Late Start On Retirement Planning


In Toronto, a couple we’ll call Robert, who is 39, and Julia, who is 38, arrived in Canada as immigrants in 2001 with virtually no assets. Since then, they have done well. They have a house with an estimated value of $400,000. Their only debt is a mortgage that will be paid off in 91/2 years. Having started late in building their capital, they worry they won’t be able to save enough for the postsecondary education of their daughter, now two years old, and for life after they end their careers.

“We send money to our families every month. Now we need to know how much we will have for our retirement when the time comes,” Robert explains.

What Our Expert Says

Facelift asked Derek Moran, head of Smarter Financial Planning in Kelowna, B.C., to work with Robert and Julia. “He has been very clever about his financial decisions,” Mr. Moran says. “He is focused on paying down his mortgage and will have substantially reduced that debt before interest rates rise significantly in several years to combat future inflation.”

Robert and Julia don’t have the usual choice to make between RRSP savings and debt reduction, Mr. Moran notes. Robert’s large annual company pension contribution reduces his RRSP space and leaves him with little room for RRSP savings. Julia uses an RRSP to capture her employer’s matching contribution.

Robert has been a member of a defined benefit pension program run by a unit of the Ontario government. He has been in the plan since April, 2003, and by age 60, he will have 26 full years of service. If Robert works to age 60, then his annual pension will be $39,653, Mr. Moran estimates. He would have a bridge to age 65 of about $7,128 a year. If he works to age 65, his pension will be $46,890. There is a 100-per-cent spousal survivor benefit on the basic pension, though nothing on the bridge.

Julia’s company has a group RRSP through which it matches her contributions up to a limit of 4 per cent of her salary. She should be able to get $5,000 a year out of her plan beginning at age 65, Mr. Moran estimates.

The couple will receive CPP benefits. By age 60, Robert will have earned 64 per cent of the maximum benefit credits and 76 per cent by age 65. If Julia continues to work at her present salary, she should have 55 per cent of maximum CPP benefits by age 60 and 66 per cent by age 65, the planner estimates.

“ We send money to our families every month. Now we need to know how much we will have for our retirement when the time comes ”— Robert explains

Each partner can work to age 60 and then defer commencement of CPP benefits to age 65. At that time, Robert would receive $6,946 a year. Julia, on the same basis, would receive $5,000. If each partner works to age 65 and then begins benefits, they would be $8,277 for Robert and $7,175 for Julia. All sums are in 2009 dollars.

By age 65, Robert will have been in Canada for 34 of the 40 years needed to qualify for the maximum Old Age Security pension, currently $6,204 a year. That works out to $5,273 a year. Julia, a year younger than Robert, will receive about $5,429 a year.

Adding up the total pension benefits from Robert’s employer, their CPP and OAS, and assuming that they defer taking CPP benefits until they are 65, the couple will have $39,653 from Robert’s job, his bridge of $7,128 a year to age 65, for a total of $46,781. At 65, they lose the bridge, but gain $8,277 from Robert’s CPP, $7,175 from Julia’s CPP, $5,000 from her RRSP and OAS payments in the amounts of $5,273 and $5,429 for a total of $70,807 a year.

Robert and Julia can increase their registered education savings plan contributions to take advantage of the Canada education savings grant. Currently, the couple puts $600 a year into an RESP. They can raise that to $2,500 a year to take full advantage of the CESG limit, which is 20 per cent of contributions to a limit of $500.

If they add the full $2,500 a year beginning in 2009 and receive the $500 CESG grant each year, then, assuming a 3-per-cent annual real return, the plan would have $58,954 of assets, which would easily support a $15,000 payout per year for a four-year university program, Mr. Moran says. If they maintain the present level of funding, the RESP would have just $12,988 on the same assumptions. That would provide $3,300 a year for a four-year program. The difference is a choice between going to a local university and living at home versus a choice of many universities across Canada.

By the time they retire, Robert and Julia will have a disposable income comparable to what they now spend on themselves after mortgage costs and employment expenses are removed from their budget.

“Their income will be based on secure pension flows for their lives,” Mr. Moran says.

Client situation

The People

Robert, 39, and Julia, 38, a couple in Toronto who support extended families

The Problem

Late start on building retirement savings

The Plan

Rely on Robert’s substantial employment pension, Julia’s RRSP

The Payoff

Comfortable retirement in spite of delayed planning

Monthly income after tax



House $400,000; Savings $7,000; RRSPs $31,518; RESP $952; Car $7,000; Total: $446,470
Liabilities: Mortgage $313,453

Monthly disbursements

Mortgage $3,033; Property tax $2,80l; Food & restaurants $854; Clothing $60; Child care $1,000; RESP $50; Car fuel, repairs $200; Car, home insurance $210; Travel $650; Life insurance $45; Gifts to parents $553; Utilities & bus $652; Misc. $200; Saving $756; Total $8,543

© The Globe and Mail, Used by Permission