It's hard to imagine a more enticing vision of retirement than the plan Dave and Debbie have devised.
Debbie, in her early 40s, wants to retire at 50, and Dave, in his mid-40s, has his sights set on age 55. That is, if additional money isn't required to help their teenage son with post-secondary education.
But an early escape plan from the iron shackles of employment would be just the start of their retirement.
"Our plan would be to sell the house and live out at the cottage, which is built for four seasons," Debbie says, adding they may consider part-time work during the first few years of retirement.
"Then we'd possibly become snowbirds to get past the ugly winters."
Earning a combined annual income before taxes of almost $150,000, they've managed to save up about $430,000, mostly through their current and past employer group plans.
They have a combined mortgage of $197,000 for the home in Winnipeg and their cottage, but they have no other debts.
The couple is also well-insured. They have critical-illness and life insurance policies outside their work.
While Dave and Debbie say they believe they have made the right choices, they wonder whether they're saving enough to retire early.
"We don't want to give up our present lifestyle if we don't have to," she says, adding they like to travel and entertain at their cabin. "But if we're doing the wrong thing, and we have to amend, we'll certainly do that."
Certified financial planner Doug Nelson says Dave and Debbie have a lot of moving pieces to their plan.
And the best way to figure out how everything will fit together is to try as best they can to forecast how their retirement income will match up to their expenses.
They have annual expenses of $68,400. This includes many expenses they will not have during retirement, such as RRSP contributions and possibly a mortgage payment. When Dave is considering retirement, in about five years, they will have about $672,000 in savings.
"At a five per cent investment return, this would generate only $33,600 of before-tax investment income," Nelson says.
If they were to sell their home in the city, they would also have additional income if they invested the proceeds from the sale.
"If the house was sold for approximately $310,000 at that time, then the net proceeds from the sale of the home would be $174,000, which could be used to generate more income in retirement," says Nelson, adding this would be the amount left after the mortgage is paid off in full.
"At an investment return of five per cent, (the $174,000) would generate approximately $8,700 in before-tax investment income annually."
This would increase their retirement income -- all flowing from their work pensions and other savings -- to $42,300 before taxes.
"Is this enough? It will depend on their 'part-time income' and their lifestyle 'needs' and 'wants' at that time," Nelson says.
Another consideration is market risk.
"Many believe we are in an extended bear market environment today," Nelson says.
"In this environment, investment returns may be below the long-term trend for some time, such as stock market returns in the minus-two per cent to five per cent range over the next 10 years," he says.
"If this is the case, they want to review their investments to ensure that they aren't relying too heavily on stock market growth."
Alternative strategies that would produce lower but more reliable returns are investments that pay dividends, interest or distributions, such as real estate investment trusts (REITs).
The key to staying on track, Nelson says, is to review their investment strategy regularly.
Still, Dave and Debbie do have some additional room for improvement in their savings strategy. One of their first moves is to start investing in a tax-free savings account.
"The TFSA is a better overall investment option than their plan to invest in Canada Savings Bonds," he says. "In both cases, they're investing after-tax money, but the money that grows inside a TFSA is tax-free, whereas the money in a CSB isn't."
But the problem with CSBs isn't just that they're not growing tax-free. After all, Dave and Debbie could invest the CSBs in a TFSA.
The problem is CSBs provide poor returns compared to other investments, such as GICs, mutual funds and exchange-traded funds. Higher returns over the next few years would provide them with more money for retirement income.
Still, Nelson says, saving outside their RRSP should only be done once they've used up all their RRSP contribution room each year.
"Always maximize RRSPs and pensions first because these investments can be made with before-tax dollars," he says. "The next step is to invest in TFSAs, RESPs and insurance."
These investments are made with after-tax dollars, yet they can grow and be redeemed tax-free.
Nelson says the last choice to invest their money should always be non-registered investments.
At the very least, $50 from one of their bi-weekly CSB contributions should be invested in the RESP. They are currently contributing only $2,200 annually to the RESP, earning $400 in government grants. If they contributed $2,500, they'd get the maximum grant of $500.
Nelson says they can also contribute the maximum of $5,000 a year to recover missed grant money from past years, to a maximum annual grant of $1,000.
"This should be their next greatest financial priority after saving for retirement," he says. "It is a better use of money than investing in the CSBs."
While their savings strategy could use a little work, they have done a good job of using insurance to manage risk.
Having critical-illness insurance (CI) is a good way to make sure a health crisis doesn't send their plans off track. CI pays a lump-sum payment upon diagnosis of an illness, such as a heart attack or cancer, and it would help cover current expenses if one of them is unable to work for a period of time.
Their policies of $100,000 each more than cover their annual salaries -- a good rule of thumb.
As for life insurance, their term life policies of about $700,000 each, in addition to their work-sponsored policies, would likely more than make up for lost income if one of them dies. One concern they did have was converting their term plans to a universal, joint to last survivor plan to help provide tax-free money to cover tax liabilities for their estate when they die.
Nelson says this is a good strategy to consider over the next decade, but the premiums for these plans are more costly than term life, which means they would have less money for retirement savings and day-to-day expenses.
And they will more than likely need as much money as they can get, he says. Dave and Debbie are on track to reach their goal, but they will likely find money tight in the first few years -- especially if they have to help their son with additional post-secondary expenses.
"The best approach may be to gradually retire between ages 55 and 65," he says. As more sources of income become available -- CPP and OAS -- they will have more income flexibility.
"In my view, this is the ideal transition into retirement, given the many uncertainties and the long road of life ahead."
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