Early retirement can still add up for couple, despite health issues

Acouple we’ll call Freddy, 59, and Mary, 57, live in British Columbia. Freddy manages a construction consulting company, Mary works for the provincial government on a part-time basis. Mary brings home $1,483 per month while Freddy takes home $3,360 per month. The total, $4,843 plus investment income of $700 per month brings their total take home income to $5,543 per month. Their expenses of $4,198 leave a reserve of $1,345 per month for health issues. It’s comfortable living, but looking ahead, they wonder if they can sustain spending of about $5,000 a month when they retire, which, Mary says, should be in the near future.

Pushing them to retire are serious health issues that threaten to cut the number of years Freddy can run his business. Early retirement has a cost in reduced years to earn income, but it’s a reasonable plan to cope with the strain of long days. Freddy plans to close his business. It has no value without him.

“We’d like to quit our present jobs and perhaps do something more fun,” Mary says. “Freddy’s work is strenuous, so it would be good for him to retire. What we need to know is whether we can afford to do it with the income we want.” Their plan is to end their work within two years, sooner if possible. Their dilemma — will their savings, Mary’s government pension, CPP and OAS, get them to their income target?

Family Finance asked Graeme Egan, head of CastleBay Wealth Management Inc. in Vancouver, to work with Freddy and Mary to solve the numerical problem — what will their retirement income be?

ASSETS AND INCOME

They have substantial net worth of about $2,022,000 including $750,000 in their B.C. residence and $230,000 in a vacation property in the U.S. They pay off their credit cards every month and have no other debts. The potential return based on $1,012,000 they hold in financial assets earning 3 per cent after inflation is $30,360 per year. If that principal is annuitized with a 3 per cent rate of return for the 37 years from Freddy’s age 60 to Mary’s age 95 it would generate $45,653 per year before tax. If split and with no other income, their taxes would be negligible.

Their expenses, $50,376 per year, could be reduced to match their income. They could sell their U.S. vacation property and obtain perhaps $200,000 after selling costs and exchange. That sum, invested on the same basis, would generate $9,000 a year and close the gap. Their total annual income from investments would be $54,653.

TFSA income based on present assets of $85,000 and included in the total would be $3,835 per year and untaxed. We will assume they sell the American property to avoid the need to file U.S. inheritance tax returns even though no U.S. succession duty would have to be paid, and to reduce the strain of travelling.

PLANNING

Freddy could take his Canada Pension Plan benefits at age 60 of $664 per month or $7,968 per year at a discount of 36 per cent of the age 65 benefit. Over 35 years from age 60 to age 95 that discount would cost his full expected benefit of $1,038 per month less $664 per month or $374 per month for 35 years. That’s a huge total of about $157,000. Early benefits vs. long-run benefits is a gamble. Given his health concerns, however, it is a reasonable bet to make, Egan suggests. Take benefits at 60, he recommends. When Freddy reaches age 65, his Old Age Security would start at $584 per month.

Two years later, at her age 60, Mary would receive $512 per month from her work pension plus a monthly bridge of $279 or $3,348 per year to age 65, bringing her pension from 60 to 65 to $791 per month. At 60, she could also get early CPP of $502 per month. Her total monthly pension income from 60 to 65 would then be $1,293. At 65, she could add Old Age Security, $584 per month at 2017 rates.

SHORT AND LONG-RUN INCOME

Summing up the couple’s pension outlook, with the assumption that they start next year when Freddy is 60, they would have permanent investment income of $54,653, his early CPP benefit of $664 per month or $7,968 per year for total income of $62,620 per year. If the income is split, income tax, which would exclude TFSA cash flow, would be about 10 per cent and leave them with $4,700 per month, almost on their $5,000 monthly target.

At Freddy’s age 62, Mary could add her work pension and bridge, total $791 per month or $9,492 per year. At his age 65, he could add OAS; $7,004 per year is the present rate. Their total pre-tax income would rise to $79,117 per year. When Mary is 65, she could add full CPP at $9,412 per year, just as her bridge ends, leaving $512 per month or $6,144 annual work pension. She would also add her full OAS pension, $7,004 per year for total annual income of about $92,185 before average 13 per cent tax not including TFSA cash flow. Their total income after tax would be $6,685 a month, well ahead of their $5,000 target.

They could get more out of their present income and retirement cash flow by taking advantage of a property tax loan program the B.C. government provides. Persons over 55 can borrow their property tax levy from the government at a non-compounding cost of less than 1 per cent of the annual sums. The program puts a lien on the primary residence and the loan must be repaid with the home is sold. The plan would save them about $84 per month in property taxes on their B.C. condo. They have two cars. One might do in retirement, saving $200 a month in maintenance and insurance. Their adjusted allocations with no savings would drop to about $3,500 per month, allowing savings for more travel or a new or newer car when the need arises.

“This couple has the foundation of a financially secure retirement,” Egan concludes. “With a few adjustments, it will be prosperous as well.”