Laura, 36, depleted her savings to live abroad and study. How can she rebuild her nest egg on $72,800 a year?

Can Laura make her finances work for her to meet her retirement goals?

Laura, 36, is worried about the future. She depleted her savings at 30 to live abroad for a year and half and go to grad school, but now she’s saving again and wonders how much she needs to tuck away for retirement.

Laura earns $72,800 annually working at an NGO. She makes an additional $1,100 freelancing per month, on average. While she has a good understanding of her spending and saving, Laura doesn’t know the steps she needs to take financially to feel more secure about her golden years.

“I’d like to know that I’m comfortable in retirement. I’m not really sure how much I need to retire at 65,” Laura says. “I spent my TFSA when I was living abroad for over a year and on going back to school.”

Right now, Laura puts $200 a month in a Wealthsimple medium-risk investment TFSA.

“There’s only $2,000 in there right now and it’s losing money, but I imagine that will go up when markets are better,” Laura says.

She also has $23,500 in an RRSP, to which she contributes $600 a month. “It goes directly into the account without me ever seeing the money. It’s just a daily interest RRSP with my bank and I’d like to change to an option that makes more money,” Laura says.

In a regular savings account, Laura has $50,000 (US) from her family that she doesn’t know what to do with.

“It’s in a regular savings account, which I feel I should do something with. But this account is not for any type of spending and should only be used to contribute to a down payment if needed one day, so I don’t consider it as money I actually have,” Laura says. “However, I have no big plans of home ownership in Toronto at the moment because it is completely unaffordable.”

Can Laura make her finances work for her to meet her retirement goals? We asked her for two weeks of her spending to see what she can do.

The expert: Jason Heath, managing director at Objective Financial Partners.

Laura seems to have a great grasp on her spending and saving and knows where everything goes. She automatically saves each month to her TFSA and to a group RRSP with an employer matching contributions. Spending less than what you make and saving systematically are key strategies for financial success.

She notes her TFSA is losing money but does not seem too worried. She has the right mindset acknowledging that markets do not move up in a straight line and volatility is inherent with investing. For a long-term savings goal, losing money every few years is the tradeoff for earning mid to high single-digit returns over the long run. When you are in the accumulation phase, a stock market downturn just means stocks are on sale.

Laura has a lot of things that could happen to change her path over the next 30 years, but since she asks about how much she needs to retire at 65, we can do some quick math. If Laura continues her current TFSA and RRSP contributions to age 65, increasing them with inflation each year, earning a 5 per cent annual return, she would have more than $1.1 million in savings by age 65. That could probably support about $20,000 of after- tax spending in today’s dollars for life. Government pensions — Canada Pension Plan and Old Age Security — would probably cover another $20,000 of after-tax spending in today’s dollars. That’s about $3,333 per month and she is spending about $4,000 per month now if we back out her TFSA contributions and monthly therapy.

This is a really rough calculation. As her salary increases, if she allocates a slightly larger percentage to saving, it would not take much to bridge the gap. Likewise if her investments earn a higher return. So, Laura may be on a relatively good trajectory. Mind you, she does not have any car payments right now. She could get into a relationship that reduces her monthly expenses. If she buys a home, she might trade rent for mortgage payments. She could inherit money from family. So, there are a lot of variables that make a back-of-the-napkin calculation just an approximation.

She should take time to learn more about investing so she feels comfortable investing her RRSP for the long run. It is in cash right now so not working for her. She should use the $50,000 from her family that is in a savings account to contribute to a TFSA at the very least. Even if she wants to keep some or all of it in cash, at least the interest would be tax-free. But it sounds like she does not have any imminent plans to buy a home in Toronto anyway, so she might as well invest some of the money with a longer-term time horizon.

Laura should make sure she is maximizing her tax deductions and credits. As a work-from-home employee and a freelancer, she will have home office expenses as well as potentially automobile expenses and other miscellaneous expenses she can deduct on her tax return. RRSP contributions could be advantageous at her level of income and reduce the tax payable on her untaxed freelance income. Her $240 per month of therapy is an eligible medical expense. Even if she has a group health insurance plan at work, her co-pay or share of expenses not covered by the plan, as well as any premiums she pays, will be eligible for a medical expense tax credit as well.

Results: She spent less. Spending in week one: $813.53. Spending in week two: $627.97.

How she thinks she did

Laura admits she didn’t change much about her spending clothes, “mostly because my goals all seem far off and so they’re almost a little lofty.”

She has been more money-conscious and seeing the adviser make simple calculations for savings has encouraged her to spend less in certain areas, including takeout and dinners.

“If I lower my weekly spending on dinners out and takeout by even just $40, I’ll save $2,080 a year, which is definitely a bigger motivator than just thinking of it as $40,” Laura says.

Take aways:

Laura still feels overwhelmed and confused by the investment options outlined by Heath, but she found his encouraging advice.

Heath’s “back of the napkin” calculations have her thinking seriously about how much money she wants to have monthly when she retires.

“The easiest way for me to save is to never actually see the money in my account to begin with, so I may take the advice to just up my contributions to my RRSP directly through my employer so that the money doesn’t feel mine to begin with,” Laura says.

She’s planning on taking Heath’s advice and putting her chunk of savings into a TFSA, but adds that she’s unsure of how to pick one and doesn’t trust her bank to give her the best guidance. This has motivated her to look into taking a business or finance course to be more financially literate.

“This exercise was a good kick in the butt to really look into RRSP options and perhaps find an investing 101 course to take.”


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