Comfy nest egg needs more feathering

In London, Ont., a successful corporate manager we'll call Vern, 45, grosses $215,000 a year plus bonuses averaging $30,000 a year. His salary supports his wife, whom we'll call Tess, 46, a homemaker, and their 9-year-old child. In spite of their substantial family income, $10,000 a month after taxes and deductions for life insurance premiums and pension contributions, Vern and Tess have only $92,000 in their retirement, education and chequing accounts, and a company pension plan with a value of $66,000. They have lived for the moment in the belief they will die relatively young, as members of their families did.

"I want to retire when I am 60," Vern explains. "Do I need to contribute more to my RRSPs or should I pay down the mortgage faster?"

What our expert says

Facelift asked Caroline Nalbantoglu, a registered financial planner with PWL Advisors Inc. in Montreal, to work with Vern and Tess to estimate how much income they will need in retirement.

"Vern and Tess do not have enough savings to allow them to retire as they wish," she explains. "Either they curtail their lifestyle a little while Vern is earning a substantial salary or cut it a great deal more in retirement."

In less than a decade, their child may begin university. Vern and Tess need to boost registered education savings plan (RESP) contributions from their present level of $100 a month to $208 a month, the planner suggests. That would entitle them to capture the full annual Canada Education Savings Grant of the lesser of 20 per cent of contributions or $500. If they reach that target, the total value of the RESP at their son's 18th birthday would rise from $44,000, with present contributions, to $63,000. That larger sum would pay tuition for four years at university.

Their 4-per-cent mortgage will be fully paid in 14 years, just before planned retirement. They do not need to speed up mortgage payments; retirement savings are more important, Ms. Nalbantoglu says.

Vern's registered retirement savings plan totals $75,000 and he has $75,000 of additional contribution space. His employer puts 5 per cent of his salary into a defined-contribution pension plan. He also has a stock purchase plan to which he contributes $400 a month. His employer adds another 25 per cent or $100 each month. The money goes to his taxable savings, which he uses for RRSP contributions at the end of the year. He should make the most of the company stock-purchase plan by contributing 5 per cent of his salary to get the full company match, and top up the total to reach the RRSP annual limit of $21,000 for 2009, the planner advises.

Vern has a $9,000 balance on his line of credit. He can easily pay that off with some of his annual bonus. His bonus after tax and RRSP refund should total $24,700, the planner estimates. Of that, $5,000 should go to a Tax-Free Savings Account for Vern and another $5,000 to a TFSA for Tess. If they do this each year and get a 3-per-cent annual real return, they should have $232,760 in their TFSA accounts by age 60. These funds can be used without tax on withdrawals to provide retirement income before they tap their RRSPs or begin Canada Pension Plan benefits, the planner notes.

The remainder of the bonus and RRSP refund, about $15,000, can go to non-registered savings. If Vern and Tess contribute that amount every year to age 60, they should have $500,000 in total assets by then, including funds saved in the TFSAs. Thus, at age 60, Vern and Tess will have income of $7,634 from Vern's CPP - $10,905 less a 30-per-cent penalty for beginning benefits five years before age 65 - plus money from his pension plan which will have grown to $486,000, from which the minimum annual withdrawal would be 3.33 per cent or $16,038, for a total of $23,672 a year.

Their expenses, net of retirement savings and mortgage, child care, some food, RESP savings and other items, add up to $5,400 a month. However, that amount will have inflated to $8,417 a month or $101,000 a year with 3-per-cent annual price increases. They can finance this huge gap of $77,328 by drawing down their anticipated $500,000 of non-registered and TFSA savings, Ms. Nalbantoglu says.

By age 65, Vern and Tess will have reduced their non-registered savings and TFSAs close to zero. If they have not used their RRSP assets until age 65, the account will have grown to $1,024,981, the planner estimates. At this point, they can begin withdrawing $21,557 a year from their RRSPs through a registered retirement income fund. Pension splitting should avoid the OAS clawback of benefits of $6,204 per person. In addition, they will have Vern's CPP benefit of $7,634 in 2009 dollars, and two Old Age Security benefits that will total $12,408 for a pretax total of $41,599 a year. After income splitting and tax, the couple would have $36,716 to spend. Meanwhile, their expenses will have grown to $117,000 a year, Ms. Nalbantoglu estimates, leaving a gap of $80,284.

"Vern and Tess must close the massive gap between projected expenses and income by increasing RRSP contributions and using bonuses and tax refunds to add to TFSAs and non-registered plans," the planner says. "They think their ancestry limits their life expectancy. Even if that's true, they have to save much more for retirement. All it takes now is the will."

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The People: Ontario couple, 45 and 46, planning retirement

The Problem: Despite substantial income, insufficient savings

The Plan: Increase savings dramatically

The Payoff: Income sufficient for a comfortable retirement

Monthly net income: $11,000

Assets: House $450,000; RRSP $75,000; RESP $15,000; Pension $66,000; Cash $2,000; Total: $608,000

Monthly disbursements: Mortgage $ 2,000; Prop. tax $600; Food $1,200; Restaurants $300; Entertainment $500; Clothing $200; Child care $200; RRSP $1,000; RESP $100; Car lease, gas $500; Utilities and Internet $1,000; Travel $300; Car, home insurance $400; Group life $200; Charity, gifts $200; Gifts to spouse $800; Line of credit $500; Total: $10,000

Liabilities: Line of credit $9,000; Mortgage $250,000; Total: $259,000