A single dad nearing retirement hopes to fund daughter’s training

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John* is a single father of a younger daughter and is considering how he can assist her by means of post-secondary training whereas retiring or at the very least shifting to part-time consulting work in 5 – 6 years after which begin to journey three to 4 months every year.

The 55-year-old is a health-care skilled and earns about $210,000 yearly earlier than tax. He joined his present employer about 4 years in the past after a public-sector profession. Since January, along with his present employment revenue, John has been receiving a pension of $65,000 a yr listed to inflation from his former employer. If he retires as deliberate, he can be eligible to entry his present employer’s pension plan, additionally listed to inflation, which might add one other $2,000 to $2,500 per 30 days.

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John has been divorced for about two years and this yr, due to the extra pension revenue, he ought to be capable to eradicate the debt he incurred when the wedding ended, together with a $20,000 line of credit score and $23,000 in credit-card bills.

His largest expense is the $700,000 mortgage at 2.1 per cent he took out to purchase his ex-wife’s fairness stake within the household dwelling, which is valued at $1.35 million. His present month-to-month bills are $6,965, together with $1,300 in biweekly mortgage funds.

“If my daughter goes to college, I can downsize or faucet into the fairness in my dwelling to assist her and to fund journey and different features of my life as they develop,” he mentioned.

John lives in Vancouver, a metropolis he loves and needs to keep up a foothold in, even when he does promote his present dwelling.

“I took out a 30-year mortgage to maintain my month-to-month funds low to grasp how costly it’s to dwell alone,” he mentioned. “This yr, I’m targeted on erasing the residual debt of my divorce after which saving. What short-term investments can I make within the subsequent 5 to 6 years that may carry me by means of that low-cash-flow interval between the ages of 60 and 65?”

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John at present has a modest funding portfolio that features $15,000 in mutual funds in a tax-free financial savings account (TFSA), $5,000 in a non-registered account (additionally invested in mutual funds) and $5,000 in money for emergencies.

He wonders if he ought to spend money on a registered training financial savings plan (RESP) for his daughter and whether or not he ought to apply for Canada Pension Plan and Outdated Age Safety advantages at age 65.

“With two listed pensions, can I delay as a way to maximize advantages? Is there the rest I ought to contemplate transferring ahead?” he requested. “I’ve a little bit of time to be in a really comfy place in 5 years.”

What the knowledgeable says

Ed Rempel, a fee-for-service monetary planner, tax accountant and blogger, believes John will want about $120,000 a yr in revenue to retire together with his present way of life plus future journey bills, which he estimates at $20,000.

“Proper now, John is on observe to retire on $105,000 a yr in 5 years, which might permit for an additional $10,000 a yr for journey,” he mentioned. “To extend his annual revenue in retirement to $120,000 would require $500,000 in investments along with his two beneficiant pensions and CPP and OAS.”

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To get there, Rempel mentioned John might want to make investments about $7,000 a month.

“It is a enormous quantity, however together with his excessive revenue and the employer pension he’s already gathering, he ought to have simply over $7,000 a month after bills accessible money circulation to take a position,” he mentioned. “Nonetheless, if John can tolerate the danger of a high-equity portfolio, he would solely want to take a position about $4,500 a month for the subsequent 5 years.”

Build up a $500,000 funding portfolio in 5 years would simply permit John to withdraw $15,000 to $20,000 a yr further from age 60 to 65 to assist a extra comfy retirement.

In both case, and as a common piece of recommendation, Rempel recommends “by no means getting used to a life-style you can’t maintain.” In John’s case, he mentioned it will be a mistake to get used to spending his further money circulation as a substitute of investing for the subsequent 5 years as a result of it means he must spend much less on his way of life in retirement.

“With $75,000 in TFSA contribution room, maximizing his TFSA is one of the best place for John to begin to keep away from tax on these investments. After that, he ought to simply spend money on non-registered investments,” he mentioned. “He’s in a excessive tax bracket, so investing tax effectively can be vital for non-registered investments. Proper now, his retirement revenue is sort of totally primarily based on his pensions. If he doesn’t make investments considerably, he would want to begin his CPP and OAS at age 60 to retire at age 60.”

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If he does make investments considerably now, Rempel recommends deferring CPP and OAS to age 70, which supplies an implied return of 8.7 per cent per yr.

“He’s a reasonable investor and it’s unlikely his funding returns would offer extra,” he mentioned.

John additionally puzzled if he ought to faucet into his dwelling fairness for journey or different bills from age 60 to 64.

“It is a first rate choice that may permit him to defer CPP,” Rempel mentioned. “If he desires to do that, he could have to extend his mortgage shortly earlier than retiring, since it might be a problem to qualify for an excellent bigger mortgage after he retires.”

As for saving for his daughter’s training, Rempel mentioned contributing $5,000 a yr to an RESP till she is 17 will present a 20 per cent ($1,000) annual authorities grant. This could cowl her tuition for 4 years, however not dwelling bills.

“If she finally ends up not going to post-secondary, he can withdraw the cash plus 80 per cent of the expansion, however he loses the grant.”

Rempel additionally recommends cancelling the life insurance coverage on himself and the entire life coverage on his daughter, who’s the one particular person financially depending on him and who will already inherit his web price.

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“Entire life insurance coverage is way dearer than a comparable time period coverage,” he mentioned. “The face worth is probably going tiny in comparison with any future life insurance coverage his daughter would possibly want when she is married with children.”

* Identify has been modified to guard privateness.

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