Can Amy, 49, and Basel, 53, retire soon even if they keep their luxurious lifestyle?

Amy has a glamorous and well-paying career in the entertainment industry, bringing in about $210,000 a year. She enjoys the freedom of self-employment. Basel, too, works in the sector, earning about $86,000 a year as a consultant. They draw salaries from their jointly owned corporation.

Amy is 49 years old and Basel is 53. They have one child, 13.

Amy, a prodigious saver, wonders if they can retire in a few years when she is 55 and Basel is 60.

While they earn big, they also spend big – and hope to continue doing so. Their high expenses are owing mostly to their discretionary spending on skiing, travel and eating out.

They have substantial savings and investments and a house in the Toronto area valued at $2.4-million with a $713,000 mortgage.

“Given our savings to date, is it realistic for me to retire at age 55?” Amy asks in an e-mail. “And given what we have in our investments to date, should we switch our focus from investing to paying off our mortgage faster?”

We asked Anita Bruinsma, a financial planner and investment coach with Clarity Personal Finance in Toronto, to look at Basel and Amy’s situation. Ms. Bruinsma holds the certified financial planner and chartered financial analyst designations.

What the Expert Says

“Basel and Amy have considerable savings of about $2.4-million but their lifestyle is expensive,” Ms. Bruinsma says. They plan on spending $180,000 a year in retirement. To achieve that, they will need about $220,000 of pretax income per year, assuming they are able to take advantage of income splitting, the planner says.

“Retiring at 55 for Amy and 60 for Basel will require a lot of savings.”

In preparing her forecast, Ms. Bruinsma assumes investment returns averaging 5.6 per cent a year, an inflation rate of 2.1 per cent a year and that they live to be 95 years old. She also assumes the $180,000 target is in today’s dollars and that their spending remains the same over their entire retirement, rising with inflation. “This might not be realistic because a large amount of their spending is on skiing and travelling, hobbies they will likely curtail as they age,” the planner says. Their mortgage will be paid off when Amy is 67 and this will lower their annual costs.

They would also like to spend about $160,000 on upgrades and renovations on their home over the next few years. “This plan assumes they make these renovations, and I’ve excluded this money, as well as a $30,000 emergency fund, from their retirement savings,” she says.

“They have done a great job saving for their child’s education with $111,000 in the registered education savings plan (RESP) and there are still several years for this to grow.” Even if they don’t add anything more to the RESP, they should have enough to pay for a four-year university education.

To achieve their retirement goal, Basel and Amy would need to have about $4-million in savings by the time Amy is 55, the planner says. At their current pace of saving, they will have about $3.7-million in their RRSPs, tax-free savings accounts and non-registered funds, including money in the corporation.

“It’s important to note that this retirement savings target is highly sensitive to the inputs like inflation and investment returns, given the big numbers we are working with. Like all retirement savings estimates, it should be seen as a target,” Ms. Bruinsma says. “Reality never works out exactly like the model.”

They could reach their retirement target by saving about $35,000 a year more than they are saving now, she says. If retiring at 55 is important to Amy, they could reduce their discretionary spending, such as travel, for a few years while they are still working. “This would help them beef up their savings, but it doesn’t seem like this is what they’d want to do,” the planner says. “Amy and Basel say a big $25,000-a-year trip is important to them.”

Alternatively, the couple could lower their retirement spending to $155,000 a year, work longer, or some combination of both.

Amy should open a spousal RRSP for Basel and stop contributing to her own RRSP. “She’s been contributing to it since she was a teenager, a very powerful strategy, and it is expected to grow to almost $1.5-million by the time she is 55.” Even with large withdrawals in the early years of retirement, Amy will have high required withdrawals starting at age 72. Also, they won’t be able to split the income from Amy’s RRSP until she is 65. By adding to a spousal RRSP for Basel, they will be able to even out their taxable income somewhat before age 65 while reducing Amy’s tax bill now, the planner says.

Basel and Amy haven’t said what they plan on doing with their home. Selling their home would be a game-changer, adding at least $1.6-million to their savings, depending on when they sell it. If they plan on downsizing or renting at some point during their retirement, or if they use a home equity line of credit or a reverse mortgage to access the equity, they will have enough for Amy to retire at 55.

Amy wonders whether they should shift their focus from saving to paying off their mortgage.

“No,” Ms. Bruinsma says. “Certainly at their current mortgage rate of 1.59 per cent they should not be adding even an extra dollar to their mortgage.” When their mortgage renews next spring, the rate will probably be higher. “As long as their expected investment returns are higher than their mortgage rate, it would make sense to keep making the minimum payment on the mortgage and maintain their savings rate.” Considering where five-year mortgage rates are today, it would make sense to keep adding to their investments, she says.

In summary, Amy can retire at 55 but they will need to make some choices: they can beef up their savings, reduce their spending in retirement, or tap into the equity in their house at some point, Ms. Bruinsma says. “They have options and are in a good position financially to retire.”

Client situation

The People: Amy, 49, Basel, 53, and their son, 13.

The Problem: Can Amy retire at 55 while maintaining a high-cost lifestyle?

The Plan: Increase their savings, reduce their retirement spending target or use the equity in their home to fund their lifestyle in later years.

The Payoff: A better understanding of the tradeoffs.

Monthly net income: $19,285.

Assets: Corporate guaranteed investment certificates $234,430; corporate stock portfolio $437,000; her non-registered stocks $104,110; his non-registered stocks $128,090; her savings account $125,000; his savings account $65,000; her TFSA $143,915; his TFSA $144,225; her RRSP $986,875; his RRSP $46,145; registered education savings plan $111,000; residence $2,400,000. Total: $4,925,790

Monthly outlays: Mortgage $4,600; property tax $435; water, sewer, garbage $165; home insurance $190; electricity $130; heating $150; maintenance $250; garden $100; cottage rental $1,030 (spread over 12 months); transportation $505; groceries $1,000; clothing $415; gifts $200; vacation, travel $2,500; tutor $735; dining out $1,250; drinks, entertainment $225; personal care $400; sports, hobbies $725; subscriptions $100; health care $175; health, dental insurance $100; life insurance $75; phones, TV, internet $285; RRSPs $2,835; RESP $315. Total: $18,890. Any shortfall is drawn from corporation.

Liabilities: Mortgage $713,000 at 1.59 per cent.

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