Posted by Tim Stobbs on March 19, 2009
Well welcome back to part II of the family profile. Well last week it was determined the couple could easily have kids, but what about early retirement? Could they leave the working world at 55? Well to crack that nut we need some net worth information.
Her RRSP (including locked in) = $60,000
His RRSP (including locked in) = $60,000
Her non registered = $190,000
His non registered = $190,000
Her TFSA = $5000
His TFSA = $5000
House (no mortgage) = $400,000 (approx worth)
Her investment loans = $130,000
His investment loans = $120,000
Net Worth = $660,000
So that looks good given their ages (35 her, 37 him). Now those investment loans are suppose to be paid off in 20 years, so that would be just in time for retirement (I’m making the assumption that since his is a lower loan that he can pay it off in 18 rather than 20 years). I’m also assuming they retire when he is 55, so they have 18 years to get things together.
Now I wasn’t given a average rate of return to use, but based on what income is coming in on those loans I’m going to estimate their rate of return at 8%. Then let’s shave off 2% for inflation and 1% extra to be a buffer. So I’ll use 5% real return in these calculations.
Rather than try to determine estimate their saving rate I’m going to do this backwards assume zero extra savings for now and define the short fall if there is any.
So let’s grow these accounts forward. The RRSP’s will both grow to $147,000 in today’s dollars each. Then the investment loans I’m assuming 4% of the return goes to paying down the loans with 1% left over for growth. So those would grow to $227,500 each. The TFSA’s would grow to about $12,300 each. Which isn’t much so I’m going to just treat those accounts as extra vacation money and not worry about them. So without adding anything to the accounts they would have $749,000 at age 55.
Other income will be OAS at 65 for $12,400 a year total. CPP I’m going to assume he gets the average pension of $5777/year and she will get half that at $2888/year at age 65 (I’m assuming she is staying home with no income from post baby onwards). Therefore they will take in $21,065/year after 65.
Assuming they keep their spending the same as I proposed last week. The would need about $38,736/year in retirement income.
Now let’s draw down their accounts. I’m going to assume they shift to a bit more conservative portfolio at 55 and they are only earning 4% real return at that time. So from 55 to 65 they drawn down $3228/month. That would leave them with $641,300 at 65.
Then continuing the drawn down at a slower rate since OAS and CPP are now off setting some income requirements. So now they are taking out $1472/month. Which of course to those with handy calculators would realize is less than 4% of their remaining $641,300 at 65. So they won’t run out of money.
So in conclusion, yes they can have kids at once. Yes, she can stay home with the kids and yes they can retire at 55 if they are willing to stop using the cleaning lady and drop their travel budget down to $6000/year once the car payment is done.
Of course there are so many assumptions in these calculations I could be completely wrong, but from a high level analysis it does look possible. Also they could down size the house and free up some cash if need be and the TFSA accounts give them a little extra saving for a few bonus trips in retirement. All in all they look like they will be fine.