Spouses Christine* and André*, both 49 years old and parents of a 14-year-old teenager, are planning to retire at 55 from their respective jobs. They would therefore have another six years of employment income to prepare for adequate funding for this early retirement, with the intention of maintaining their lifestyle of a couple of newly active retirees with a child starting university.
“My wife and I have good incomes – $230,000 a year combined – and savings habits that focus on fully contributing our registered accounts [RRSP retirement savings, TFSA tax-free savings and RESP education savings ], says André in a conversation with La Presse.
“Nevertheless, we are wondering about our financial capacity for retirement at 55, in six years. Among other things, does our pace of retirement savings so far look sufficient to support a family lifestyle at its current level? »
This lifestyle amounts to approximately $90,000 per year, before the disbursement of contributions in registered savings accounts.
For the moment, the family balance sheet seems rather well stocked. It includes some $855,000 in financial assets in savings accounts (RRSP, TFSA, RRSP and current accounts), to which is added an amount of approximately $600,000 in net worth of the residential triplex (land value of $922,000 less mortgage liability of $320,000).
On the other hand, it is with respect to the family income during the first years of retirement of Christine and André, before the start of their retirement plan annuities, that the situation looks more complicated.
In fact, considering that their employment pension benefits will begin at age 58, i.e. their third year of retirement, and that their public pensions (provincial QPP and federal PSV) would begin at age 65, i.e. their 10th retirement year, Christine and André are looking for advice on how to best use their RRSP and TFSA assets as their primary sources of income during their early retirement years.
This is while taking into account the short-term tax implications, as well as the needs for “financial longevity” well into old age, after many years of retirement.
The situation of Christine and André was submitted for analysis-advice to Louis Morneau, who is a financial planner and financial security advisor at the firm Aisance Heritage Management, based in Brossard, a suburb of Montreal.
Income (gross employment and net rent): $117,500 RRSP assets: $248,000 TFSA assets: $138,000 Non-registered investment savings account assets: $30,000 Defined benefit pension plans: 2,800 $ per month at age 58
Income (from gross employment and net rent): $112,500 Assets in RRSPs: $200,000 Assets in TFSAs: $140,000 Assets in Employment Retirement Accounts (LIRA, c.d.): $92,000
Family residential triplex value: $922,000 RESP assets (child age 14): $37,000 Pooled cash account assets: $30,000 Triplex mortgage liabilities: $320,000
Total income (before taxes): $230,000 per year Lifestyle expenses: approx. $90,000 per year (residence and lifestyle costs, before contributions to registered savings accounts)
“Here we have a typical case of a family enjoying good income from various sources, but whose spouses and parents are concerned about optimizing their personal finances in view of a retirement project in a few years, at 55 years,” Louis Morneau first notes in his advisory report.
But before offering his advice to Christine and André, he wants to point out to them the already foreseeable budgetary effects of retiring from their gainful employment a decade before the usual age of 65.
First, says Mr. Morneau, they must consider the impact of stopping their employment contributions to the Régie des rentes du Québec (RRQ) at age 55 on the amount of life annuities they would be eligible for at age 65. years.
“According to the pension calculators offered by the RRQ and the Institut québécois de la planification financière (IQPF), André will receive $1,044 per month and Christine will receive $827 per month from age 65, taking into account the fact that ‘they stop contributing at the age of 55,’ explains Louis Morneau.
“This means they will suffer a shortfall of about $434 per month or $5208 per year for André, and $474 per month or $5688 per year for Christine. In total, their retirement project at age 55 implies that they will have to find a solution to compensate for this shortfall of around $10,900 per year. And that could become more and more significant in their budget towards old age. »
In positive consideration, Louis Morneau notes that André will be eligible at age 58 for a defined benefit pension plan that promises a minimum retirement income (about $33,000 per year before taxes) and reliable until the end of life. .
After his basic considerations, Louis Morneau has developed for André and Christine three strategies for financial planning and tax optimization for their next years of retirement and early retirement.
These strategies are based on three common parameters: a net return of 4% per year on retirement savings assets, an average inflation rate of 2.1% per year, and a life expectancy of up to 95 years.
The first proposed strategy? “To maintain their lifestyle around $90,000 a year in early retirement, André and Christine could start by tapping into their tax-free savings account (TFSA) for the first two years of retirement, before spending then to their Registered Retirement Savings Plans (RRSPs), suggests Louis Morneau.
However, he points out, “this strategy would involve selling the triplex before their 76th birthday, which is in their 20th year of retirement, because their self-contained retirement savings assets will have been exhausted by then.”
The second strategy to consider? “If André and Christine wish to keep their triplex until later in life, while avoiding a shortage of funds before their death, financial planning estimates suggest that they should be prepared to reduce their lifestyle to around 78 $000 a year from the start of their retirement, says Louis Morneau.
“Again, their TFSAs will be used as a source of early retirement income at age 55, before their RRSPs take over thereafter. »
Finally, as a third financial strategy for André and Christine, Louis Morneau suggests that they consider postponing their work retirement plan for a few years if they wish to maintain their current lifestyle during their retirement, and without having to sell their residential triplex to avoid lack of funds in old age.
“For example, by delaying their retirement by just two years, from 55 to 57, André and Christine could postpone their financial need to sell the triplex from 75 to 90,” said Louis Morneau.
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