The current situation
Lana, 42, works in Toronto’s financial sector and is the mother of two children aged 8 and 10. “I have been working for 15 years and now I’m ready to step away from the corporate ladder and be a full-time mom,” she says. However, her husband Jeremy, 43, is nervous they won’t make ends meet even on his take-home pay of $7,500 a month. The couple currently owns $1.1 million in real estate, but owe $350,000 in mortgages and an auto loan. They plan to pay $20,000 annually to eliminate their mortgages, until Jeremy retires in 11 years. But despite the plan, doubts remain. “I don’t want to jeopardize a comfortable retirement since we won’t be able to save much when we switch to living on just one salary,” says Lana.
According to Janet Gray, a certified financial planner with Money Coaches Canada in Ottawa, Lana’s on track to leave her job now with enough in her RRSP to last until she’s 100, provided Jeremy doesn’t retire before age 54 and remains a member of his employer’s defined-benefit pension plan. However, to be successful the couple will need to protect Jeremy’s income for the 11-year period before he retires using full disability insurance coverage. They should supplement this coverage with $1 million in term life insurance coverage—to replace his income should he die prematurely. As well, Lana should make minimal, if any, withdrawals from the RRSP until age 71, when it converts to a RRIF. “Assuming a 5% return on the RRSP and a 2% inflation rate, over the next several years, Lana will accumulate $1.7 million in her RRSP by age 70, enough to last a lifetime,” says Gray.