Put your retirement back on track

Everyone dreams of retirement, but Bruce Sellery wonders if you can you afford the one you envision?

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Question

My husband and I are both 42 and we have a 14-year-old daughter. Our house is worth $590,000. We only have $37,000 left on our mortgage, but $250,000 on a secured line of credit at 4%. We have about $110,000 in RRSP savings and add about $10,000 each year, but we have no other pension. We have a combined household income of $133,000 per year and we’d like to retire at age 60 with 80% of our current income to spend. Some days I feel like we’re okay with a net worth of $443,000, but then there are other days when I freak out about our debt. We’ve thought of several options, including rolling the line of credit into our mortgage or downsizing and paying off the debt. What would you suggest?

Answer

Take a deep breath. Freaking out is not very helpful when it comes to getting a handle on your money. And it is also premature—we don’t know if you should be freaking out yet. I’ll be sure to let you know when it is time, but first I’m going to restate your question. It sounds like what you’re asking is this: “Based on what we’re saving, are we on track to retire at age 60 with 80% of our current income to spend? And if not, what can we do about it?”

Pull up a retirement calculator online: The first part of your question is easily answered—as long as you understand that you’re making some big assumptions. For starters, you may not need 80% of your income in retirement to maintain your lifestyle. (See “Retirement calculation pitfalls” for more things to consider when setting your retirement assumptions or read “How much do you need to retire well“)

For now, I’ll stick with your assumption of needing 80% of your income in retirement. I put the information you gave me into an online calculator and assumed a 2% rate of inflation, a 6% return on your investments and the need to fund 30 years of retirement. (After that point I’m assuming that you’ll be living in that all-expenses paid, all-inclusive, luxury resort in the sky.)

Digest the results: It is still not time to freak out, but you’re not going to like these results. To retire at that age with that amount of money to spend, you will need to have saved just over $3 million. On your current path you’ll have just under $700,000, which is, of course, nowhere close.

Are you still with me?

Play with your assumptions: If you increase your retirement age to 70 and decrease the amount of money you have to spend to 60% of your current gross income then you will get a heck of a lot closer to a match. You’ll have about $1.5 million saved versus $2.1 million needed. If you were to increase the amount you put into your RRSP every year from $10,000 to $17,000 then you will reach that new target of $2.1 million. But I bet that won’t be easy with a teenager who just might want to head off for some post-secondary education.

You’ll note that your house didn’t enter into these calculations. Until you sell it, the equity you’ve built is tied up and you can’t use it to put groceries in your fridge. This is where your downsizing idea might come into play. Say you move to a less expensive home and eliminate your debt; you’ll be able to increase the amount that you contribute to your RRSP every month, which needs to be your top priority.

Increase RRSP contributions: Your RRSP savings are what will allow you to pay for groceries, golf and goodies for the grand kids. And right now you are not on track based on the lifestyle you want in retirement. There are two levers you can play with: increase your income or cut your spending. The latter can yield faster results: to improve cash flow by $60 you can either cut spending by $60 or increase income by $100, assuming a 40% tax rate.

I have come up with an approach I call “Sustainable Spending.” It uses the ABC method—analysis, brainstorm and commit. Start by analyzing your monthly cash flow and then brainstorm ways you can improve it. Once you’ve done that then you have to commit to the two-to-three things you are going to change to reach your goal. Improve your cash flow and use the proceeds to beef up your RRSPs and then put the higher tax refund you generate back into your retirement savings.

Maximize your investment returns: Once the money is safely in your RRSP you need to make sure you make the most of it. That means getting the highest return for the lowest cost.

Time to freak out: The bottom line is that you are not on track to get what you want. Now that you know that you can freak out for five minutes, but only if you promise me that when you’re done you’ll take the steps that I’ve outlined above to get a handle on your money. Your daughter needs you to get it together so you’re not begging for a clothing allowance and ride to the mall when you’re 75.

ask@moneysense.ca

One comment on “Put your retirement back on track

  1. I like that you focus on RRSP. My best advice is to leverage that RRSP for increased savings. There are many options, but if someone has enough funds, they can use their RRSP to pay off a higher interest mortgage to the bank, then hold the mortgage in their RRSP, making lower-interest monthly payments back into the account. This reduction in monthly spending opens up more cash for savings or even for further investments. There is also RRSP swapping to consider…

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