WOMAN MUST CUT COSTS, BOOST INVESTMENT RETURNS BEFORE RETIRING

SITUATION

Woman, 56, with two kids at home can’t afford to retire without more assets, and fewer costs, including those related to her horse

STRATEGY

Delay retirement to 60 to increase asset growth and cut payout years, grow investments and get adult kids to contribute more to the household

I n Alberta, a woman we’ll call Helen, 56, is tired of her work. She wants to retire from her job as a chemical analyst for a small company in the oil industry. She has financial assets of about $700,000 which, with the assistance of Old Age Security and Canada Pension Plan, will be her total retirement support. For now, she has two children in their early 20s living at home and a riding horse to feed. A cautious person, she is not sure she is financially ready to quit a job that provides $4,000 monthly after-tax income. She has no debts but she also has no company pension. “I have been working in some capacity since I was 12, raised two children on my own and managed to pay off my house and my car,” Helen explains. “I want to retire soon, but my children need help, the younger with university expenses, the older with living expenses after coming back home. All that will add perhaps $1,000 a month to my expenses. Can I retire under the circumstances and, if so, when?”

Family Finance asked financial planner Don Forbes, head of Don Forbes & Associates Ltd./Armstrong & Quaile Associates Ltd. in Carberry, Man., who agreed to work with Helen.

COST CONTROL BEFORE RETIREMENT

“Not yet,” is Mr. Forbes’ answer. “To retire this year, Helen would have to reduce expenses by as much as 60% or have the children pay a lot more of their bills. But in two years, with some planning, retirement is possible with cuts in spending, elimination of commuting costs, office lunches and some spending on clothes for work.

Her children, still resident in her home, would have to contribute to the household budget.

Helen will continue to have a $1,000-a-month contribution to household expenses from a friend living with her. That pushes her total disposable monthly income to $5,000. Waiting an additional two years to age 60 makes even more sense, for it allows her income from her RRSP to grow and increases the probability that the children will be on their own. So 60 is the start date for this plan.

Before retirement starts, Helen has to deal with large future costs. Her horse, which costs $450 a month for stable, food, vet bills, etc. is an important part of her life. Helen can keep it, perhaps by finding a partner to share the costs and, of course, to have the use of the animal on whatever basis might be agreed. Helen has to replace her 11-year old vehicle. A new truck with a $25,000 price tag could be financed with a $475 monthly payment on a fiveyear loan at 3%. That could come in part from suspending TFSA savings, currently $300 a month, or via a withdrawal from the $20,000 balance of the TFSA or $6,000 cash on hand or some combination of those sources. It’s a tough choice, for there isn’t much fat in her spending to cut.

We’ll assume that TFSA savings stop and that the account is used in some measure for the purchase.

RETIREMENT OUTLOOK

Helen’s RRSP balance, $525,000, will grow at 4% a year to $614,200 in four years with no further contributions. If paid out so that all capital is exhausted in the 30 years from age 60 to 90, the fund would yield $34,150 a year. If Helen were to take her Canada Pension Plan benefits at a 36% discount of the age 65 benefit of $12,460, she would have annual income of $7,974 on top of RRSP payouts for total annual income of about $42,125. If she pays tax at a 13% average rate, she would be left with $36,650. She could add $12,000 from her housemate to push total income to $48,650 and monthly income after tax to about $4,050, Mr. Forbes estimates. Helen has a $150,000 investment in a troubled real estate investment trust. It has reduced payments drastically, but if it is able to revive, it would be expected to make modest annual payments of about $2,400. That would add $200 a month to income, pushing pre-tax income to $44,525 and after tax income, including the $1,000 monthly payments from her housemate to about $4,225, a month.

Helen could try to sell the asset, but in its present state, she would probably be unable to get much for it.

At age 65, Helen can begin Old Age Security benefits at $6,704 a year, raising total income to $51,229 a year, or $44,570 after 13% tax, plus the $12,000 annual payments from her housemate for final income of $56,570 a year, or about $4,700 a month, to spend, Mr. Forbes says.

Helen’s monthly expenses and savings allocations currently add up to $5,000. But they will decline when her children leave home, eliminating perhaps $1,000 of expenses. After retirement, her gas costs for commuting, car repairs, and clothing for work would decline.

Further cuts in costs are possible if she can share horse expenses with a co-owner she needs to find. She is already shopping the horse to find a co-owner. She can easily live within her projected retirement income even without payments from her problematic real estate deal.

Delaying retirement also reduces the time her assets have to support her. Death is a reality in planning how long assets should last.

Should Helen outlast her RRSP payouts, she can sell her house for money for assisted care, Mr. Forbes notes.

Helen can raise retirement income by cutting investments costs. She has a single asset in her RRSP, a bank’s balanced fund with 2.4% management expense ratio. If she moves to a blend of 60% equity exchange traded funds and 40% investment grade bonds in a 10-year ETF ladder, her fees might average 3/10ths of 1%, and her returns could conservatively rise to 5% or more after costs. That would be a 25% jump. If she would like to get the feel of the move, she could switch perhaps 10% a year to the ETFs and try them out.

“There is no doubt that Helen is going to have a modest retirement income,” Mr. Forbes says. ‘ The variables are expense control, which has to be worked out with her children, and investment returns, which, as indicated, are in her control.”