FAMILY FINANCE

Affluent Alberta couple should build up inflation protection and cu ll investments to get retirement plans on track

An affluent Alberta couple must build up inflation protection, cull investments to boost retirement plans.

In spite of the Alberta economy’ s downward spiral, Charles and Bet tina Cr ohs man* seem financially secure. Both have careers apart from the ailing energy industry, their incomes more than cover expenses and they have substantial financial assets. Yet, they have good reason to worry. Their investment portfolio is messy and it’ s too heavily weighted in bonds and cash to out pace future inflation, which could hurt when they enter retirement.

A senior manager for a consumer products company, Charles ,57, brings home $9,200 a month. Bet tina, also 57 and an administrator for a manufacturing company, adds her take-home income of $3,500 a month on top of a net $3,300 pension she already receives. The couple’ s monthly income allow sample funds for saving. But Charles would like to retire in eight years, while Bettina wants to quit now, despite the loss of some future pensionbenefits.

“Our goal is simple: ensure that we have adequate funds for retirement,” Charles says. “We would like to travel and we plan to down size our home, which we now share with our 19- year-old son, when he finishes university and move son .”

Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., notes the couple have been diligent savers and conservative spenders, setting up the base for a comfortable retirement. “If they downsize their house around age 70, as they plan, they could liberate even more money to generate income ,” he says. But there are some things they should do in the meantime.

Charles earns 60% of the couple’ s income and is ina high tax bracket. If Bet tina re tires, her income will drop to the $48,000 pension she already receives. Between now and Charles’ retirement, the couple can use a lending plan to bring down their combined tax bill. Charles can lower his tax bill if he lends money—and their portfolio has

$93,400 of cash squirrel ed away—to Bet tina and she pays him interest at the prescribed rate, currently 1% per year, which is deductible to her and taxable to Charles.

The advantage of this plan is clear from the numbers. On, say, $50,000 of income, a dollar of Canadian-source dividends costs her 9.63% in tax. Charles would pay 20.33% on that same dollar of income on top of his $174,000 salary. Tax savings will depend on how the money Bet tina borrows is invested, but Moran notes they could be substantial over the eightyear period until Charles re tires.

Charles and Bettina already have $1.66 million in assets including a $550,000 house. If they continue to save $7,000 a month, as they do now, and grow their financial assets at 3.5% per year over inflation, their nest egg will be more than $1.9 million in seven years. That would give them $109,000 to spend per year until they are 90, assuming their money grow sat 3% over inflation until then.

But if Bettina were to quit now, their savings capacity would drop to $4,000. Assuming 3% growth after inflation, their investments would grow to more than $1.65 million in 2016 dollars by the time they are 65. That could produce an annual income of $92,300 with return of capital to age 90. We’ll go with the latter assumption since