George has a full-time position in the public sector, a private business and takes on consulting projects. His wife Elyse is a stay-at-home mom to their two teenage children. Both George and Elyse are 49 and he would like to be financially secure enough to retire at 60.

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“How can we save effectively for retirement, given that my wife has not worked since 2005 and will not have any kind of pension or significant savings or RRSPs?” they ask.

One of the couple’s children has persistent mental-health challenges and will likely require financial support throughout life. George and Elyse are currently paying $1,000 a month to supplement care and anticipate this will increase to between $1,500 to $2,500 a month after the teen ages out of some government support programs. They would also like to be able to help their other child, should it be needed.

George earns $225,000 before tax ($196,000 in regular salary and $29,000 in non-pensionable stipends) from his full-time job, between $45,000 and $90,000 in dividends from his business and between $45,000 and $60,000 from other professional activities, such as consulting. He has a defined benefit pension plan indexed to inflation from his employer that will pay $96,500 a year if he retires at 60 and $128,376 a year if he retires at 65. Upon his death, Elyse would receive 100 per cent of George’s pension for five years and then 60 per cent. He also has a $400,000 life insurance policy through his employer.

Thanks to accelerated mortgage payments of $4,700 a month, they paid off the mortgage on their $1.8 million British Columbia home this year and are now debt-free. They have no desire to downsize. The family’s monthly expenses are $16,600 (this includes $5,000 a month in income tax on George’s dividend and professional income outside his salary).

Now that they are no longer making mortgage payments, they have earmarked those freed-up funds to save for retirement ($1,500 a month to a personal tax-free savings account, or TFSA), to save to meet future expenses of their child with a disability ($600 a month directed to a personal TFSA) and to cover $30,000 to $40,000 of necessary home improvements.

George and Elyse’s investment holdings include: $10,000 in cash; $20,000 in a TFSA term deposit (4 per cent); $25,000 in a TFSA invested in medium- to high-risk mutual funds; $30,000 in a Registered Education Savings Plan (RESPs); and $225,000 in mutual funds held in an investment account in George’s corporation. He directs $1,000 a month from his business earnings into this investment account and views it as a pension for Elyse, who is a shareholder.

“Is this a good idea? Are there other options I should be looking at? Or should I take more dividends and put those funds into TFSAs?” he asks.

The couple stopped contributing to the family RESP about two years ago, when it became clear only one of their children would likely be going to university or college in the near future.

Since he has an employer pension and limited Registered Retirement Savings Plan (RRSP) contribution room, George would like to know if it makes more sense to maximize non-taxable investments such as TFSAs rather than RRSPs, which will be taxed later on?

He would also like advice about when he and Elyse should apply for Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.

The couple want to maintain their current lifestyle in retirement and to travel two or three times a year. “Is retiring at 60 possible and what would it take to make that happen? Is there a better way to save to be able to afford to support our child into the future?”

What the expert says

George and Elyse enjoy a high income and are living well but have saved little for retirement — a common mistake made by people with healthy pensions, said Ed Rempel, a fee-for-service financial planner, tax accountant and blogger. “The pension plus Canada Pension Plan benefits can be okay for a frugal retirement, but most people, including George and Elyse, want a more comfortable retirement.”

Based on current spending and their desire to retire at age 60, Rempel estimates they will need an annual income of $200,000 a year before tax, or $3.3 million in addition to George’s pension plan. They are on track for $1.1 million. “They need to invest $11,000 per month more. This is out of reach,” said Rempel.

Rempel suggests a savings plan that is easier to achieve. “To retire at age 65, they would need $2.8 million in addition to George’s pension plan. They are on track for $1.75 million. They need to invest $2,900 per month more.”

“The easiest way to find this money is to direct the $2,600 a month they have earmarked for home renovations to beef up the $1,500 a month they are already investing for their retirement — assuming they are comfortable with a high-equity portfolio that should average eight per cent a year long-term,” suggested Rempel. “They could finance the renovations with a low-rate mortgage.”

According to Rempel, the most effective way for George and Elyse to save for their retirement is inside George’s corporation, but even then, the earliest they could retire is when George is 64. Specifically, he recommends George stop taking dividends and instead invest that money inside the corporation — in effect using his corporation like an RRSP — which would allow him to pay far less tax after they retire.

“George pays himself on average $67,500 in dividends and pays $33,000 in income tax on it. If he invests the full $67,500 plus the $1,000 a month he is already investing inside his corporation, they can stop contributing to their retirement TFSA and still retire one year earlier. Even with the lower cash flow, they would still have $1,100 a month for home renovations.”

If their child with mental-health challenges qualifies for a disability tax credit, they can save for them in a Registered Disability Savings Plan, which provides a much larger grant than an RESP and can be continued to age 50 for the child. “Contributing $1,500 a year would give them a $1,000-a-year grant. After the child is 18, contributing $1,500 per year should give them a $3,500-a-year grant. The contribution and grant can all be invested for this child’s future.”

Ideally, George and Elyse should both apply for CPP and OAS at age 65 after he retires to avoid paying a very high tax rate. “Deferring CPP from age 60 to 65 gives them an implied return of 10.4 per cent a year. Deferring to age 70 gives them an implied return of 6.8 per cent per year.”

* Names have been changed to protect privacy.

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