Job security concerns cast shadow over prosperous couple’s retirement plans

An Ontario couple we’ll call Matt and Linda, both 39, are raising two kids ages 5 and 3. A sales manager for a consumer products company, Matt brings home $ 6,450 a month. Linda, a health care professional, brings home $ 5,360 a month. They have a couple of rental properties that add about $ 1,500 a month after mortgage and other costs to their total income, making their monthly budget $ 13,310. At present, they are prosperous. But the future is darker, for Matt feels he has no job security and, without it, can’t plan for retirement.

“Building up a savings safety net has been my priority since I started my present job,” Matt explains. “I want to retire before 65, but, for now, future income security the goal. “

Family Finance asked Dan Stronach, head of Stronach Financial Inc. in Toronto, to work with Matt and Linda. His view — income security starts with good record keeping. “Theirs is not dependable, so we have reconstructed the accounts,” he explains.

CURRENT FINANCES

“The couple focuses on paying off their debts quickly, but they understate some expenses such as a need for life insurance while their kids are dependent, clothing for themselves and their brood, drugs and even recreation. Without improved expense tracking, retirement planning is more difficult.” There is also the problem of time, for with a decade or two to retirement, any projection is dicey. What is a problem is the uncertainty of Matt’s continuing employment.

There are other issues. The couple’s assets are not well diversified, adding risk to planning. The Ontario real estate boom has made the couple millionaires. Their home has a market value of $ 850,000, they report, and their rental properties add another $530,000. Their real estate totals $ 1,380,000 out of total assets of $1,900,000. On a consolidated basis, real estate is almost three- quarters of their wealth. Thus their retirement is heavily dependent on the health of the property market. They need to diversify, but that will happen if they continue to add to their RRSPs and TFSAs, Stronach notes.

THE DILEMMA

The couple has substantial advantages. Matt drives a company car, cutting his transport expense. He adds a modest amount to income to cover personal use. But at retirement, they could get by with one car, cutting expenses. Then come the basics.

Fr o m their $13,310 monthly income, we can take off $ 3,700 monthly mortgage costs for their residence and for one rental unit and taxes. All mortgages will be paid in full by the time they retire, child- care costs of $ 1,100 per month due to end when the younger child starts nursery school, RESP costs of $ 416 per month after the children start university or other post- secondary education, and RRSP sav- ings of $1,500 a month, $460 monthly TFSA contributions and $800 other savings.

With all those deductions from current spending, their living costs would decline to about $ 5,300 a month. That would be sustainable even with present rental properties. If they retire at 62, each would begin Canada Pension Plan with a 21.6 per cent reduction of age 65 benefits. CPP is a life annuity, Stronach reasons, and as soon as Matt and Linda’s tax brackets drop at the end of their working lives, it will be prudent to trigger this earned pension. “Delaying CPP after 65 could pay a 42 per cent bonus if they wait to 70, but it is a life annuity and ‘ life’ is the key word,” he says. It’s a take- the- money andrun concept keyed to mortality, Stronach says.

Linda’s work pension at 62 is based on approximately two per cent of the average of her last three years’ salary times years of service. Using 2017 dollars, her present salary, $ 90,000 a year, times .02, would be $ 1,800 times what will be 33 years of service or $ 59,400 in 2017 dollars.

The couple would have estimated rental income with all costs covered of $ 31,200 per year in 2017 dollars. This assumes that mortgages are paid, that taxes have not risen and that operating costs such as utilities and maintenance are unchanged.

Their Registered Retirement Savings Plans with c urrent balances totalling $ 360,000 growing at $18,000 a year with three per cent annual gains after inflation would have a value, at age 62, of $ 1,312,200. If annuitized to pay for 33 years to their age 95, this capital would generate $ 61,350 a year. .

Their Tax-Free Savings Accounts with present balance of $ 65,000 and annual contributions of $ 5,520 would grow at 3 per cent after inflation for 23 years to $312,000 and support distributions of $14,625 a year to their age 95.

Using just this data, the couple’s initial retirement i ncome at 62 would be $ 172,500 a year, not including TFSA distributions. After 22 per cent average tax, they would have $12,400 a month to spend.

At age 65, each could add Old Age Security leaving final disposable income at about $ 13,000 a month, more than enough for their present way of life.

REDUCING RISK

With two small children and a decade and a half to go before the younger starts post- secondary education, the family needs life insurance. Matt and Linda both have t erm life coverage through their jobs. Each has a death benefit of twice current gross income. It is dependent on continuing employment. If either parent were lost or unable to work, the family situation could be dire. So the first step would be to buy their own term life coverage for $ 1 million each as a minimum. The cost would be just $620 a year for Matt and $ 512 for Linda for ten year terms guaranteed renewable to age 80. Neither parent smokes. These sums are affordable out of present savings, Stronach adds.