Is Saving $500,000 In Investment Income Enough For Couple To Meet Their Retirement Goals?

Kathy,* 50, and Trevor, 53, have two financial goals they want to achieve before Kathy retires at age 55 and Trevor retires at age 60. They want to pay off the mortgage on their primary residence and build up $500,000 in easy-to-access investment income — they are thinking about a laddering strategy for guaranteed investment certificates (GICs) — that will allow them to spend three months out of the year travelling and help their two young adult children, should they need it.

Kathy earns $117,000 a year before tax and will receive an annual employer defined benefit pension of $62,400 (also before tax) if she retires at 55. Trevor earns $145,000 a year before tax and will receive $78,000 a year before tax from his employer defined benefit pension at 60.

The couple’s primary home is valued at $1.2 million and they have a $240,000 mortgage at 5.59 per cent, which matures in just under 10 years and costs them $2,400 a month. They also have a rental property valued at $620,000 with a $178,000 mortgage at 3.6 per cent interest that matures in 17 years. The property generates a small net annual income of $1,500. They would like to keep it but only if it makes sense.

They are considering two strategies. One is to sell the rental property and use the proceeds to pay off their current mortgage and invest the rest. The other is to keep the rental property and refinance it to pay off the mortgage from their primary residence.

The family’s monthly expenses are about $12,000, a figure that includes costs associated with competitive sports and transportation costs for both children. With both children in university this fall, this will free up at least $600 a month.

Trevor and Kathy have focused on maximizing their registered education savings plan (RESP) , which is currently worth $82,000. They now plan to maximize their tax-free savings accounts (TFSAs) , currently worth $30,000 and invested in mutual funds. They also have $27,000 in registered retirement savings plans (RRSPs) , also invested in mutual funds, but aren’t sure if they should maximize contributions, as they both have pension plans.

The couple have experimentally invested $8,000 in cryptocurrencies. “I’m not sure where it falls into overall planning and funds for crypto are limited,” said Trevor.

Both Trevor and Kathy have life insurance through their employees and they each have $250,000 in term insurance that matures in 2035. They have an opportunity to convert to whole life policies, but aren’t sure if that is necessary, especially since premiums will likely be expensive. Or should they forego the policies and direct that money to ETFs or other savings products?

What the expert says

To meet their goals of early retirement , saving $500,000 is an appropriate amount, said Ed Rempel, a fee-for-service financial planner, tax accountant and blogger. To pay off the mortgage in the next five years, Kathy and Trevor will need to invest $6,300 a month in GICs — their desired strategy — and increase their mortgage payment by $2,200 a month to $4,600. The problem: they only have about $1,700 in monthly cash flow available now, said Rempel.

The easiest, and most effective, solution is to sell their rental property, he said. “Keeping it and refinancing to pay off the mortgage on their primary residence will create tax issues, as only the rental property portion of the new combined mortgage is tax deductible. At the same time, their return on the rental property is low. If they sell it and use the proceeds to pay off their home mortgage and invest the remaining amount, which should be about $170,000 based on the $440,000 in equity they have built up, they can achieve their goals.”

With their mortgage paid off, they should have just over $4,000 a month cash flow available, Rempel said. “They would need to invest $3,100 a month and the $170,000 remaining proceeds to accumulate $500,000 by the time Kathy retires.”

If they invest all of it in balanced mutual funds, such as their existing investments, instead of in the GIC ladder, then they should only need to invest $2,400 a month, Rempel said. As well, it would be more effective to invest for some growth instead of a GIC ladder since their retirement is likely to last about 40 years.

As for the couple’s concerns about maximizing contributions to their registered accounts, Rempel said given they are both currently in the 43 per cent marginal tax bracket and expect to retire in the 31 per cent marginal tax bracket, they would benefit from using their $170,000 net proceeds from the sale of their rental property and their $3,100 monthly savings to maximize their RRSPs first and then their TFSAs.

“They can contribute their lump sum to maximize their RRSPs, but then deduct the optimal amount each year and carry forward the rest — $7,000 a year for Kathy’s RRSP and up to $35,000 a year for Trevor to get 43 per cent tax refunds on their contributions,” he said.

Because of the uncertainty around cryptocurrencies and what future growth might look like, Rempel’s advice is to keep it if they like but not to consider it part of their retirement portfolio.

Assuming Kathy and Trevor sell their rental property and pay off the mortgage on their principal residence, the question of whether or not they should convert their term life insurance policies to whole life policies depends on the survivor benefit for their pension plans, he said. “If it is available, they should choose 100 per cent survivor benefit so that the survivor would continue to receive the same pension. In that case, they don’t really need any life insurance after they retire. “If they cannot get a 100 per cent survivor benefit (or at least 80 per cent), then converting their current policies to term-to-100 policies would be beneficial and cost less than a whole life policy,” said Rempel.

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*Names have been changed to protect privacy

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