loved ones. Also, Linda and Germain would have deprived themselves of trips during the years when they were still able. »

With the second financial hypothesis, all in travel and without additional retirement savings, Mathieu Huot estimates Linda and Germain’s retirement savings capital at $455,000 at the start of their 90s, and approximately $955,000 by adding the net resale value of their home.

“It seems sufficient for their budgetary needs towards their foreseeable end of life. However, it would come with little room for maneuver in the event of donation projects or inheritance to their loved ones. And not to mention possible financial regrets for having spent a lot on travel without regard to the strengthening of their retirement savings, ”believes Mathieu Huot.

* Although the case highlighted in this section is real, the first names used are fictitious.