This Alberta couple's dream of spending half the year in Mexico can work

COUPLE'S NET WORTH $1.82M

In Alberta, a couple we'll call Herb and Sally, both 53, want to make their transition from building their retirement savings to spending them. Herb has been out of work for two years, Sally, a manager in a non-profit organization, quit her job in June, giving up her $128,000 pre-tax income, and joined Herb planning a move to Mexico. The problem is whether they can afford to stop working entirely a dozen years before the more common retirement age of 65. They have a 21-year-old child who still lives at home, but they do not need to support him and he will move out if they leave the country. They have already sold a cottage, one car and an off-road vehicle in anticipation of the move. Now they want to see how their finances will hold up with no earnings, no further savings and perhaps four decades of life ahead of them.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Herb and Sally. His view is that their plan should work, though they will have to wait seven years before they can access their Canada Pension Plan benefits. They can also count on OAS and small job pensions. What their investments will provide them is the challenge in structure their income for the next 42 years, through age 95.

“They have $1.82 million in net worth,” Moran says. “Their Alberta home, which they plan to keep, makes up only 25 per cent of that. The balance, is available for investment. Their goal should be attainable.”

TIMING INCOME

Herb and Sally are 12 years away from the age 65 start of full Canada Pension Plan and Old Age Security benefits. Because of their situation, they may be tempted to tap CPP early, something that comes with a reduction of 7.2 per cent per year. If they want to start five years early at age 60, that's a 36 per cent cut. Based on the full benefit amount of $9,000, an age-60 start at $5,760 each per year would mean forgoing $3,240 per year each from age 65 on. As a result they would receive about $170,000 less in direct payments from the government if they both live to age 95. They will not need to take early CPP and the opportunity cost of taking the money early is clearly too high, Moran says.

There are moves the couple can make to generate more retirement income. First, consider their $355,000 rental property. Take off the $232,388 they owe for the property and their equity is about $122,612. The rent they receive, $2,112 per year, is a very modest two per cent after paying property taxes and insurance. That is a poor return for tying up their money but it is no time to sell in the depressed Alberta property market.

LIFE IN

TWO COUNTRIES

Herb figures he can find a place in Mexico to rent for $1,200 per month. Adding a similar amount for living costs works out to $2,400 per month or $28,800 per year. He and Sally plan to keep their mortgage-free Alberta home and the rental which at least pays its mortgage cost on a variable rate currently at a bit under two per cent per year.

To pay the bills for their life in Mexico with several trips a year to visit their children in Canada, they have $1,228,400 in financial assets, variously held in RRSPs, locked-in retirement accounts (LIRAs), TFSAs, cash and taxable investments. They will each also be entitled to job pensions totalling $20,610 at 65.

RETIREMENT INCOME

Only $59,400 of their financial assets are in LIRAs, so we'll just leave the money to run its course to distribution starting at 71. The balance of their funds is $678,000 in their RRSPs, held mostly in low fee exchange traded funds; $110,000 in their TFSAs; and $381,000 of taxable investments consisting of $126,000 in cash and $255,000 in a private equity pool that, so far, has posted acceptable returns.

For simplicity, we'll use the couple's overall level of financial assets to calculate income before they turn 65 and can draw on CPP, OAS and their pensions.

Their financial assets earning three per cent per year after inflation and fees and set to pay out for the 42 years to their age 95 would generate $50,320 per year. That includes $4,500 per year from TFSAs. Rent from their Alberta property would add $2,112 per year after expenses. That would raise their total income before 65 to $52,432 per year. Assuming that the couple remains resident in Canada for at least six relatively warm months of the year, they would pay Alberta tax on all but the $4,500 that would come from their TFSAs.

Assuming an even split of the remaining income, and no tax on TFSA cash flow, their tax would be at most nine per cent per year, leaving them with $4,000 per month. $1,800 would cover Alberta house and rental costs. That would leave $2,200 to cover estimated total living costs in Mexico of $2,400 per month. They could dip into their six figure cash reserves for any cost overruns. The alternative, starting reduced pensions early, would be very expensive over the assumed four decades of their retirement.

At age 65, they could add annual pension income of $20,610, CPP income of an estimated $9,000 each and Old Age Security, currently $7,362 per year. Those sources of income would boost total annual income to $103,654. Assuming splits of eligible income they would pay tax at an average 15 per cent on the non-TFSA income leaving them $7,400 per month to spend, far above their estimated cost of living.

The unknowns in this projection are the fate of their not very profitable rental in Alberta and the availability of various income credits given the tax levels likely to change in the wake of the present pandemic. Over perhaps 25 years, allowing for changing interest rates, they would eliminate their mortgage, adding present mortgage cost of $11,400 a year to their disposable income.

Herb and Sally can afford homes in Alberta and Mexico. “With diverse investments, CPP, OAS and job pensions their plans should work,” Moran concludes.