Tess wants her money to last until age 75 — but what if she lives longer?

THE AMOUNT OF MORTGAGE DEBT TESS HAS $618K

In Alberta, a woman we’ll call Tess, 52, has a solid job with a tech company. Her income is $125,000 plus stock and cash bonuses that add $30,000 per year. She has a $350,000 townhouse with a $128,000 mortgage, a $670,000 investment property in B.C. with a $490,000 mortgage and financial assets that add up to about $440,000. She would like to retire in eight years when she is 60 but worries that with her $618,000 of mortgage debt and the uncertainty of the Alberta economy her plan may not work.

“What’s the earliest I can retire and not end up broke before 75?” she asks. “My view is that once the money is done, retirement is done. My outlook is life to 75, then no more.”

Family Finance asked fee-only planner Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Tess.

“This case is interesting because Tess assumes she will die 15 years after she retires,” Moran explains. “There is no medical reason for that assumption.”

MORTALITY AND CASH FLOW

Tess has built $844,000 in net worth with thoughtfulness, care and commitment. Her rent from her B.C. property is $2,400 per month. Taxes and loan interest cut that down, but with her house and the income property, she is well invested in real estate. Her plan is to move into her B.C. rental when retired and to sell her residence in Alberta. That provides time for the Alberta property market to recover. The critical variable in her case is her assumption that her money only needs to last until the arbitrary cut- off of age 75. This is cash-flow fatalism given her belief that she should not outlive her money.

Tess’ plan is to work in Alberta for eight more years, then move to B.C. to enjoy 15 years in her property. Her present residence, the Alberta townhouse, will have its $128,000 mortgage paid off by age 60 at her present rate of $1,400 per month. Her B.C. property with mortgage payments of $ 2,150 per month will have an outstanding balance of perhaps $250,000 in eight years depending on the course of interest rates and the rate she gets when her present 3.17 per cent note has to be renewed.

Tess’ present portfolio of financial assets in her RRSP, taxable accounts and chequing account add up to $427,000. She used up all of her former TFSA balance for a down payment for her B.C. property and is now rebuilding the TFSA at $2,000 per month. Her equity in her properties is growing at approximately $3,000 per month, Moran estimates.

ASSET- VALUE PROJECTIONS

Using present asset values and assuming that Tess’ annual $15,000 stock bonus is used to pay down her mortgages, her assets at age 60 would be as follows.

The $ 400,000 in her RRSP growing with Tess’ contributions of $8,750 plus the company match, total $17,500 per year, for eight years to her age 60 at three per cent over the rate of inflation would have a value of $667,000 and then support payouts of $54,245 for the following 15 years. If the payouts run from retirement at 60 to age 90, they would support payouts of $33,000 per year to exhaustion of capital and income.

If Tess makes $ 24,000 in annual contributions to her TFSA — which is possible given her current space and the additional annual $6,000 contribution allowance — that sum growing at three per cent would reach $77,500.

Then with reductions of contributions to $6,000 per year for the next five years it would continue to grow to a value of $122,650.

That sum, assuming continued three per cent growth, would support payouts of all capital and income of $9,975 to age 75 or $6,260 to age 90.

By age 60, Tess’ residence in Alberta will be paid for in full. We assume that she sells the unit for its present value of $350,000 and uses that sum to pay off the balance of her B.C. mortgage, with about $ 100,000 left over for moving costs, legal fees and potential capital gains taxes. We cannot predict rates, so we do not include the sum in our calculations.

RETIREMENT INCOME

If Tess is trying to exhaust her funds by age 75, beginning at age 60 she would have $54,245 taxable income from her RRSP and $9,975 in non-taxable income from her TFSA. After 18 per cent average, she would have $54,456 per year or $4,538 per month to spend.

Assuming she must support herself until age 90, she would have $33,000 from her RRSP and $6,260 from her TFSA. After 12 per cent tax on RRSP payouts and no tax on TFSA cash flow, she would have $2,900 per month to spend. In either case, with no further mortgage payments or savings, she could cover an estimated budget of $2,400 per month.

At age 65, Tess could add CPP at an estimated $9,200 per year based on entering Canada’s workforce at 34 and contributing for 26 years to age 60.

She would have 33 years residence in Canada out of the 40 needed for full benefits, so her net OAS would be $6,110 per year. Her total income would rise to $79,530. After 20 per cent average tax, she would have $5,470 per month to spend to age 75.

Using age 90 as a planning horizon and 14 per cent tax on all but TFSA cash flow, she would have $3,985 per month to spend.

For Tess, the decline in retirement income she would suffer by adding another 15 years of life to her planning is mitigated by indexed public pensions that do not try to estimate age of death

The total income Tess can obtain by living another 15 years from 75 to age 90 would allow her to accumulate wealth and pad her safety net.

“She has more security than she realizes,” Moran concludes.

WHAT’S THE EARLIEST I CAN RETIRE AND NOT END UP BROKE BEFORE 75?