Gabrielle* started saving seriously for her retirement a little late in life. She has been well disciplined since then and is now seeing the results in her retirement projections. Small downside all the same: it must remain realistic in relation to the return on its investments.
The situation
Gabrielle is 58 years old and is a senior executive in a large company. She plans to retire in four years, but fears that’s not realistic. Single, she is the mother of two now adult children. When they were in school, she was unable to save much for her old age.
“But, at 40, after a difficult separation, I realized that I was not on the right track for my retirement,” she says. So I worked hard. I bought my home in 2008 and began making more disciplined contributions to my registered retirement savings plans [REER]. »
His strategy for being able to stop working in four years is to pay off his debts (his mortgage and his line of credit), build up an emergency fund and contribute as much as possible to his RRSPs. Currently, she contributes 14% of her salary to her employer’s group RRSP and the latter contributes 4%. Gabrielle also invests $5,000 per year in workers’ fund RRSPs (FTQ or CSN). She still has $180,000 in unused RRSP contribution room.
“I don’t contribute to my tax-free savings account [CELI]because my readings show that it is preferable for me to use all my RRSP contribution room first,” she explains.
Gabrielle estimates that she will only need $31,000 net per year in retirement, when she will no longer have debt. She likes to travel a lot, but she will adapt her spending in this area according to her abilities.
Right now, she has almost $420,000 invested primarily in stocks. “I did simulations with the return I am currently obtaining which is more than 9% and this tells me that I will have around $700,000 in four years,” she says. I plan to wait until age 70 before applying for my Old Age Security and Quebec Pension Plan pensions [RRQ] to benefit from the bonus. »
She calculates that this would give her approximately $55,000 gross per year from age 62 to 90. “Is this realistic,” she asks, “or am I too optimistic?” »
Numbers
- Annual income: $188,000
- QPP: $1,359 monthly provided at age 65
- Group RRSP: $302,590
- Locked-in retirement account (CRI): $70,700
- RRSP in workers’ funds: $26,945
- RRSP: $4,315
- Employer shares: $13,425
- House: value of $400,000
- Mortgage: $80,000
- Mortgage line of credit: $28,000
- Other land: value of $45,000 and will not be sold
Advice
First of all, Mylène Lapointe, financial planner and group savings representative attached to PEAK Investment Services, would like to congratulate Gabrielle for her decision at age 40 to seriously start investing in her RRSPs.
“It was the right thing to do because his salary is very high, so it allows him to reduce his tax bill and also to save for a comfortable retirement,” she says.
Readjust the rate of return and life expectancy
The expert still believes it is important to adjust two elements in her forecasts. First, the rate of return used to carry out its simulations which is 9%.
PHOTO DENIS GERMAIN, LA PRESSE ARCHIVES
Mylène Lapointe, financial planner and group savings representative attached to PEAK Investment Services
“It’s too optimistic,” says Mylène Lapointe. Just because it’s 9% right now doesn’t mean it’s going to be the same in the years to come. It is better to be more pessimistic and to be very happy if, in the end, things go better than expected. Above all, she doesn’t want to find herself running out of money because the returns aren’t there. »
To carry out simulations for a balanced growth portfolio, the Financial Planning Institute recommends taking a rate of return of around 4%.
“Gabrielle should also ensure that she is always comfortable with the level of risk in her portfolio,” advises Mylène Lapointe. Right now she has almost all stocks, but many people as they get older are more comfortable having a portion of bonds to reduce volatility. »
In addition, the financial planner estimates that it would be more prudent to estimate life expectancy at at least 94 years rather than 90.
“With these adjustments, Gabrielle would have $42,000 net per year instead,” she explains. She would still be doing very well with her lifestyle of $31,000 net and she could also allocate a good additional budget for travel. »
In these scenarios, the sale of the house was not considered. “On the other hand, if she sells it, say at age 84, at a fairly pessimistic price of $572,000, she will then be able to afford to spend $74,000 net per year,” says the financial planner. This will be more than enough to pay for rent or a residence for the elderly. »
Consider the TFSA
If the 100% investment strategy in RRSPs has been very interesting for 20 years for Gabrielle who has a very high salary, Mylène Lapointe still advises her to invest a little in her TFSA.
“She doesn’t have any at all at the moment and once she retires, it could sometimes be tax advantageous to disburse certain amounts from her TFSA rather than her RRSP so as not to increase her income too much taxable. »
The financial planner explains that when her taxable income will be lower in retirement, Gabrielle will benefit from using the Laferrière curves each year with her financial advisor to see what will be the most advantageous for her disbursement strategy.
“Because government assistance, such as tax credits for solidarity, for the GST and for home support for seniors, is calculated based on taxable income,” says Mylène Lapointe. So sometimes, it is better to draw part of what you need from your TFSA so as not to increase your taxable income too much. »
All the same, she emphasizes that Gabrielle can be very proud of what she has accomplished in recent years. “She made the right decisions and she can retire in four years as she wishes without worrying. »
* Although the case highlighted in this section is real, the first name used is fictitious.