Are Barry and Beth saving enough to retire at 62, help their kids get a down payment and have a big trip soon?

Barry and Beth.Tijana Martin/The Globe and Mail

At 52, Barry and Beth have their highest income, generating a combined salary of over $450,000 a year. He works in education and is a senior executive at an investment company. They have two children in university.

Beth and Barry own a $2 million home in Toronto with about $150,000 in mortgages, as well as a $115,000 credit line.

In the short term, their goals are to continue to fund their children’s education, build their retirement savings and take a “meaningful trip,” Beth wrote in an email. Barry has a defined benefit pension plan partly linked to inflation, while Beth has a defined contribution plan. She will also receive significant bonuses, depending on her company’s performance, but has requested that they not be included in the financial projections because they are not guaranteed.

In the long run, they hope to help their children with down payments on their first homes. Their goal is to retire from work at age 62 on a budget of $12,000 per month, or $144,000 per year.

“Do we save enough for retirement?” Pete asks. “If yes, are we in a position to retire before age 65?”

We asked Matthew Sears, a certified financial planner at TE Wealth in Toronto, to look into Beth and Barry’s situation. Mr. Sears also holds the position of Chartered Financial Analyst (CFA).

What does the expert say?

Until recently, Beth and Barry were sinking as much as they could into mortgage loans and a line of credit, says Mr. Sears. But with the recent rise in interest rates, they’ve decided to channel cash flow from mortgages into savings with the goal of paying the loans in full when they come due in late 2024 and early 2025. Balances at maturity will be around $57,000. And 60 thousand dollars.

Their line of credit is expected to be paid off in the next two years. “I wouldn’t recommend doing anything risky with this money if they want it to be available in 2024 and 2025.” It would be a suitable type of secured investment.

Mr. Sears suggests that they focus on paying off the line of credit first before investing or redirecting the money to savings. They pay 4.2 percent on the credit line. Beth falls in a marginal tax bracket of 53.53 percent and Barry 43.41 percent. That means they would have to generate pre-tax rates of 9 percent for Beth and 7.4 percent for Barry, to be far ahead of paying off the 4.2 percent credit limit, he says. This assumes that they will receive interest or income from foreign stock dividends.

The scheme says that if they were earning income from Canadian dividends, which are better taxed, Beth would have to make 6.19 percent and Barry 5.62 percent.

Interest rates can also rise, increasing the cost of a line of credit.

“Redirecting the monthly surplus will pay the LOC in 12 months,” the planner says. To pay it sooner, they can sell $32,000 of the shares they hold in their taxable account, which has a significant capital loss. “They can recognize the loss and direct the proceeds from the sale to the LOC.”

Alternatively, this can be used to get the most out of their TFSAs, but they should be aware of the superficial loss rule, he says.

“Since they have experienced a loss, they should not just transfer the shares in kind to the TFSA. They should sell the money and contribute it to the TFSA,” says Mr. Sears. “When a TFSA is contributed, they should not buy back the shares within the 30-day period or else the loss would be considered a superficial loss.” It wouldn’t be a problem if they chose to invest the money in something else.

After the mortgages were paid off and the line of credit, Barry and Pete could redirect the amount they were paying ($1,300 on mortgages and $5,000 in LOC) plus the monthly surplus of about $4,600, to retirement savings starting in March 2025, Mr. Sears says. “The retirement goal at age 62 is to achieve just 95 percent with this,” the chart says. To fully achieve their goal, they will need to save an additional $3,700 per month from 2025 to 2032.

To summarize the savings plan, Barry and Beth channeled $9,600 toward a line of credit between now and July 2023. Beginning in August 2024, they either funneled $9,600 toward risk-free investments like GICs or toward mortgages. If they put the money aside in the GICs, they would then use the money to pay off the mortgages in full in 2024 and 2025. Then, starting in 2025, they would funnel the $1,300 per month that was going to the mortgages and instead, that $9,600 would go To a credit line for retirement savings.

“Another way to look at it is that they need about $2,947,000 in investable assets to maintain their retirement spending target,” says Mr. Sears. In the forecasts above, their maximum sustainable spending is $11,500 per month, which is very close to their monthly retirement spending goal.

Forecasts assume Beth and Barry retire in January 2033, begin collecting Canada Pension Plan and Old Age insurance benefits at age 65 and live to age 95. Barry gets a pension of $5,090 a month starting at age 62. The average rate of return on her investments is 5.45 percent and inflation is 2.2 percent.

Beth contributes 4 percent of her salary to a defined contribution pension plan with 100 percent employer matching.

A lower rate of return would change things a bit. “If we lower the expected rate of return by one percentage point in retirement, they will only reach 85 percent of target spending,” says Mr. Sears. “The maximum sustainable expenditure would be $10,000 per month. Instead of $2,947,000 to meet the spending target of $12,000 per month, they would need $3.25 million in investment assets.”

One item that is not accounted for is Beth’s annual discretionary bonus, which they prefer not to rely on in their planning, notes Mr. Sears.

“If bonuses are paid each year and added to savings, this will make up for the shortfall needed to meet the retirement spending goal.”

Once the debts are paid off and the savings are removed, current spending on Barry and Beth’s lifestyle will come to about $8,275 a month, which is about 70 percent of the retirement spending goal, notes Mr. Sears.

customer case

People: Barry and Beth, both aged 52, and their two children, 19 and 21

the problem: Are they saving enough for retirement at 62 with $12,000 a month?

the plan: Pay off the line of credit, then mortgages and cash flow redirects plus any surplus to long-term retirement savings. If it’s a bit short, saving any rewards Beth might get will cause it to float.

Yield: A clear path to the retirement goals they pursue.

net monthly income: $24715

Origins: $32,000 inventory; Residence 2 million dollars; Her TFSA is $53,000; His $43,000 TFSA; $457,000 from RRSP; $112,000 from RRSP; Her closed retirement account from her former employer is $202,000; Her DC pension plan is $134,000; The estimated present value of his DB pension plan is $375,000; Registered $70,000 education savings plan. Total: $3.48 million

Monthly expenses: $1,300 mortgage; property tax $675; Water, Sanitation, and Garbage $150; home insurance $175; Electricity and heating $350; Security $35; $300 maintenance; $100 garden; Transportation $875; groceries $1000; Undergraduate fees $1,500; 500 dollar clothes; $5,000 credit limit; charitable gifts $850; Vacation, travel $250; Dining, drinks, and entertainment $1,100; Personal Care $100; pets $200; Sports and Hobbies $200; Doctors, Dentists, and Pharmacy $125; Health and dental insurance $505; Life insurance $785; Communications $500; RRSPs $500; TFSAs $1,000; Pension plan contributions $1,980. Total: $20,055. Surplus $4,660

Liabilities: a $72,995 mortgage at 1.62 percent; Mortgage $78,185 at 1.67 percent; $115,000 credit limit at 4.2 percent. Total: $266,180

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