National Post Article: A single dad nearing retirement hopes to fund daughter’s education and his golden years

The National Post asked me to review the finances of a single dad nearing retirement who hopes to fund his daughter’s education in his golden years.

The 55-year-old is a health-care professional and earns about $210,000 annually before tax. 

Since January, in addition to his current employment income, John has been receiving a pension of $65,000 a year indexed to inflation from his former employer. 

If he retires as planned, he will be eligible to access his current employer’s pension plan, also indexed to inflation, which would add another $2,000 to $2,500 per month.

Based in Vancouver, he would love to stay in the city, but is open to downsizing.

In the article you’ll learn:

• Whether he should enjoy a great lifestyle during the last 5 years before he retires.
• How much debt he has from his divorce, and how he plans to pay it off.
• Whether or not he should invest in a registered education savings plan (RESP) for his daughter.
• If he should apply for Canada Pension Plan and Old Age Security benefits at age 65.
• Why he needs to invest $7,000/month to be on track for a retirement where he can travel and help fund his daughter’s education.
• Why he needs to build up $500,000 in investments over the next five years to retire the way he desires.

CLICK THE LINK BELOW TO READ THE ARTICLE BY MARY TERESA BITTI:

A single dad nearing retirement hopes to fund daughter’s education and his golden years

Financial Snapshot:

Assets

Primary residence approximate value: $1.35 million, $700k mortgage

2013 Honda pilot $10k value (paid off)

Investment holdings

Life insurance: 

Me term $120/month 

Lola whole $150/mth

Debts

Credit card o/Loans $22k LOC outstandings balance $20k 

Expenses

Mortgage $1300 biweekly 

Strata fees $610 monthly

Utilities $500 monthly 

Groceries $600 monthly

Transportation costs $350 monthly

Insurance premiums $110

Property tax 1500/yr

Dining out/entertainment $800/mth

Travel $6000/year

Financial Planning Notes & Ed’s Insights

Specifically, his goals are to make sure he can support his daughter through post-secondary education, retire or at least shift to part-time consulting work in five or six years and then start to travel three to four months each year. 

John wants to retire with his current lifestyle plus travel for 3-4 months per year in 5-6 years. If the extra travel is about $20,000/year, then he would need about $120,000/year to retire with his desired lifestyle.

For that lifestyle, on top of his 2 generous pensions and the government pensions, he would need about $500,000 in investments. To achieve this, he would need to invest about $7,000/month. This is a huge amount, but John should be able to afford this.

With his high income and collecting his other pension already and his lifestyle expenses of $6,65/month, John should have just over $7,000/month available cash flow that he could invest.

General advice: “Never get used to a lifestyle you cannot sustain.” It would be a mistake for John to get used to spending this extra $7,000/month, since then he would not be happy having to cut back when he retires.

If he can tolerate the risk of a high equity portfolio, then he would only need to invest about $4,500/month for the next 5 years, which he should be able to do easily.

John is on track to retire on $105,000/year in 5 years, which would allow for an extra $10,000/year for his 3-4 months of travel.

What short-term investments can I make in the next five to six years that will carry me through that low cash flow period between the ages of 60 and 65?

Normally, it is best to think of retirement investments as long-term. You may need more in some years, but you can have a reliable long-term retirement income while withdrawing varying amounts.

If John invests a significant amount like $7,000/month or $4,500/month, then he should have close to $500,000 in 5 years, which would easily allow him to withdraw $15,000-20,000/year extra from age 60-65 to support his desired more comfortable retirement.

John has no RRSP room but $75,000 TFSA room. Maximizing his TFSA is the best place for him to start to avoid tax on these investments. After that, he should just invest non-registered. He is in a high tax bracket, so investing tax-efficiently will be important for non-registered investments.

Right now, he has almost no retirement investments, so his retirement is almost entirely based on his pensions. If he does not invest significantly, he would need to start his CPP at age 60 to retire at age 60, since he would not have money for his lifestyle.

He wonders if he should invest in a Registered Education Savings Plan for his daughter or if the planners have any recommendations. “If my daughter goes to university, I can downsize or tap into the equity in my home to help her and to fund travel and other aspects of my life as they develop,” he said.

An RESP is a good vehicle for him to save for Lola’s education, since he will get a 20% grant. He can invest up to $5,000/year ($2,500/year for the current year plus one catch-up year). The grant is an extra $1,000/year until she is 17.

Saving $5,00/year and investing in an RESP should roughly cover her tuition for 4 years, but not room & board or living expenses. It is a good idea for her to earn enough to pay for these costs, so she can learn some money skills. Money skills are highly valuable in life – far more valuable than cash gifts from parents.

The growth is normally tax-free if withdrawn while she is in university, since she would have her personal tax credits plus university tuition credits, which usually offset the tax on RESP withdrawals.

RESPs accept a wide variety of post-secondary education, including colleges and foreign universities, so there is a good chance she would eventually use her RESP.

If she ends up not going to any post-secondary, he can withdraw the money, which means he loses the grant and 20% of the growth, but he can get his money back plus most of the growth. He can then decide whether to keep it or give it to Lola for another reason.

John is also considering applying for Canada Pension Plan and Old Age Security benefits at 65. “With two indexed pensions, can I delay in order to maximize benefits?

Delaying CPP from age 60 to age 65 provides an implied 10.4%/year return. If you invested the CPP pension amount from age 60-64 and earned 10.4%/year, you would have the same lifetime pension as you would by starting at age 65. Deferring from age 65 to age 70 is an implied return of 6.8%/year.

John is a moderate investor, so he should ideally defer his CPP and OAS to age 70, since it is unlikely his investment returns would provide more.

However, right now he has almost no retirement investments. Unless he invests a significant amount the next 5 years, he would have few options other than taking both as early as he can (CPP at age 60 and OAS at age 65).

John asked about tapping into his home equity for travel or other expenses for the 5 years from age 60-64, which is a decent option for him to allow him to defer CPP. If he wants to do this, he may have to increase his mortgage shortly before retiring, since it may be a challenge to qualify for an even larger mortgage after he retires.

Is there anything else I should consider moving forward?” he asked. “I have a bit of time to be in a very comfortable place in five years.”

The best advice for John is to invest all his extra cash flow of about $7,000/month for the next 5 years, so he can retire with the lifestyle he wants.

To save expenses, he should first pay off his credit card and credit line, since the interest costs are higher than his investments should earn after tax.

He can also cancel his life insurance on himself and his daughter. The only person financially dependent on him is his daughter who would already inherit his net worth of almost $650,000.

The whole life insurance policy is a waste of money and expensive at $150/month. Kids don’t normally need life insurance since losing their income is almost definitely far less than not having all her costs.

The policy is far more expensive than a comparable term policy. The face value is likely tiny compared to any future life insurance she might need when she is married with kids.

We have seen the awkward conversation quite a few times when a parent is sold a whole life policy for their kids and then expects the child to take it over once they are working. By that time, it was a tiny policy with a high premium. Even though the parents took it out more than 20 years earlier, the child almost never wants the policy. They sometimes take it over to avoid embarrassing their parents and not wanting the policy. If the child takes it over, they almost always cash it in immediately to invest it far more effectively!

-Ed