Dave* and Isabelle* have such different career paths that they fear not reaching retirement at the same time.
“I would like to share our family’s financial journey with your team! », Isabelle writes to us.
While this 43-year-old mother has had a job for years with a defined benefit pension plan, Dave, 50, has not sailed on a long, quiet river.
After working as a self-employed information technology consultant, he decided to become an entrepreneur by creating his own business with two business partners. The company has grown to around ten employees and has achieved good turnover.
“What had to happen happened,” recounts Isabelle, “after several excellent years, poor financial planning as well as several disputes between shareholders forced the closure and bankruptcy of the company. »
The family relied on a single salary, that of Isabelle. “My partner was not able to contribute to his retirement for several years. »
Dave ended up finding contracts. He continued his career as an information technology consultant, then was employed for a while before losing his job and becoming self-employed again with an incorporated company.
The couple has been contributing to their 13-year-old child’s Registered Education Savings Plan (RESP) for three years. As for the mortgage, it should be paid off in 11 years.
“I am fortunate to have a job with a defined benefit pension plan and I also have savings in my RRSP and TFSA. I wonder if it is necessary to continue contributing to my RRSP and my TFSA given the advantageous pension plan,” asks Isabelle, who wants to retire at 60.
Dave has less savings than his partner, but has a nice amount of money sitting in his consulting business account.
“He was able to accumulate a good amount of money, but doesn’t know how to invest it,” explains Isabelle, “which is a big problem. He would like to retire at 60. »
The couple needs a precise plan. How could Dave accumulate the additional money needed for retirement?
Chantal Matos, financial planner and senior financial advisor at Gestion Financial MD, looked into Isabelle and Dave’s case.
First of all, the planner encourages the couple to continue making payments into the RESP. As the child is 13 years old, there are four years left to make up for the years not contributed. The rules allow you to contribute up to a maximum of $5,000 per year, which corresponds to two years of maximum contributions.
Isabelle and Dave can put in $5,000 per year until the child turns 17 in order to obtain the maximum amount of subsidies from both governments.
The couple estimates their annual living cost at $140,000. When he finishes paying off the mortgage in 11 years, that cost of living will drop to about $100,000, Chantal Matos calculates.
Isabelle is hesitant about her RRSP and TFSA contributions given her employer’s generous retirement plan. Should she continue? The financial planner is categorical.
“Yes, because her pension plan will allow her to obtain an annual income of $36,750, which is not sufficient for the cost of living she wants,” says Chantal Matos. If she works until age 65, her pension plan will be more attractive. She could receive a sum of $70,000 per year.
Isabelle will receive her pension from age 60 and will be able to fill the gap with her TFSA. At age 65, she will receive the Quebec Pension Plan (QPP) pension and the Old Age Security (OAS) pension. RRSPs converted to RRIFs will follow from age 71.
For Dave, his accountant advised him to pay himself $150,000 per year in business income in dividends. The financial planner disagrees.
“I advise him to see with his accountant how he can earn an income, because he has no pension fund,” explains Chantal Matos.
“I even advise him to pay himself the maximum eligible salary earnings each year, i.e. $66,600 in 2023, to contribute the maximum to the QPP. »
By paying himself a salary, he will also be able to obtain RRSP contribution room corresponding to 18% of this salary. The remaining $83,000 can then be paid to him as dividends.
Dave wanted to know how to create his own retirement fund.
First, Chantal Matos recommends that she contribute as much as possible to her RRSP. Hence the importance of paying yourself a salary from your company in order to have contribution rights.
“I recommend he contribute $40,000 per year to recover his unused contribution room of $214,000. Contribution rights will be added each year. »
His business generates $250,000 in annual revenue and Dave expects to take in $150,000 in revenue each year. After taxes paid, Chantal Matos calculates that he could invest $20,000 to $30,000 in the company’s investment portfolio.
She suggests he meet an investment advisor. The accumulated $358,000 sitting in his business account will then be able to grow.
When Dave retires at age 60, he will pay himself dividends. The planner calculates that he will be able to pay himself $70,000 per year until he is 70 years old. The company account will then be empty. Subsequently, Dave will be able to count on his RRSPs converted into RRIFs.
As for the Quebec pension and the Canada pension, she advises him to postpone them until age 70 in order to obtain the maximum amount.
If the family respects the cost of living of $100,000, the annual savings of $40,000 for Dave, $20,000 for Isabelle in addition to the $5,000 in the RESP, each person can hope to retire at age 60.
