Cou­ple can re­tire early, but ‘with caveats’

The Globe and Mail Metro (Ontario Edition) - - REPORT ON BUSINESS - DIANNE MALEY Want a free fi­nan­cial facelift? E-mail fin­ Some de­tails may be changed to pro­tect the pri­vacy of the per­sons pro­filed.

Some of their plans – buy­ing a cam­per van and ren­o­vat­ing their house – may need to be ad­justed, ex­pert says

Bernard and Marla are plan­ning to hang up their hats in a year or so, buy a cam­per van – a small mo­torhome – and travel the con­ti­nent, vis­it­ing fam­ily and friends in the sum­mer and head­ing south to a warmer cli­mate in win­ter. He is 59, she is 56.

Af­ter rais­ing three chil­dren and pay­ing off the mort­gage on their B.C. home, they are well fixed to re­al­ize their goals. Bernard is bring­ing in $101,000 a year at his man­age­rial job with the gov­ern­ment, which means he has a de­fined-ben­e­fit pen­sion plan. Marla makes $107,000 a year as a self-em­ployed health­care provider with no pen­sion plan.

They’d like to have $60,000 a year af­ter tax to spend when they quit work­ing.

They also plan to ren­o­vate their kitchen and add to the master bed­room.

They won­der whether they are on track to re­tire from work at the same time in Novem­ber, 2019. “Should we take Canada Pen­sion Plan ben­e­fits at age 60 or 65?” Marla asks in an e-mail. Is their port­fo­lio prop­erly di­ver­si­fied? Should they take out a home-eq­uity line of credit to buy the cam­per?

We asked Heather Franklin, a fee-only fi­nan­cial plan­ner based in Toronto, to look at Bernard and Marla’s sit­u­a­tion.


Marla and Bernard can re­tire early as planned “with caveats,” Ms. Franklin says. She is con­cerned about the home ren­o­va­tion (es­ti­mated cost $100,000) and the cam­per-van pur­chase ($130,000) so close to the time they plan to re­tire. While they have the money in the bank for the ren­o­va­tion, they may want to con­sider scal­ing back a bit, per­haps ren­o­vat­ing the kitchen but skip­ping the bed­room ex­ten­sion, she says.

Bor­row­ing to buy the cam­per van may well be “too tax­ing on their in­come and fi­nan­cial re­sources,” Ms. Franklin says. In­stead, she rec­om­mends they rent a cam­per to try it out; they may find the ex­pe­ri­ence is not what they imag­ined. They could travel and rent a condo some­where warm each win­ter for 10 years for what they are propos­ing to pay for the cam­per.

If he re­tires from work at the age of 60, Bernard will get a pen­sion of about $36,000 a year, in­clud­ing pen­sion ad­just­ment, fall­ing to about $30,000 a year at 65. He will split the pen­sion in­come with Marla. By then, their spend­ing goal will have risen to $63,500 or so with in­fla­tion. They can make up the big short­fall in the first five years – un­til they be­gin re­ceiv­ing gov­ern­ment ben­e­fits – by draw­ing on their sav­ings, in­clud­ing their tax-free sav­ings ac­counts (TFSAs) and reg­is­tered re­tire­ment sav­ings plans (RRSPs).

At 65, Bernard and Marla will get about $19,000 each in CPP and Old Age Se­cu­rity ben­e­fits, the plan­ner says. She does not rec­om­mend tak­ing CPP ben­e­fits at the age of 60 be­cause of the 36-per-cent re­duc­tion in ben­e­fits. The gov­ern­ment ben­e­fits plus Bernard’s pen­sion would give them about $68,000 pre­tax, the plan­ner says. Any short­fall would be drawn from their sav­ings.

As to their port­fo­lios, Bernard and Marla hold mostly div­i­dend­pay­ing stocks and some growth stocks. “Div­i­dend stocks are an ex­cel­lent choice as a port­fo­lio an­chor be­cause they pro­duce both in­come and growth op­por­tu­ni­ties,” Ms. Franklin says. Bernard’s pen­sion plan can be viewed as the fixed-in­come por­tion of their hold­ings. Marla’s RRSP could use some fine-tun­ing be­cause of her big cash hold­ings. She “might con­sider re­de­ploy­ing this cash into stocks,” the plan­ner says.

Al­though the cou­ple have a sub­stan­tial amount of cash in bank sav­ings ac­counts, they have not con­trib­uted the max­i­mum to their tax-free sav­ings ac­counts.

They should en­deav­our to catch up, di­rect­ing any sur­plus cash (af­ter the ren­o­va­tion) to their TFSAs to take full ad­van­tage of the tax-shel­tered growth, she adds. “TFSAs pro­vide Cana­di­ans with the only true tax-free in­vest­ment.”

Once they have caught up with their TFSAs, Marla and Bernard may want to open a non­reg­is­tered, or tax­able, in­vest­ment ac­count. “Div­i­dend in­come within this ac­count would be taxed at a pref­er­en­tial rate due to the div­i­dend tax credit,” Ms. Franklin says. The div­i­dend tax credit does not ap­ply to div­i­dend in­come from an RRSP, which is taxed as in­come when it is with­drawn.


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