Work­ing in tough lo­cales, man won­ders when he’ll be able to re­tire

Calgary Herald - - FINANCIAL POST - An­drew Al­len­tuck e-mail an­­len­ for a free Fam­ily Fi­nance anal­y­sis

Jack, as we’ll all him, is 36. He makes On­tario his base, but most of the time he is away serv­ing the Gov­ern­ment of Canada in some of the world’s tough­est spots as a civil­ian man­ager. His gross in­come is $7,850 per month plus non­tax­able bonuses of $1,700 per month haz­ard pay. He has two un­de­vel­oped in­vest­ment prop­er­ties abroad. They have a $50,000 com­bined value.

“I do haz­ardous post­ings in or­der to re­tire at 55,” he ex­plains. His goal — a safe life in a warm place where an in­come mod­est by Cana­dian stan­dards would buy a pleas­ant ex­is­tence. The risk, of course, is oc­cu­pa­tional, for Jack courts dan­ger to earn a retirement in­come he would spend in safe places. It is an ex­is­ten­tial dilemma.


Fam­ily Fi­nance asked Derek Moran, head of Smarter Fi­nan­cial Plan­ning Ltd. in Kelowna, B.C., to work with Jack.

Time is the essence of the plan­ning prob­lem and pay­ing down a $339,700 mort­gage on his On­tario home is his big­gest ob­sta­cle. Jack has two fi­nan­cial lives, one in Canada and an­other wher­ever he is sta­tioned.

We’ve av­er­aged in­come and ex­penses home and away to cre­ate a fi­nan­cial pro­file.

Jack’s im­me­di­ate fi­nan­cial dilemma is what to do with the mort­gage on his $500,000 On­tario condo.

He could sell the condo, take the tax-free gain on the $435,000 price he paid, and move into some­thing cheaper, then in­vest the dif­fer­ence, per­haps $200,000 af­ter costs in fi­nan­cial as­sets that would gen­er­ate three per cent to four per cent per year af­ter in­fla­tion.

The virtue of do­ing so is a steady fu­ture in­come.

The arith­metic of the sale would cut the po­ten­tial gain down by trans­ac­tion and mov­ing costs. He can make the move when he re­tires, but not now, Moran ad­vises.


Jack’s two in­vest­ment prop­er­ties abroad have a $50,000 to­tal es­ti­mated value. There are no mort­gages on the prop­er­ties and they are not de­vel­oped.

Jack’s plan is to sell one and use the cash to build a cot­tage on the other to rent for in­come. He might need a loan to make it hap­pen.

But it would have to be a Cana­dian home eq­uity line of credit. Jack needs to clear away ex­ist­ing debt to make room for more.

For his home in Canada, there is a mat­ter of mort­gage and line of credit debt. His mort­gage costs him $1,954 per month plus $550 condo fees.

His home’s amor­ti­za­tion is 30 years, but with his present ac­cel­er­ated pay­ments, the mort­gage would be paid up in 17 years when Jack is 53. He also pays $884 per month on a $21,000 line of credit. It will be paid off in about two years.

Us­ing to­day’s ac­cu­mu­lated pen­sion val­ues, at 55 Jack will have a de­fined ben­e­fit pen­sion of $4,710 per month, $56,520 per year, from his gov­ern­ment job be­fore tax. At 65, he will lose a $9,998 bridge to 65 so that his pen­sion would be $46,572 per year for the rest of his life.

When Jack is 55, he will have put in about 30 years of full-time work. He should be el­i­gi­ble for 75 per cent of the max­i­mum Canada Pen­sion Plan ben­e­fit, which works out to $10,208 per year. He can draw that sum start­ing at age 65. He will be el­i­gi­ble for the full Old Age Se­cu­rity ben­e­fit, cur­rently $7,160 per year, at 65.


Jack can add to his in­come from CPP and OAS and his own job pen­sion with in­come from his Reg­is­tered Retirement Sav­ings Plan and his Tax-Free Sav­ings Ac­count.

His RRSP has a $20,470 present bal­ance. He adds $380 per month.

If the plan were to grow with this rate of con­tri­bu­tion, which is lim­ited by the Pen­sion Ad­just­ment to 18 per cent of gross in­come less what his em­ployer puts into his pen­sion, then in 19 years at his age 55 it would have $150,425 bal­ance, as­sum­ing three per cent an­nual growth af­ter in­fla­tion.

If he were to spend that cap­i­tal, still earn­ing three per cent af­ter in­fla­tion, and pay out all in­come for the next 35 years to his age 90, it would sup­port an in­come of $7,000 per year in 2018 dollars.

Jack’s TFSA has a $66,470 bal­ance.

He has in­vested $20,000, so the rest is growth.

He could add an­other $37,500 to fill his space.

As his cash flow al­lows, he can add $5,500 per year and with three per cent growth af­ter in­fla­tion, the plan will have $254,700 in 2018 dollars at his age 55.

If he elects to main­tain the TFSA, then it would pro­vide a pay­out of $11,850 per year from 55 to 90.

Jack’s in­come at 55 would there­fore be his $56,520 from his job pen­sion, $7,000 from his RRSP and $11,850 from his TFSA. That’s a to­tal of $75,370. With 15 per cent av­er­age tax but no tax on the TFSA pay­out, he would have $5,500 per month to spend.

From 65 on­ward, Jack’s in­come would con­sist of $46,572 per year from his em­ploy­ment pen­sion, $7,000 from his RRSP af­ter an­other decade of growth with no more con­tri­bu­tions, $11,850 from his TFSA, $7,160 from Old Age Se­cu­rity, and $10,208 from the Canada Pen­sion Plan.

His to­tal in­come would be $82,790 per year.

Af­ter av­er­age 15 per cent in­come tax on all but the TFSA in­come, he would have $6,012 per month to spend.

With­out the $3,976 sum of mort­gage ex­pense, line of credit pay­ments, RRSP, TFSA, and cash sav­ings, his cost of liv­ing would be about $2,824 per month. As­sum­ing he gets a home with taxes and costs at present rates, he should have a com­fort­able retirement with a hefty mar­gin for travel and a newer car when needed.

The large monthly sur­plus and the chance that Jack will de­velop his for­eign land will make it pos­si­ble for him to aug­ment his in­come af­ter age 90, if the need arises.

He would still be re­ceiv­ing his job pen­sion, CPP and OAS. It will be a se­cure retirement, Moran says.

The down­side — and a sig­nif­i­cant cost — would be med­i­cal and hospi­tal in­sur­ance cov­er­age if Jack ceases to sat­isfy res­i­dence re­quire­ments for provin­cial health­care poli­cies as they may ex­ist in fu­ture.

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