Weekend Reads How much you need to retire at age 55 in small-town Ontario

00:20  05 december  2017
00:20  05 december  2017 Source:   MoneySense

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Am I on track? Chris and Anne ask MoneySense if their plan will work.

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IMG_8750© Used with permission of / © Rogers Media Inc. 2017. IMG_8750 Chris P. and his wife Anne are both 36 years old and live in a small rural town in northern Ontario. Chris is a safety inspector and Anne works as an administrative assistant. The couple also has three boys under the age of eight. “We’re busy,” says Chris, whose wife Anne just returned to work earlier this month after her third maternity leave. “With hockey, baseball, soccer and lots of nature walks with the kids, we try to fill our spare time with doing activities with the boys,” says Anne.

The couple has a household income of $115,000 with Chris being the highest income earner in the family, earning $90,000 and Anne earning $25,000. Both work full-time. And even though they have large expenses on their budget these days—daycare is about $9,400 a year while food and groceries—including diapers and other baby products—comes in at about $20,000 annually. “With three kids, expenses can be high but we are still very much savers,” says Chris. “It’s our good savings habits over the last 10 years that have allowed us to build up our retirement savings.”

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How much you need to retire aged 55 , 60 and 65 really depends on the lifestyle you would like to have in retirement , while also considering that due to better health for an ageing population, life expectancy is increasing.

Retirement at 55 is a surprisingly attainable goal for most people; however, it does require saving discipline and an Below we offer a step-by-step guide for how to get there. Related Articles. How To Retire At Age 40. Round Up Purchases. As you know, small amounts of money can quickly add up!

Owning their own home was one of their top goals when they married 10 years ago and today they own a small, three-bedroom home they bought several years ago. It has a small mortgage on it that they hope to pay off within the next five years. “We’d like to pay it off as quickly as possible,” says Chris. “The house is worth about $400,000 and we have no plans to move up to a larger one, even though that means that two of our boys will have to share a room. We’re fine with that. We’re really focused on saving for retirement now—an also contributing to the boys’ Registered Education Savings Plans (RESPs) when we can—because our goal is to see if we’ll be able to retire at age 55.”

Still, the couple is not sure they will actually retire then, “but it’s nice to know we are planning our financial affairs to do that if we want to when we reach our mid-50s,” says Chris. Right now, their savings plan consists of the following: Chris contributes to his employers Defined Contribution Savings Plan (DCSP), to which his employer contributes as well. He also has a Registered Retirement Savings Plan (RRSP) worth about $250,000 that he’s been maximizing contributions on his entire working career. “I’ve always topped up my RRSP, regardless of our expenses,” says Chris. “I’m the higher income earner by far, so it just pays to have me contribute to the RRSP—for now.”

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Deciding exactly how much you need to retire at any age is a personal decision, but the best way to calculate it is to determine your retirement budget. Keep in mind that if you are retiring at age 55

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Their other assets include $40,000 in Anne’s RRSP and $13,000 in Chris’s Tax-Free Savings Account (TFSA). Anne doesn’t have a TFSA yet. “Anne has back contribution room of $40,000 for her RRSP but she makes less than $30,000 annually so it’s not a goal of ours to top that up,” says Chris. “In future, there will be extra money as the boys grow and that’s when we plan to contribute to Anne’s RRSP and TFSA.”

The couple’s goal is to retire at age 55 with a comfortable net income of $45,000 to $50,000 annually. “Our investments are all in high-growth portfolios that are 80% equities and 20% fixed income,” says Chris. “The same goes for our RESPs for the boys, where we have $8,000 invested for each child. We plan to contribute just enough over the next few years to get the full RESP grant for them.”

The couple doesn’t see any big expenses on the horizon. “We plan to stay in our home until retirement,” says Anne. “No upgrading to a bigger home for us. At most, we’ll do a renovation if we feel we need some extra room but we would never borrow money for that. We’d save the money and then pay it off.”

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What Anne and Chris may do when they retire is a bit of traveling. “We had a destination wedding in the Dominican Republic 10 years ago and we really had a lot of fun,” says Anne. “We like economical travel and it’s in our nature to want to stay away from any type of financial mental stress. We’re not big spenders but I’m sure we can find lots of things to do if we retire at 55.”

