John and Mary in their 20s
Both John and Mary started their 20s in university. They studied hard, learned a lot, made good friends, enjoyed themselves — and then met each other and fell in love. After graduating at the end of their fourth year they got married. It was a wonderful time.
However, not so wonderful was their apparent financial situation. The total cost of tuition, books and living expenses for John (who left home to go to university) was $20,000 a year. For Mary (who lived at home) it was $13,000 a year. That resulted in a combined four-year price tag of $132,000 for the two of them. They both worked summers and got some help from their parents, but they still graduated with a combined $50,000 in student loans.
By age 25 they both had jobs with entry-level salaries, but they had no significant money in the bank, no apparent assets, and they still owed $20,000 in student loans. While their financial situation sounds grim, they in fact had a valuable hidden asset: the earning power resulting from their educations. When you consider that the median annual wage of Canadians with a bachelor degree is about $18,500 a year higher than the wage earned by those with just a high school diploma, it’s obvious that going to university was a great investment. It will likely amount to an extra $650,000 each in income over their 35-year careers.
In the remaining years of their 20s, John and Mary continued to progress in their careers, finished paying off their student loans, bought a car, and started to save up for the down payment on a house. Then one day when they were nearing their 30th birthdays, Mary approached John with a twinkle in her eye: “I’ve just been to the doctor and guess what?”
In their 30s
Not long after turning 30, John and Mary were blessed with the birth of their first child, a delightful baby girl named Rachel. With this extra rather expressive person in the family, their small apartment felt cramped. So they scraped together a down payment to buy a house in the suburbs. They stretched to buy as much house as they could afford and opted for a 35-year amortization to keep their payments low. Not long after moving, they were blessed again by the birth of a son, Tyler. By the time Mary got back to work after her second maternity leave, life was a hectic scramble.
By the time they reached 35, their net worth had grown to $100,000. Most of that came from the down payment on their house and subsequent mortgage payments. They hadn’t saved any significant amount on their own, although John benefitted from his employer’s contributions to a defined contribution pension at work.
Still, they were pleased to have mostly managed to stay out of trouble with consumer debt, although they had run up their credit card balances at a couple of points and currently owed $10,000 on a car loan.
In the remaining years of their 30s, they were able to get their finances under better control. Their incomes grew as their careers progressed and as they neared their 40s, they were able to start saving again.
In their 40s
As John and Mary turned 40, they started to find their lifestyle improving. Their expense load lightened a little when the kids no longer needed after-school care. But they still spent a lot on sports, various lessons, summer camp, quickly outgrown clothes, and more electronics.
They continued to get good pay increases as their careers progressed, despite occasional setbacks, like a six-month period when Mary was laid off and out of work.
When they turned 45, they added up the value of their assets and subtracted the money they owed, and found they had a net worth of $250,000. Most of it was in their house. They had managed to make some extra mortgage payments and now more of their regular payment was going to pay down the principal. The market value of their house had ups and downs, but overall kept pace with inflation. They also had about $100,000 in financial assets consisting of a combination of personal RRSPs, RESPs, as well as employer group RRSPs and defined contribution plans. About 70% of their retirement money was invested in equities for growth. They had a small amount of debt attributable to a car lease, but no other consumer debt and were faithfully paying off their credit card balances each month.
During the rest of their 40s, they continued to build savings and pay down the mortgage. As they neared their 50th birthdays, they could see the financial progress they had made, but now they were starting to think about retirement. How much money would they need and when would they have enough?
In their 50s
As their 50th birthday present to themselves, John and Mary paid their financial adviser $1,000 to prepare a financial plan. Their adviser told them that if they wanted to retire at age 65, they should plan to have their house paid off, plus financial assets of between $250,000 to $750,000, depending on the retirement lifestyle they wanted.
John and Mary thought that financial savings of $400,000 would be enough, and secretly hoped they might be even able to retire a bit early. Then they looked at their current financial savings of $115,000 — and the fact they still had a ways to go in paying off the mortgage — and they wondered if they would reach their target at all.
But as their 50s progressed, they found their savings accelerating. It helped that their kids, Rachel and Tyler, had graduated from university and got jobs, so they no longer needed support. By age 55, John and Mary’s net worth was up to $450,000, their $300,000 house was fully paid for, and their financial assets were up to $150,000.
They still had a ways to go, but they made sure most of the money that previously went towards their mortgage and kids’ educations was channeled into savings. They had lots of unused RRSP room, so they were able to generate hefty tax refunds too. These changes supercharged their savings, and they were amazed to find themselves socking away a full $40,000 a year.
In their 60s
By their 60th birthdays, John and Mary had grown their financial savings to $350,000. They were getting close to what they felt they needed to retire, but they weren’t quite there yet. Then John was laid off. Mary was growing weary of the 9-to-5 grind and didn’t know how much longer she wanted to keep going. John received a good severance package, but had
trouble finding a new job.
John started taking temporary contract jobs. They paid almost as well as his previous job, but without benefits. Mary soldiered on at her job for a couple more years. Then she took on a part-time job with the same company with less stress, but at a lower pay rate. They continued to save money, but at a slower clip. John gradually scaled back his contract work and they both retired fully at age 65.
When they retired, John and Mary’s nest egg was worth $400,000, plus they had saved up a $30,000 dream fund for an extended trip to Europe to celebrate their new freedom. About two-thirds of their savings were invested conservatively in fixed income, with the remainder in stock ETFs. The value of their house had kept pace with inflation in the previous decade and was worth $300,000. Their combined net worth was $730,000, and they were debt-free.
Starting at 65, they lived on a total of $46,000 a year, plus subsequent inflation adjustments. Their annual income consisted of $30,000 from CPP and OAS, plus $16,000 drawn from their savings.
With more time and no work-related expenditures, they found they spent less on things like meals out and clothing, and they sold one of their two cars. On the other hand, during the first few years they spent a lot more on travel. They spent much of their dream fund on a spectacular two-month tour of Europe when they were 66. As the years rolled on, they realized they were financially secure. Their planning had paid off and they were getting the most from a rewarding and comfortable retirement.