Usually comfortable and active, the family life of spouses Sébastien*, 46, Julia*, 47, and their three children aged 21, 18 and 15 has been greatly disrupted for a year by a diagnosis of cancer in their eldest.
The situation
“After a difficult year, our outlook on the present and the future is different. Enjoying the good times in life has become essential for our family, says Sébastien in an interview with The Press.
“Among other things, my wife and I no longer want to have to work full time for 20 years before the usual retirement age of 65. We wonder about the financial feasibility of a semi-retirement in about ten years, around our 55e anniversary, and a full retirement five years later, around our 60e birthday, says Sébastien.
“For the moment, I think that we are in a good budgetary and financial situation to consider such a project. However, I see some shortcomings that need to be corrected in our balance sheet of assets and liabilities, as well as in our financial planning priorities. »
Numbers
Sebastian*, 46 years old
employment income : $126,000
Assets in retirement savings plan (RRSP) : $130,000
Assets in a tax-free savings account (TFSA) : $80,000
Assets in a locked-in retirement account (LIRA) : $54,000
Assets in non-registered account : approximately $15,000
Share of assets in an employer pension plan : approximately $250,000
Julia*, 47 years old
employment income : $60,000
Active in RRSP : $20,000
Active in TFSA : $2500
No pension plan
Children’s financial assets:
In TFSA (21 years old) : $20,000
In a Registered Education Savings Plan (RESP) : $21,000
In current savings accounts : $15,000
Non-financial assets of parents/spouses:
Principal residence : approximately $400,000
Two recent vehicles : approximately $60,000
Liabilities of parents/spouses:
In mortgage loan : $9000
In home equity line of credit : $124,000
On car loan : $40,000
By credit card : $2000
Family budget:
Gross income : $188,000/year
($186,000 in jobs and $2,000 in government allowances)
Estimated expenses : $85,000/year
residency related : $23,000
related to family lifestyle : $62,000
For example, thanks to his employment in the financial sector, Sébastien’s personal assets are well stocked — to the tune of $525,000 — in work-related pension plans, TFSAs and RRSPs.
Mainly due to lower income, Julia’s financial assets in TFSAs and RRSPs remain very thin, and without a pension plan. The value of his financial assets is barely $22,000, while his unused TFSA and RRSP contributions total $143,000.
As for Sébastien and Julia’s joint balance sheet, it consists of $460,000 in value of residence and recent vehicles, but also $175,000 in loan liabilities and mortgage line of credit, as well as a car loan. .
Moreover, the financial assets related to the three children (TFSA, education savings, current savings) total some $55,000.
The questions
In this context, Sébastien and Julia have two main concerns in view of their early retirement project. First, considering the foreseeable evolution of their financial and budgetary situation, can Sébastien and Julia envisage their project of semi-retirement from work (and 50% of employment income) in about ten years? And full retirement five years later? Second, in order to replenish Julia’s RRSP and TFSA accounts, would it make financial and tax sense for Sebastian to make “catch-up” contributions to his wife’s registered savings accounts?
The situation and the questions of Sébastien and Julia were submitted for analysis and advice to Charles-Antoine Gohier, who is practice leader in financial planning and wealth management at National Bank Financial in Montreal.
Advice
From the outset, Charles-Antoine Gohier sends his wishes of “courage” to the family of Sébastien, Julia and their three children.
PHOTO PROVIDED BY NATIONAL BANK FINANCIAL
Charles-Antoine Gohier is practice leader in financial planning and wealth management at National Bank Financial in Montreal.
“When such an event occurs, it is completely normal to want to spend quality time with our loved ones and to question our plans. »
It is with this feeling of contributing to the financial feasibility of Sébastien and Julia’s gradual retirement project, in about ten years, that Mr. Gohier has prepared some advice for them.
First, he recommends that they check that their management of the family budget is sufficiently precise and reliable, starting from their net and disposable income (after taxes and social contributions, contributions to registered savings, disbursements linked to debts) to come to their total family lifestyle expenditures.
“It is important to have the most complete picture possible of their budgetary situation in order to properly predict its evolution over the next 10 years, as well as the financial feasibility of their project of semi-retirement at age 55 and retirement complete at 60, notes Mr. Gohier.
“For the moment, with the information provided on gross employment income and family lifestyle expenses, I think that there could be an underestimation of the total disbursements compared to the net income of Sébastien and Julia. »
According to Mr. Gohier’s estimates, the amount of net and truly disposable income of Sébastien and Julia — around $85,000, after taxes and payroll taxes, registered savings contributions and disbursements related to debts — is equivalent to the amount of their current family lifestyle expenses.
“Sébastien and Julia seem to have little budgetary leeway in the short term in order, for example, to consider additional ‘catch-up’ contributions in Julia’s RRSP and TFSA,” says Mr. Gohier.
The tightening of budget management by Sébastien and Julia is necessary so that they can better assess the feasibility of a significant reduction in their disbursements before the start of their semi-retirement and the drop in their employment income.
Considering that their financial balance sheet continues to evolve at the current rate (growth in retirement savings assets, reduction in debt liabilities), Charles-Antoine Gohier estimates that semi-retirement at age 55 would be financially feasible for Sébastien and Julia, on the condition that their lifestyle budget then be reduced to $60,000 per year, about $25,000 less than its current level.
If Sébastien and Julia decided to opt for full retirement from the age of 60, Mr. Gohier estimates the lifestyle budget at around $70,000, which would then be financially viable based on the income from their savings assets. pension, as well as pensions from Sébastien’s private pension plan and public plans (provincial QPP, federal PSV).
As for the “catch-up” contributions envisaged by Sébastien for the registered savings accounts (RRSP, TFSA) of his wife Julia, Charles-Antoine Gohier strongly doubts their fiscal and financial relevance over the next few years.
Instead, he suggests that Sébastien and Julia prioritize these next steps in their financial and tax planning:
- make up all the contributions still available in the education savings plan (RESP) of their younger child of 15 years;
- accelerate the repayment of their debts with higher interest costs (credit cards, home equity lines of credit, auto loans) in order to reduce and eliminate these financial disbursements more quickly in their entire family budget, in advance of their early retirement plan;
- regarding Sébastien’s wish to contribute to the bailout of Julia’s RRSP, while avoiding tax complications during the retirement disbursement, favor the establishment of a new “spouse’s RRSP” in Julia’s name and to which Sébastien could contribute up to to her own annual allowance amount, while maximizing her tax credit thanks to her higher taxable income than Julia’s.
“According to the tax rules concerning the RRSP, Sébastien should not make a simple annual gift to Julia so that she can then contribute to her own RRSP, at the risk of generating penalties concerning monetary gifts between spouses for contribution purposes. in RRSPs,” recalls Charles-Antoine Gohier.
“While waiting to set up a spousal RRSP in Julia’s name, and make his contributions directly to it, Sébastien would do better to increase his share of family expenses so that Julia has more cash to increase her own RRSP contributions. personal. »
* Although the case highlighted in this section is real, the first names used are fictitious.
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