FAMILY FINANCE

Acouple’sfinancialplanthatreliesonthehealthofthe energysectorneedstobemadelessriskyandsimplified

An Alberta couple have to de-risk their financial plans.

Henry Kohlsonn* and his wife, Bonnie, have staked their financial live son what is turning out to be a flimsy bedrock. Henry’s job, managing transportation facilities from his office in the middle of Alberta’ s oil patch, is dependent on the health of the provincial energy industry. Bonnie, a health-care professional, works for a hospital. For the moment, their gross annual family income of almost $300,000 is secure. But that income support san extended family: a 24- year-old son and his fiancée, one of Bonnie’ s brothers nearing 60, and several four-footed cohabitants. The son and his wife-to-be will eventually leave, but a larger financial problem looms: almost all the couple’ s remaining investments are in so-called accredited investor funds focused on Alberta resources. They have parlayed their home and their investments into one province and its commodity and energy industries.

Henry, 55, and Bonnie, 59, are a few years from retirement, yet realize that their investments will, at best, provide less than their present take-home income of $16,167 a month plus rental income from their inhouse kin. Henry, who at one time was a sales man for investments sold only to highnet-worth investors, lost $68,000 on his own investments, then had a huge tax bill to pay on the income they generated before collapsing. Bonnie still holds some of these

funds. Their house has a mortgage, as does another one in the Maritimes, and Henry is still required to pay the Canada Revenue Agency $2,000 a month for a back-tax bill related to a settlement to avoid bankruptcy. “We have dreams ,” Henry says .“We’ d like to buy a $120,000 trailer and a $60,000 truck to pull it and just head out for warmer places for half the year.”

The couple’s financial future depends in part on reducing the number of people whore lyon them .“They support too many family members ,” says Caroline Nalbantoglu, head of CN al Financial Planning Inc. in Montreal. “They generate a surplus of $3,400 each month and will soon free another $2,000 a month when the CRA bill is paid, but the surplus gets used up for expenses like dental work for their son .” Another child ,38, is independent and requires no support.

The live-at-home son and Bonnie’s brother pay a total of $600 a month rent. That partly off sets the $2,295 monthly payment on their $352,000 mortgage, due to be paid off in 2030, and $263 in monthly property taxes. A property in the Maritime st hey own for Bonnie’s mother requires a $942 monthly payment on the $165,000 mortgage and taxes of $264 a month, but mom pays $1,200 a month rent, leaving a near- zero carrying cost. Nevertheless, the extra house ties up capital that could be better invested elsewhere.

Money available for investment will rise when Henry’ s debt to the CRA is settled in early 2016. He can resume $2,000 monthly RRSP contributions to replace the RRSPs he cashed into pay taxes. His annual contribution would produce a tax refund of $9,360 that can be added to savings.

Their $352,000 mortgage allows a 10% annual pre-payment of the original debt, so Henry and Bonnie should be able to put in $30,000 after the CRA bill is paid. The couple’s present 3.99% mortgage loan mature s in July 2016. If they renew for another five years at 2.6%, maintain present payments and add $30,000 a year to the sum outstanding, they can have the mortgage eliminated in about six years, just about the time that Bonnie will be retiring at 65. The remaining surplus, perhaps $6,000 a year, can be put into Tax-Free Savings Accounts. When the mortgage is paid off in 2022, they can direct the $30,000 to their TFSAs, which will have the present $41,000 space for each, plus an additional $5,500 per person per year under present rules until they hit the future limit.

How their growing savings should be invested is a dilemma. Bonnie continues to hold nearly $200,000 in risky, illiquid Alberta land and energy investments. Less risky, more-liquid assets such as utility stocks with 5% dividends and potential appreciation are safe rand potentially more profitable. When times are tough for ha res, it can pay to bea tortoise, N al ban tog lu suggests.

If Bonnie’ s $332,400 in RRSP investments grow with her existing contributions of $3,600 a year, then a return of 3% after inflation would give her $420,900 at age 65. Henry, starting over with an RRSP next year, can add $24,000 a year so that when Bonnie is 65, he would have $160,000. If both sums are combined, they would have registered savings of $580,900. If their TFSAs grow from their present zero balance with $41,000 in catch-up contributions in two years and $5,500 each for four years, they would have $85,600 on the eve of Bonnie’ s retirement.

If Bonnie’s $48,000 non-registered savings contributions are left to grow at a net 3% and her $30,000 in cash grows at the same rate, the $78,000 sum with no further contributions would be $93,150 at 65. Their private investments would have a value of $759,650. If annuitized so that all capital and returns are paid out in the 30 years from Bonnie’s age 65 to 95, this capital would produce $37,627 annual cash flow before tax. At 65, Bonnie will be eligible for full Old Age Security of $6,846 a year at present rates and full Canada Pension Plan benefits of $13,110 a year. Her company pension will add another $20,173.

The couple’s total income, including all income from annuitized RRSP, TFSA and other investments ($ 40,000 a year), would generate a total annual income of $77,756. Henry would continue working until he’s 65, with pre-tax income of $194,500 a year. Their total income would be $272,256 a year. After an average tax rate of 25%, they would have a take-home income of $17,016 a month. When Henry is 65, his employment income will stop, but he will be eligible for full CPP and O AS, making their total pre-tax annual retirement income $98,712.

Assuming they split eligible pension income, they would pay average tax of 10% and have a take-home income of $7,330 amonth. There would still be rental income from Bonnie’s brother, who pays $200 a month, making monthly final income $7,530 after tax. The son and his fiancée will presumably have moved out by then. Bonnie and Henry could sell the rental house at a present value of $269,000, invest the money at 3% with all capital gone in 26 years and thus have annual income of $14,610 a year, making for a final pre-tax-income $113,322 or $8,310 amonth after 12% average tax. Bonnie’s mother could rent elsewhere for the same $1,200 a months he pays Henry and Bonnie.

In retirement, their $12,500 monthly living costs will drop by the terminated CRA payments of $2,000 a month. Food bills may drop by $200 a month after their son and eventual daughter-in-law are gone, and there will no longer be a need to make $2,000 monthly RRSP contributions. They can cut cellphone costs, now $340 a month, by $200, dining out at $600 a month by $300, and clothing and grooming, now $500 a month, by $200. Total savings: $4,900 a month for a new monthly budget of $7,620.

There would be a monthly surplus of $690 to lease a truck and finance a trailer, though it might not be as grand as the $120,000 model they have in mind since that would take on a large debt in retirement. Alternatively, they could sell their house and use the money to buy the $120,000 trailer and truck, rent accommodation in summer in Canada, or live in the trailer year round. It’s their choice of way of life, Nalbantoglu says.