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

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John* is a single father of a younger daughter and is considering how he can help her by post-secondary training whereas retiring or not less than shifting to part-time consulting work in 5 – 6 years after which begin to journey three to 4 months annually.

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 earnings, John has been receiving a pension of $65,000 a 12 months listed to inflation from his former employer. If he retires as deliberate, he might 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 thirty days.

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John has been divorced for about two years and this 12 months, due to the extra pension earnings, he ought to be capable of eliminate 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 desires to take care of 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 12 months, I’m centered 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 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 education savings plan (RESP) for his daughter and whether or not he ought to apply for Canada Pension Plan and Old Age Security advantages at age 65.

“With two listed pensions, can I delay as a way to maximize advantages? Is there anything I ought to take into account shifting ahead?” he requested. “I’ve a little bit of time to be in a really snug place in 5 years.”

What the professional says

Ed Rempel, a fee-for-service monetary planner, tax accountant and blogger, believes John will want about $120,000 a 12 months in earnings to retire along with his present way of life plus future journey bills, which he estimates at $20,000.

“Proper now, John is on monitor to retire on $105,000 a 12 months in 5 years, which might permit for an additional $10,000 a 12 months for journey,” he mentioned. “To extend his annual earnings 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 big quantity, however along with his excessive earnings and the employer pension he’s already accumulating, he ought to have simply over $7,000 a month after bills accessible money stream to speculate,” he mentioned. “Nonetheless, if John can tolerate the chance of a high-equity portfolio, he would solely want to speculate about $4,500 a month for the following 5 years.”

Increase a $500,000 funding portfolio in 5 years would simply permit John to withdraw $15,000 to $20,000 a 12 months further from age 60 to 65 to help a extra snug retirement.

In both case, and as a normal piece of recommendation, Rempel recommends “by no means getting used to a way of life you can not maintain.” In John’s case, he mentioned it might be a mistake to get used to spending his further money stream as an alternative of investing for the following 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 the most effective 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 might be vital for non-registered investments. Proper now, his retirement earnings is sort of solely primarily based on his pensions. If he doesn’t make investments considerably, he would wish 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 offers an implied return of 8.7 per cent per 12 months.

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

John additionally questioned 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 could be a problem to qualify for a good bigger mortgage after he retires.”

As for saving for his daughter’s training, Rempel mentioned contributing $5,000 a 12 months 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 individual financially depending on him and who will already inherit his internet price.

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“Entire life insurance coverage is way costlier 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.”

* Title has been modified to guard privateness.

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