Posted by Canadian Dream 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.
Assets
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)
Debt
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.
Posted by Canadian Dream on March 11, 2009
Well I’m typically not in the business of offering specific advise to a person’s situation, but when someone recently asked me to have a crack at their numbers I decided I would have a look and try for a change of pace. I made it known I’m not an expert on this, but will rather be just giving them my thoughts of the situation. Then much to my amusement I was told they both worked in the financial planning industry. So they already are experts compared to most people.
The couple has several questions including if they have a baby will they be alright during her maternity leave and afterwords would she have to go back to work (full time, part time or not at all). The second set of questions was could they retire early at 55? She is currently 35 and he is 37.
Ok before I even look at dollar number I’m already struck by something. They are waiting too long to have kids. After age 35 your odds of medical problems with your kids start increasing dramatically for woman. So to avoid things from getting worse for odds in a health sense you need to start having a baby RIGHT NOW. Do not pass go, do not collect $200 go straight to the bedroom and have sex. We will sort out the money after the fact. Also people generally assume you can get pregnant at the drop of the hat, which some people can. While other can not. You don’t want to find out the hard way it takes you over a year to conceive. Therefore get busy having lots of sex.
Now with that out of the way, let’s get onto sorting out the money issues. She makes $70,000/year while his is a bit more variable so I’m suppose to use the lower number of $50,000 to be conservative.
Expenses are currently as follows:
Expenses – Basic (monthly)
Car payment = $500 /month (will be done in April 2010)
Transit pass = $96
Groceries = $300
Toiletries = $100 (includes cleaning products)
Property tax = $280/month
Heat, hydro, water = $200/month
Cell phones, cable, internet = $200/month
Insurance policies (critical illness, health, life) = $200
House and car insurance = $200/month
Parking pass for husband = $100/month
General maintenance for car = $42/month
Gas for car = $100 month
Total = $2318/month or $27,816/yr
Discretionary Expenses (monthly)
Clothing = $150
Travel = $1200
Restaurants = $300
Entertainment = $100
Cleaning lady = $160
Total = $1910/month or $22,920/year
Grand Total = $4428/month or $50,736
Ok obviously they have a serious love of travel (they take a lot of cruises) and for those reading the above carefully would note they also own their own home free and clear. Instead of the traditional mortgage they pulled off a Smith Maneuver so they just have very large taxable investment accounts and very large investment loans to match. Yet for today I’m generally ignoring their assets to focus on their first baby related question.
Because of their Smith Maneuver I can’t predict their after tax income. It’s just too complex for me to even guess at. So after being assured that they get enough income from their investments to cover the loan interest and pay it down in 20 or so years I’m going to ignore it. Instead I just plugged in their regular income into a tax calculator and assumed no deductions and got rough estimates of after tax income of $52,800 for her and $39,150 for him.
So during baby’s first year when mom is off, life is fairly good. Mom would get about $400/week from EI and that with Dad’s income could cover their normal expenses and leave some extra to cover baby related costs.
Yet after that if she wants to stay home full time they are going to have to cut back a bit. Currently the difference between his income and their expenses is about $11, 500/year or $965/month. So the obvious solution would be drop the cleaning lady to cover off the baby expenses and then drop the travel budget to zero until the car payment is done. Then make some or all of the car payment money your basic travel fund. So then net their spending would be down $1200/month. That would leave a bit extra wiggle room since I don’t see any retirement savings in the above. The couple can use their Child Tax Benefit money to fund the kid’s RESP. Then if the husband has a good year they can bank it up in a travel fund for an extra trip or throw money at their retirement plan.
Now the above doesn’t consider yet the whole early retirement plan or the fact mom might decide she doesn’t want to stay home with the kid all the time. I know many mothers who like to work part time just to have a bit of their own life that doesn’t involve the kids. So just because you don’t have to work doesn’t mean you don’t want to work a bit. Consider part time work or even trying a home based business. I’ll touch these options a bit more next week when I look at the early retirement question.
So to summarize: yes have kids now, you can afford to stay home if you give up some travel and are willing to make it a bit more of variable expense to match the fluctuations in the husbands income. Any one else have some ideas for this couple so far? If so please share in the comments.
Posted by Canadian Dream on November 4, 2008
I do like my inbox some days. Jordan sent me a note with the following interesting question:
Hey Tim, I was chatting with friends last weekend about money and told them of my plan to retire early. They thought I was crazy and basically take a much different tact of using their money now and so aren’t able to put much away for the future.
One thing that came up was the subject of inheritance, they have 2 sets of parents who have been successful professionally and probably each have a net worth of a few million per family. They figure that eventually they will inherit a portion of that and count it in their financial plan for retirement. My own parents are near the same financial level, and again they think I’m crazy because I’ve never planned on getting anything.
I’m curious where you fall on this topic, I doubt you would count on it either, but is it worth avoiding completely or is there some way or even reason to plan for it?
Maybe since most people plan to retire at 65 they are at the age when inheritance might be coming and needed the most without savings of their own. Where as early retirees need a to have a more solid financial base decades before inheritance would even be likely?
Ah, inheritance. It’s one of those sliding scale kind of issues when talking about retirement planning. To those that expect to get nothing or near nothing they don’t worry about it. To those that may get $500,000 plus it could be rather significant.
I personally like to rephrase the question to people. Hi we’ve got this great new investment product that could give you up to a million dollars during your retirement. The drawback is it’s based on a complex life insurance scheme that means we have no idea when you will see the money or the exact amount you will receive. Do you want to invest?
Of course a rational person would go: NO! I tend to agree and don’t plan on getting a dime from my parents after they die. After all we are talking about people that will likely live till 90+ so they could eat up a fair amount of their wealth just on long term care or other medical costs as they age. Also they might decide to skip their kids and give some of the money directly to their grandchildren when they are alive. Not to mention if they even get close to the same age of their parents before they die I won’t see any money until I’m in my 60’s. Hardly useful to me when I would have already been retired for over 15 years at that time.
Overall I suggest to people that you don’t plan on inheritance for any of your basic retirement expenses. If you want to treat it as a vacation slush fund or buying a second home someplace warm, so be it. It can make a good retirement just a bit nicer. Just make sure you are not planning on that money to eat or pay rent in retirement. Your parents already looked after you as a kid, don’t expect them to do it when they are dead. Be a big person now and plan for your own retirement regardless if you plan to do it early or at 65.
Well that’s my two cents on that topic. What are your plans for any inheritance you might receive? Would you use it in your retirement planning? If so, how would you use it?
