Ontario couple want to retire self-employed

Expert says it’s doable if they increase savings and reduce costs

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In Ontario, far from the Bay Street Canyons, a couple who will be called Peter and Lucy, both 55, live a comfortable life in a $1.1 million home with a combined after-tax income of $12,524. $ per month. They feel like they’ve been on their career treadmill for too long. They have a vision of freedom – offices and meetings – and being able to pursue their own distinct goals of earning a living. Their problem is to come up with a three-decade retirement plan that begins in five years, when they turn 60. It can be done if they grow their savings and reduce their costs.

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Pierre and Lucie are not sure that their RRSP and TFSA savings totaling $509,890 minus $354,000 in debt will be able to sustain them. Their retirement income goal is $90,000 after tax in 2022 dollars.

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The plan is for Lucy, who works in technology, to quit her full-time job and work as a consultant. Its objective is to acquire more flexibility in terms of working hours. Peter, who struggles in business development, wants to quit his job and then do contract work that would bring in $50,000 a year before taxes.

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Expense management

They want a retirement that preserves their pleasant living environment and their income but allows them to reduce their expenses, in particular by reducing their housing. It would seem like a simple process to transfer wealth from a home into retirement income, but the problem is doing it effectively.

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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, BC to work with Peter and Lucy. According to him, they must save so that their retirement is more than a pipe dream.

Moran says they are behind in building up their RRSPs and increasing those balances should be a priority. He suggests they put the $10,800 currently in their TFSA into Lucy’s RRSP for an immediate 48.5% return from a tax refund, then contribute the money back the following year.

Lower the costs

First, the cars. Peter and Lucy have two slightly aging luxury cars and a car loan that costs them $1,209 a month. This represents 10% of their net income. They can transfer the loan to a home equity line of credit with what would probably be half the interest they are currently paying, and slowly pay off the HELOC. Once self-employed, they can charge for work-related mileage, including finance charges. This process can free up $900 per month, Moran estimates. The savings can go into Lucy’s RRSP.

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Next stop: home. Their current mortgage debt of $312,000 is amortized over 18 years. They’ll be in their mid-70s by the time it’s paid off. Rising interest rates will likely increase the interest cost of their mortgage by 2.4%, now $1,734 per month, when it rolls over in December 2026.

Peter and Lucy should consider downsizing their home to around $825,000. This would free up $275,000 less on selling costs. In five years, their current mortgage debt will be less. Their home equity will be similar to the price of their target retirement home. It would also potentially increase cash flow, as the couple currently only have $5,000 in cash. They could get the new house without any mortgage. Profitable for 30 years from age 60, these funds will produce $13,620 per year before taxes.

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In their semi-retired future, their combined expenses of $12,524 could decrease thanks to the elimination of $1,734 in monthly mortgage costs, $1,209 in car loan payments and $5,617 in savings. This represents a total reduction of $8,560, bringing their expenses to $3,964 per month or $47,568 per year.

Using age 65 as a benchmark, they will each receive $13,500 in annual CPP benefits and will be eligible for full OAS of $8,000 per year. That’s a total of $43,000 as part of their required gross retirement income of $105,000.

Building Capital

Adding their TFSA balance as a one-time contribution to their RRSP of $499,090 would increase the value to $509,890.

If they themselves add $4,617 to RRSPs and the same amount from employers in matching plans, that totals $9,234 per month or $110,808 per year. Tax refunds from the enhanced contributions would add $40,000 to annual income.

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Then add $4,446 per year saved by streamlining a dozen small life insurance policies into a single term policy of $500,000 over 10 years, $987 per month or $11,844 per year with car loans that they can eliminate by selling one of their cars, and $1,353 per month or $16,236 per year in savings on dining, travel and entertainment expenses, and they will have additional annual contributions of 32 $526.

At age 60, RRSPs of $509,800, having grown for five years with annual contributions of $143,334 at 3% after inflation, will be worth $1,374,800 and will then pay out $68,098 for 30 years until the age of 90. After qualifying income splitting and an average of 12%. tax, they would have $59,926. This is below their goal of $90,000. $13,620 from house downsizing would bring income to about $72,000 after tax. Spread $40,000 in tax refunds for the last year of work over the five years until retirement and they would have $80,000 a year to spend. An early start to CPP for an adjusted partner with a 36% cut reducing the net payout to $8,640 could close the gap, but Moran says it’s best to keep CPP intact and try to cut spending during this period.

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At age 65 and over, they won’t have RRSP contributions and corresponding tax reductions, but each can access $8,000 per year of Old Age Security and individual benefits estimated at $13,500 Canada Pension Plan for a total annual pre-tax income of $124,718. After splitting and average tax of 16%, they would have about $104,000 a year to spend.

Retirement at age 60 is possible subject to market volatility and price inflation. Our assumption of a modest 3% post-inflation return on RRSPs, cost cutting like eliminating a car in retirement, and streamlining life insurance policies add cost reductions to the income estimate. Good portfolio management will help them achieve their goal.

Retirement Stars: 4**** out of 5

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