WHERE CHRIS AND ANNE’S FINANCES STAND TODAY

Home: $400,000

Christopher’s RRSP: $250,000

Anne’s RRSP: $40,000

Christopher’s TFSA: $13,000

Anne’s TFSA: $0

RESPs: $24,000

Total Assets:  $727,000

WHAT THE EXPERT SAYS

“Chris and Anne are off to a great financial start,” says Janet Gray, a certified financial planner and money coach in Ottawa. They will have a paid-off home in five years and have no plans to move up, which is great for a retirement plan.” And Gray explains how the house may feel a bit small now, but it’s just the right size for them—allowing them to have extra savings to focus on building their retirement nest egg.

Gray also notes that Chris is doing the right thing by topping up his RRSP, which at his income level provides a great tax refund. “I suggest he look at contributing to Anne’s Spousal RRSP in the near future, which will still give Chris the tax refund now—and uses his RRSP contribution room—but will allow for better income sharing in retirement along with less tax overall.”

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Spending your days of leisure at 50 while many of your peers are still forced to work out of financial necessity could be within your reach if you follow the FutureAdvisor step-by-step guide. Related Articles. How To Retire At Age 40. in Early Retirement .

Listed below are the ending values at age 65 based on those assumptions More from my site. How Much Money Do You Need to Retire ? Saving and Investing With Smaller Amounts of Money.

Aiming to pay off their small mortgage in five years is a good strategy. “They should stick to this schedule as it allows them to have the room in their budget to top up the RESPs for the kids as well as Chris’s RRSP.”

With Anne working full time again, Gray also says it would be wise to open a TFSA for her so she can build retirement savings there because, at her much lower income level her own RRSP is not the best tool for her. The spousal RRSP from Chris is the better savings method.

“As well, getting the extra boost from the employer match on contributions in the Defined Contribution Savings Plan is also beneficial,” says Gray. “It’s free money on the table so it’s a benefit that Chris—and anyone else who has such a plan at work—should take advantage of fully.”

Gray goes on to explain that once the daycare costs slowly fade over the next three to five years, there will be more resources to redirect to savings. “But staying on their current track, and with a goal of a modest retirement net household income of $50,000 annually, they will have no problem being able to retire at age 55 as planned.

As well, Gray says the couple should also continue to top up the kids RESPs at $2,500 per child in order to get the maximum Canadian Education Savings Grant (CESG). “Because Anne is working too now, there will be money in their present budget to keep making these contributions for the kids.”

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% Average Annual Inflation Rate. % How much do you need to live on annually? (in today's $). Step 2. Now do the calculation from age 55 to 65 years. 15=Years until you retire . ( age 40 to age 55 ).

Deciding exactly how much you need to retire at any age is a personal decision, but the best way to calculate it is to determine your retirement budget. Keep in mind that if you are retiring at age 55

Finally, Gray’s analysis shows that long term, the couple will be just fine. She has run the numbers and projected out to age 100 for both Chris and Anne.  “If Chris continues to max out his RRSP room until retirement and he’s able to achieve 6.5% in net return on his investments, the couple will meet their goal. With the 80% equity and 20% fixed income mix they now have, the investments should yield the required 6.5% average annual return that they need to make retirement at age 55 achievable. “The projection I’ve done includes Chris taking full CPP benefits at age 65 and Anne getting 50% of CPP benefits at age 65, due to her lower income,” says Gray.

What could change the plan? Of course, if for whatever reason they adopt a more conservative portfolio of 60% equity and 40% fixed income at some point in the future, they would then need to contribute more money to their retirements savings or wait a couple of years longer to retire completely. “A more conservative portfolio would likely net them an average annual return of only about 4% net—not quite enough to retire at age 55 on $50,000 net annually,” says Gray. “But even then, if they were willing to cut expenses and live on a more modest $45,000 net annually—which doesn’t seem hard for them since they enjoy simple living—their dream of retiring fully at 55 would still work out.”

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