When you are already in your thirties, you have a good annual budget to dedicate to travel and when, to do more, you plan sabbatical years in addition to early retirement, you must make sure that you do not run out of funds to go to the end of his dreams.
Posted at 6:00
Jonathan * (38) and Thibault * (34) left their native France to settle in Quebec in 2013. Jonathan earns a $ 60,000 salary in public service and benefits from the government and government employee pension plan for one year . Thibault works in the private sector on the same salary and has an annual bonus of around $ 10,000. Jonathan plans to retire at 55 and Thibault, at 53, then want to buy a car and trailer to travel across Canada and the United States.
Until then, they plan to take two sabbaticals, likely in 2028 and 2034, to travel and spend time with their family in France.
Together they save about $ 30,000 annually and as of 2027 when the mortgage is repaid, they plan to increase the amount to $ 50,000.
They wonder if they will have enough money to do it all, or if they should revise some elements of their planning.
Owned by the couple: Montreal condominium paid $ 224,000 in 2017 with mortgage loan to be repaid in 2027
Unused Home Equity Line of Credit: $ 76,000
Couple’s annual expenses: $ 54,000, including $ 16,000 for travel
The couple’s estimated annual expenses for a gap year: $ 50,000
Net salary Jonathan will earn from deferred pay leave for each gap year: $ 30,000
Estimated annual expenses of the retired couple: $ 60,000, including $ 30,000 for travel
Annual salary: $ 60,000
RRSP: $ 57,000 (maximum) invested in mutual funds
TFSA: $ 40,000 invested in mutual funds and a 1% high interest savings account.
Unregistered Savings: $ 5,000 in company stock
Savings in France: $ 20,000 in an account with 1.5% annual interest.
Annual salary: $ 60,000 + bonus of approximately $ 10,000
RRSP: $ 45,000 (maximum) invested in the FTQ Fonds de solidarité
TFSA: $ 10,500 invested in the FTQ Fonds de solidarité
Unregistered Savings: $ 1,500
Are retirements at 53 and 55 realistic?
Jonathan and Thibault are true travel enthusiasts and intend to do more and more with their gap years and early retirement. To assess whether these projects are realistic considering their financial situation, Marie-Eve McLean, financial planner at Proactif, Financial Services, began by looking at their retirements at the ages of 55 and 53 without taking into account their gap years.
However, he says it must be considered that, since they arrived in Quebec in 2013, they will not enjoy the Régie des rentes du Québec and the Old Age Security pension as if they had spent their entire career here.
Respecting the standards of the Institut québécois de planification financière, he then made a forecast considering that they will live to be 94 years old, with inflation of 2% per annum and a balanced portfolio that has an annual return of 3.2%.
“Their wealth would run out when Jonathan was 85 and Thibault 81,” says Marie-Ève Mc Lean.
However, there are several scenarios that might allow them to do this. For example, reducing their standard of living to $ 51,500 per year. Or both work until the age of 56.
The financial planner also stresses that investor profiles should be properly assessed. “If their profiles are quite growing, the potential return could approach 5%, which would allow them to reach their goals without reducing their lifestyle. ”
Are the gap years realistic?
If we take the scenario we wanted at the beginning and add the two sabbatical years, the couple would reach the end of their wealth at 79 and 83 years.
“I had to reduce the couple’s savings a bit the years before the holidays, because their capacity will be reduced while Jonathan will have a lower salary due to the deferred salary holidays,” explains Marie-Eve Mc Lean. This will affect the long-term growth of investments. ”
He then looked at the scenario of just taking a year off, in 2034, as it would give them more years to spare once they paid for the house.
“For this to work, they both would have to retire at the age of 55 and cut their lives to $ 58,000,” he says.
He also points out that they may decide to take two six-month sabbaticals. “The savings, due to the compound return, would be less affected in the long run and would still go away twice,” she says.
To finance a gap year, many plunge into their registered retirement savings plans (RRSPs), but this would not be the solution for this couple, who need $ 20,000. “First, because Jonathan will have a salary, so even the first dollars taken from the RRSP would be taxed,” says Marie-Eve McLean. Also, as their RRSPs are maximized and if they withdraw amounts, they will not regain their contribution room, unlike the TFSA [compte d’épargne libre d’impôt]. They should therefore favor the TFSA, or home equity line of credit, based on its interest rate over what they think they can get in their TFSA in return. ”
Investments and other possible solutions
Marie-Ève Mc Lean also invites Jonathan and Thibault to review their investments.
“They are very little diversified, for example with Thibault, which has invested all of it in the Fonds de solidarité FTQ, which is mainly made up of Quebec equities,” he points out. In addition, this fund has strict rules that prevent the withdrawal of sums to finance a sabbatical. ”
Finally, the couple may consider other strategies to finance their projects. For example, instead of rushing to pay for the condo, spouses could do the opposite: pay it slower to save more.
“Ce n’est pas une stratégie faite pour tout le monde, mais ça pourrait être intéressant parce que les taux d’intérêt des prêts hypothécaires sont faibles et que, selon leur profil d’vestisseur, ils pourraient avoir un rendement de leurs placements plus pupils. But they should feel comfortable with the risk involved and forgo the peace of mind of being debt free. ”
He points out that they might also sell their apartment once they buy their caravan when they retire to travel.
“This decision would give them the liquidity to carry out all their projects without changing their initial retirement scenario and gap years,” he says.
But, one thing is certain, their projects have big financial repercussions and they have to plan them rigorously.
“Their budget has to be really solid, because we’re talking about having to live about 40 years with no income,” he says. They need to be cautious, especially as we don’t know what the future holds, and forecasts don’t indicate that stock market returns over the next few years will be as high as we’ve seen recently. ”
* Although the case highlighted in this section is real, the first names used are fictitious.
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