Secret to this Albertan’s solid retirement plan: Saving half his pay

THE VALUE OF FRED’S TWO CONDOS $450K

In Alberta, a man we’ll call Fred, 55, has thrived in his career as a marketing researcher, building up net worth of $952,500 on a salary of $8,150 per month before tax and $5,298 after tax and benefits deductions. He lives in a $250,000 condo and has a foreign rental property with an estimated value of $200,000. Fred has planned well for retirement but worries about the durability of his job.

Fred would like to retire at age 60 but is unsure of his future income. His company might terminate his job with little notice and modest, if any, termination pay.

Fred’s financial problem is to balance the choice to retire with the fact that he could be without a job. But, as we’ll see, it is a very manageable dilemma.

Fred has no debt at all. Money for the nearly complete foreign rental is already designated for the builder. He has $ 142,000 cash and, given his frugal way of life, he should be able to add to savings as long as he is working. The unusual thing about Fred’s situation is his very precise view of what he has and where he wants to be. The issue is how he will get there.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Fred. The baseline for developing his retirement plan is in his numbers. His residence makes up just 26 per cent of his net worth. That gives him room to move around the pieces on his financial map.

CASH FLOW

PERSONAL FINANCE

Fred’s cash is piling up because he saves just about half of his after-tax income. His living expenses are a modest $ 2,792 per month. He contributes the maximum ( now $ 6,000 per year) to his Tax-Free Savings Account, puts $ 2,400 per year in his RRSP and about $22,300 annually into nonregistered savings. He invests in broadly diversified, low- fee exchange traded funds which average out the many risks of investing. Were he to lose his job before planned retirement, he could maintain his way of life. His ample savings are a solid financial lifesaver.

The only significant risk in the portfolio is his $200,000 reserve for a foreign condo that will rent to net around $1,200 per year. That is less than one per cent of his capital cost before inflation. If the money were to be invested at 3 per cent after inflation, it would generate $ 6,000 per year. The foreign condo is a speculation on rising property values, but it is remote from Canada. Fred could use it as his holiday resort, but the distance, a 20- hour flight from Vancouver, means it is not going to be for weekend jaunts. He could sell it, take the money and add it to $ 142,000 savings in the bank. His family lives near the condo and they might be a resource for care in his old age or even a way to leave wealth to the next generation.

RETIREMENT INCOME

Assuming that Fred’s job lasts to age 60, he could retire with substantial benefits. He would receive $1,890 per month from a defined benefit pension and $ 800 per month from a foreign pension.

Fr e d ’ s R R S P, w i t h a present balance of $92,000 and additions of $ 2,400 per year growing at 3 per cent per year after inflation, would rise to $ 119,400 by age 60 and support payouts of $508 per month in 2019 dollars for 30 years to his age 90.

MONTHLY SPENDING SNAPSHOT

Real Estate

Property tax ......................... $135 Condo fees........................... $500 Foreign condo fees .............. $400

Personal

Food, restaurant ...................$450 Clothing & grooming ..............$50 Entertainment, travel ........... $375 Charity and gifts ................... $275

Other basics

Car and home insurance ........$80 Car fuel and repairs ................$50 Home repairs ........................$225 Utilities, phone, internet...... $200

Financial

RRSP.................................... $200 TFSA..................................... $500 Non-reg savings................. $1,858

Expenses .........................$5,298

BIG PICTURE FINANCIALS

Assets

Condo Alberta...............$250,000 Condo foreign .............. $200,000 RRSP...............................$92,000 TFSA................................ $72,000 Taxable ......................... $195,000 Cash .............................. $142,000 Car .....................................$1,500

Total Assets................$952,500 Liabilities

None..........................................$0

Net Worth ...................$952,500

His TFSA with a $72,000 balance and additions of $6,000 per year growing at 3 per cent per year after inflation would become $115,322 at age 60 and support a taxfree cash flow of $ 476 per month for 30 years.

Fred’s taxable investments with a present value of $195,000 plus a $142,000 cash balance total $337,000

While last year’s federal budget dropped on Feb. 27, this year’s budget will likely be tabled somewhat later, given that Minister of Finance Bill Morneau is only holding his annual pre-budget meeting with private sector economists in Toronto next week, on Feb. 22. This annual meeting of economists is convened each winter “to gather their views on the Canadian and global economies ahead of the federal budget.”

After February, the House of Commons only returns to sit during the third week in March, leading several pundits to speculate on a budget date the week of March 18, although it certainly could be delivered sometime in April, as it was leading up to the 2015 election.

THE PRE- BUDGET PROCESS

With high personal tax rates and an election on the horizon, what personal tax measures could we expect to see in an upcoming federal, pre-election budget?

Traditionally, some hints of what might be in store come from recommendations made by the House of Commons Standing Committee on Finance, stemming from its annual pre-budget consultation process. From June through August 2018, more than 650 businesses, not- for- profits and individual Canadians participated through written submissions.

This was followed by a series of prebudget hearings across Canada that began in Ottawa in mid-September and stretched from Charlottetown to Victoria, wrapping up a month later. During these consultation hearings, selected groups and individuals who made a submission were invited to appear as witnesses. In addition, “open mic sessions” were held across Canada to allow any Canadians who were not invited to make a formal appearance to have their say.

The process culminated in the committee’s 258-page report, released in December 2018 and entitled “Cultivating Competitiveness: Helping Canadians Succeed.” Of the 99 recommendations for the upcoming federal budget, less than half a dozen of them involved personal tax changes. Two recommendations were aimed at improving the personal services business taxation model for truckers. The committee also recommended making the Canada caregiver tax credit refundable and amending the tax rules to add chiropractors to the list of practitioners eligible to assess and certify whether someone has a disability and is entitled to the disability tax credit.

During the consultation process, various submissions were made regarding lowering personal tax rates to make Canada more competitive. Other groups lobbied for an increase in the capital gains inclusion rate. While these were not formally adopted as recommendations by the committee, let’s take a quick look at these two perennial areas of interest.

PERSONAL TAX RATES

HIS MODEST LIFESTYLE AND AGGRESSIVE SAVING... RETIREMENT PLANS DON’T GET MORE BULLETPROOF.

Prior to the 2015 election, the Liberals campaigned on a promise to lower taxes for the middle class and raise taxes for Canada’s highest income-earners. Those changes became effective for 2016, when the government cut the tax rate on the middle-income bracket to 20.5 per cent from 22 per cent (for 2019 income between $47,629 to $95,259) and introduced the 33 per cent high-income bracket (for income above $210,371 in 2019). Adding in provincial/territorial taxes puts Canada’s combined tax rates between 20 per cent and 54 per cent, depending on your income and province/territory of residence.

Contrast that to the 2019 U. S. federal