With chronic illness and debt affecting their retirement goals, what should this couple do?

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Cassie and Cameron are both 48 years old and together earn $ 198,000 a year in education. They have two children aged 15 and 18. The oldest will be entering university this fall.

Because Cassie suffers from a chronic illness that could worsen over time, they hope to retire in eight years and spend the first few years traveling. Their retirement spending goal is $ 75,000 per year after tax. Both have defined benefit pension plans.

In the meantime, they are paying off their loans and saving for their children’s higher education.

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“While our house at [the Greater Toronto Area] has tripled in value since we bought it, we had to take out a small additional mortgage as well as a line of credit to deal with major structural renovations, ”Cameron wrote in an email.

“We worked on reducing our mortgage and saving in our [registered education savings plan], but the debt doesn’t seem to be going down, ”he wrote.

They wonder if Cassie should take the lump sum cash value of her pension rather than a monthly payment to free up more money for travel and perhaps leave a larger estate.

In the meantime, they want to add a small pool or swim spa ($ 25,000 to $ 50,000) to help ease Cassie’s symptoms, and they will soon have to replace one of their cars ($ 30,000).

“What changes would make the best of our situation?”

We asked Stephanie Douglas, partner and portfolio manager at Harris Douglas Asset Management in Toronto, to review Cameron and Cassie’s situation. Ms. Douglas also holds the Certified Financial Planner (CFP) designation.

What the expert says

Cassie and Cameron want to stay in their house for at least the next 15 years, says Ms. Douglas. They plan to travel at least once or twice a year for the first few years with an estimated travel budget of $ 10,000 to $ 12,000 a year, in addition to the $ 75,000.

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Cameron and Cassie’s spending target will have increased to $ 88,000 (with 2% inflation) by the time Cameron retires in 2027, the planner notes. They can achieve this without having to sell their home through their retirement plans. Cameron will receive an annuity of $ 55,761 per year starting in 2027. Cassie will receive $ 54,878 starting in 2025, when she retires. This will be more than enough to cover their living expenses. They will start receiving Canada Pension Plan and Old Age Security benefits at age 65.

“However, they would need to dip into their assets during the first five years of their retirement to support their travel goal,” Ms. Douglas said. To this end, she recommends that they try to save more while they are working.

His predictions assume Cameron and Cassie will live to be 95 years old.

With their current mortgage payments, their debt would not be paid off until 2042, she said. If they want to pay it back before they retire, they will have to increase their payments. They focused on paying off their second mortgage, but she suggests they put more money on their line of credit because it has a higher interest rate.

“Once they’ve paid off their mortgages and line of credit, they could invest more funds in their savings, which could help them fund their travel spending goal,” the planner explains.

“I suggest they take a look at their budget and find areas where they could cut costs while they’re still working,” says Ms. Douglas; for example, reducing dining and / or alcohol consumption could save them up to $ 6,000 per year. They might also consider reducing their travel budget for the next few years.

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“It would also help them save for their short-term goals of building a swimming pool and buying a new vehicle instead of having to liquidate their savings.”

When it comes to their investments, Cameron and Cassie should take a closer look at the fees they are charged on their mutual funds – some as high as 2.46 percent. They should aim to keep their fees below 1.5%, she said.

“Given their level of assets to invest, they should consider low-fee exchange-traded funds that match their risk tolerance. A tax-free savings account worth about $ 21,000 that is all in one security, notes Ms. Douglas. “This would represent almost 40% of their total investable assets. [excluding their RESP account] in a security.

She suggests that they look to diversify their investments to reduce the risk in their portfolio, and that they consolidate their accounts in one place to make them more manageable.

Cameron and Cassie contribute $ 5,040 a year to their daughter’s RESP, more than enough to take advantage of the Canada Education Savings Grant. (They receive a grant of $ 500 per year on the first $ 2,500 they deposit.) It would be more tax efficient to save the extra funds in a TFSA, she says.

While the additional funds would grow tax-sheltered in the RESP account and contributions could be withdrawn tax-sheltered, any income earned would be taxed when the funds are ultimately withdrawn from the account, says. she. If they put the additional funds into a TFSA instead, they would not have to pay tax on the withdrawals.

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Cassie wonders if she should take the cash value of her pension. She would need a rate of return of around 5% per year to avoid a shortfall if she lives to age 95, according to the planner. “Obviously, a higher rate of return would make taking cash value more attractive, but with that comes an increase in risk. Given their limited investment knowledge, Douglas worries they may not be comfortable with the ups and downs of financial markets.

As for leaving a larger estate, if Cassie died first, Cameron would have a higher income receiving 60 percent of her pension – the survivor benefit – than if he received funds from the lump sum pension money from Cassie, according to the planner. The funds from his retirement plan could be transferred tax-free into a life income fund for Cameron. The planner assumes that his spending would be reduced to 70 percent of their common retirement spending target.

Since Cameron would withdraw a significant amount from this LIF if he lived to age 95, it would be worth approximately $ 100,000 at that time and would be fully taxable for his estate.

At 95, they would still have their home, which would be worth around $ 2 million.

Client situation

the people: Cameron and Cassie, both 48 years old

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The problem: What can they do to make sure they can afford both their short and long term goals?

The plan: Take a close look at their budget to find ways to reduce it. Be more proactive with their investment strategy to reduce costs and improve bottom line returns.

The reward: Hopefully the retirement they hope for, with $ 10,000 to $ 12,000 annually to travel the early years.

Monthly net income: $ 12,833

Assets: House $ 800,000; Combined RRSP $ 35,974; Cassie’s retirement bonus $ 37,300; Cameron’s TFSA $ 21,000; RESP $ 70,100; Cameron’s pension plan commuted value $ 516,919; cash value of Cassie’s pension plan $ 737,339; in cash $ 3,000. Total: $ 2.2 million

Monthly Distributions: Mortgage, property tax, property insurance, utilities and repairs $ 3,481; transportation, gasoline, auto insurance, maintenance, parking $ 895; groceries $ 785; clothing $ 336; vacation $ 1,400; gifts $ 85; entertainment, dining out, alcohol, hobbies, personal care $ 810; pet expenses $ 130; alcohol and tobacco $ 275; health expenses $ 472; life insurance $ 171; $ 500 line of credit; telephone, Internet, cable $ 411; charitable donation $ 25; other discretionary $ 150; Contributions to RRSPs, RESPs and pension plans $ 2,490. Total: $ 12,416

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Liabilities: First mortgage $ 87,222; second mortgage $ 79,463; $ 45,000 line of credit. Total: $ 211,685

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Some details can be changed to protect the privacy of those profiled.


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