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FP Answers: If I have $350,000 saved now, am I on track to retire in 25 years?

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Personal Finance Family Finance

Expert Says Current Track Exceeds Ava’s Retirement Goals

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06 May 2022 • 10 minutes ago • 5 minutes read • Join the conversation Ava may consider other options, such as retiring earlier, spending more, giving gifts and traveling, says expert. Ava may consider other options, such as retiring earlier, spending more, giving gifts and traveling, says expert. Photo by Getty Images/iStockphoto

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By Julie Cazzin with Brenda Hiscock

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Q: I am 40 years old and want to retire at 65 with an after-tax net income of $70,000 per year. I am currently making $120,000 as an engineer. I recently did a quick calculation and assuming I live to age 100, I will have to save nearly $2 million to pay for this retirement plan. That’s a lot of money for me to save. Currently, I save $25,000 a year for retirement, and have approximately $350,000 between my Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA), invested in a mix of exchange-traded funds (ETFs), government bonds, and employer-owned sponsored funds in a group RRSP.

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My investment mix is ​​60/40 equities/fixed income and my annual investment return has been good, averaging six percent per year over the past few years. I also own a $750,000 apartment with my partner, and we have a four-year-old who we save on a Registered Education Savings Plan (RESP). Our mortgage will be paid off in 10 years. My partner and I are not married and we do not plan to get married, so I prefer to plan for retirement savings as if I were single. Am I on track to retire at 65? — Ava in British Columbia

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FP Answers: Ava, you’ve been seriously thinking about your retirement and you have a long time horizon ahead of you to get it right. Your goal of an annual after-tax income of $70,000 suggests expenses of $70,000 per year. If this is $70,000 in today’s dollars, that could be nearly $115,000 a year by the time you’re 65, assuming a two percent annual inflation rate. Inflation is a hot topic right now, but we estimate long-term inflation around the Bank of Canada’s two percent inflation target.

Assuming you are entitled to the maximum Canada Pension Plan (CPP) and Old Age Security (OAS) benefits, that will give you approximately $38,000 in pre-tax income at age 65. CPP and OAS are indexed to inflation, helping to keep pace with your rising costs in retirement. You can also delay this until age 70 to get a higher benefit, which could work well in your situation. It will be important to review the timing closer to retirement.

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If you continue to contribute a total of $25,000 per year to your RRSP and TFSA accounts, you could save well over $2 million by age 65, assuming those contributions keep pace with inflation. But the six percent annual return you’ve earned on your balanced investment portfolio in the past may be harder to achieve in the future. Assuming a more conservative net return of 4.5 percent on a relatively inexpensive portfolio of ETFs and a group retirement plan, $25,000 in indexed contributions could result in a savings of nearly $2.5 million by the time you turn 65.

Between withdrawals of Minimum Recorded Retirement Income (RRIF) from age 65 – the age I used for you to start your RRIF withdrawals at the scheduled rate of four percent of your RRIF value per year at that time and accrue this income tax-free TFSA withdrawals – the numbers show that your investments can last well past the age of 100. Remember, you don’t have to wait until age 71 to withdraw from an RRIF. Indeed, prior withdrawals coupled with starting CPP and OAS at age 71 often make sense, as it usually yields a higher estate value if you live past the age of 83.

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But there are other things to keep in mind. Your mortgage is repaid in 10 years. This will result in extra cash flow that can also go into retirement savings. Your RESP contributions will be made over 13 years. Then you may have extra cash flow.

Still, you should also consider whether your expenses may increase or decrease as your four-year-old gets older. Perhaps those costs go down when you pay for childcare, giving you even more opportunities to increase your savings. Future gifts to your child may be something to consider in your planning as more and more parents help their children get started with down payments on a first home, buying a car, and wedding expenses.

If you haven't saved money for retirement or saved very little, it probably makes sense to take CPP early.

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Should these new home buyers use their RRSPs or TFSAs to fund a down payment?

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Are you planning to retire? Do you get an inheritance? Then you may be saving more than necessary. It may be helpful for you to examine your financial roadmap and re-evaluate your retirement savings goal.

If you’re saving too aggressively and otherwise have more room in your budget for vacations, charitable donations, or activities for your four-year-old, a retirement planning exercise done with a pay-only financial planner can help you identify those options.

I respect that you and your spouse do things separately, but there may be opportunities to focus your tax-deductible retirement savings in the name of the higher-income spouse, or to take advantage of other good options like corporate savings plans. Anyway, it sounds like you’re on the right track.

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As the parent of a young child and the family’s breadwinner, you should also review your life and disability insurance. Your greatest asset is your ability to earn income, so it’s important to make sure you have enough coverage to ensure your family’s financial security in the event of an unexpected illness or death.

Making projections with a planner can open people’s eyes to what is possible in their lives. In a situation like yours, Ava, where you are exceeding your retirement goals on your current trajectory, you may want to consider other options such as retiring earlier, spending more, giving gifts, and travel. The possibilities are endless. You are well on your way to a comfortable retirement.

Brenda Hiscock is a Paying Only, Advisory Only Certified Financial Planner at Objective Financial Partners Inc. in Toronto.

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