Case study: Mid-life working couple strive to reduce debt
This is the second post of a five-part series on retirement planning and financial wellness for different life stages and family circumstances.
Jaspreet and Matt* are both 45-year-old life partners with no children living in Vancouver with Jaspreet’s mother, who is 70 and has a small pension. They are renters, with all three of them pitching in to pay the current $2,500 rent on the two-bedroom condo they live in.
The couple have been in Canada about 10 years after spending quite a few years travelling around the world. After a bout of poor health, Jaspreet’s mother left her native India and joined them after the couple settled in Vancouver a few years ago. Their first several years there were spent upgrading their education and now both have been able to land good government jobs. But they have a lot of debt from their educations and travel years, a lot of their money is spent on rent and they have no savings. They feel they must somehow concentrate on both reducing their debt while planning for retirement.
Because of their lack of savings, high debt and increasing housing unaffordability in Vancouver, Jaspreet and Matt are not considering buying a home and plan to remain as renters. House prices in Vancouver are among the country’s highest, with the average house price at more than $1 million.
Many workers in the private sector in Canada now have defined contribution benefit plans. In these plans a set amount is contributed by the employee and employer each year, which is based on the worker’s income. They don’t guarantee an amount in retirement. But, as federal employees, they are enrolled in the public service pension plan, which provides a set income for life after retirement regardless of how well the plan performs and means they have to worry less about outliving their pension savings.
On a recent Saturday morning, while having breakfast at their favourite neighbourhood café, Matt and Jaspreet decided to have a frank talk about money, mostly to determine what they needed to do in the next 20 years to have a solid retirement plan. Partly because Matt’s parents died when he was young, Matt didn’t want to wait until after retirement to do the things he wanted in life, in case he got too sick to enjoy them – that’s why they decided to travel when they were younger. And the plan always was to have a more frugal retirement instead. But, until that morning, that was as detailed as their planning went.
This is what they came up with. While Jaspreet’s mom was helping with rent now, the couple didn’t want to count on that as extra income, since she might need that money for care or other things. Their net income per month is about $8,000 and, minus their rent, they have $5,500 per month. Payments on their debt – $80,000 on a line of credit (at 5% interest) – is their next biggest expenditure, at $2,400 a month. That leaves them currently with $3,100 a month to live on.
Doing a rough estimate over their scrambled eggs and coffee, the couple figured that with their public pension plans, they each would get about $31,000 a year if they continue at their jobs, which they hope to, until 65. Average CPP payouts in Canada are about $700, and they each think they’ll get close to that – although they promised themselves at breakfast that they were going to get their CPP statement of contributions right away to learn the exact amount and find out more about their pension plan. Knowing they don’t plan extravagant expenditures near or after retirement – such as travel, children’s educations or weddings – they think that is more than enough to keep them comfortable, especially since once they retire, they plan to move from expensive Vancouver to somewhere else in Canada where housing is more affordable.
Looking at their monthly expenses, Jaspreet and Matt decided they can put $600 a month into paying down their debt faster. If they didn’t incur any more debt, at the rate they’re paying they’d have their debt paid off in about three years, but if they add that $600 monthly, they think they could do it in just over two years.
Jaspreet and Matt know they have to do more number crunching, but they felt better having just talked through some of the options. One thing they did agree on is that they are unfamiliar with investing so, as they waited for the bill, they made a pact to make an appointment with a financial advisor right away – to go over the basic plan they have come up with now and get advice on how to invest and build savings once their debt is paid.
Next in our series: Trish is a self-employed single woman who had to adjust her retirement plans after being downsized by her company.
*Jaspreet and Matt are not actual people, but their story is indicative of what many mid-life couples are discussing when it comes to retirement. It should not be construed as financial advice. Reach out to a financial advisor to discuss your situation and try out the Canadian Retirement Income Calculator to help determine what you need to achieve your retirement goals.
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