Cou­ple with $2.9M in as­sets and no debt still fret­ting about re­tire­ment

National Post (National Edition) - - FINANCIAL POST - An­drew Al­len­tuck Fi­nan­cial Post e-mail an­drew.al­len­[email protected] for a free Fam­ily Fi­nance anal­y­sis

RATHER LOW EX­PEC­TA­TIONS OF RE­TIRE­MENT IN­COME.

In Bri­tish Columbia, a cou­ple we’ll call Henry, who is 56, and Ju­lia, who is 58, have com­pli­cated fi­nan­cial lives. Henry runs his own con­sult­ing com­pany. It makes a $30,000 an­nual profit and he takes out $1,200 monthly be­fore tax. Ju­lia is a civil ser­vant earn­ing $9,900 per month be­fore tax and ben­e­fit de­duc­tions. Af­ter tax, they have $6,694 per month to spend. They have am­ple re­sources, yet they fear a squeeze in re­tire­ment. Pes­simism and lag­ging in­vest­ments dog them.

Ju­lia plans to re­tire in May 2019. Her take-home pay will drop from her present net of about $5,500 per month to about $5,200 per month un­til she is 65. At that point, she will lose the bridge in her pen­sion worth about $1,365 per month but gain a sim­i­lar amount in Canada Pen­sion Plan and Old Age Se­cu­rity ben­e­fits.

The cou­ple’s fi­nances are com­plex. They have a $1.5 mil­lion home and an $800,000 condo in the U.S. that is owned by Henry’s com­pany, which is also hold­ing $250,000 in prof­its. While he and Ju­lia have $361,000 in their RRSPs, their TFSAs have com­bined as­sets of just $800, the low bal­ance re­flect­ing a fear of in­vest­ing in any­thing but prop­erty and cash. Their in­vest­ments, apart from real es­tate are heav­ily in cash and GICs which, af­ter in­fla­tion and tax, gen­er­ate neg­a­tive re­turns. Their goal is to have $5,500 per month af­ter tax in re­tire­ment.

Fam­ily Fi­nance asked Derek Mo­ran, head of Smarter Fi­nan­cial Plan­ning Ltd. in Kelowna, B.C., to work with Henry and Ju­lia. “The good part of this case is that these folks have sub­stan­tial sav­ings and no debt. They have rather low ex­pec­ta­tions of re­tire­ment in­come as well. The bad news is that their fi­nan­cial as­sets al­most com­pletely in­vested in cash and GICs. The small age dif­fer­ence of two years com­pli­cates cal­cu­la­tions, but we’ll as­sume that they re­tire to­gether and draw ben­e­fits to­gether. It makes no dif­fer­ence in their stan­dard of liv­ing,” Mo­ran notes.

AS­SET MAN­AGE­MENT

They could sell the U.S. prop­erty. They bought it when the Cana­dian dol­lar was close to par with the U.S. dol­lar. They can cap­ture a 30 per cent gain on cur­rency and a $190,000 es­ti­mated cap­i­tal gain. The rent they get is just two per cent of their cur­rent eq­uity.

Af­ter cap­i­tal gains tax, they would walk away with an es­ti­mated $700,000. They also have $250,000 in Henry’s com­pany ac­count. The to­tal $950,000 could be taken out of the com­pany as tax­able div­i­dends over a nine-year pe­riod. Each year, they would have $105,555 avail­able from this plan. Sub­ject to tax ad­vice, and ap­por­tion­ment into non-taxed cap­i­tal div­i­dends, the bal­ance of div­i­dends would be taxed at a rate of about 20 per cent, Mo­ran ad­vises.

RE­TIRE­MENT IN­COME

To keep things sim­ple, we’ll as­sume that the $950,000 grows at three per cent a year af­ter in­fla­tion and is spent over the fol­low­ing 34 years to Henry’s age 90. That would gen­er­ate $45,000 a year in in­dexed pre-tax cash flow, Mo­ran es­ti­mates. For now, all their re­tire­ment sav­ings are in cash and GICs. They can do much bet­ter with in­dex funds, low fee mu­tual funds or well­cho­sen in­di­vid­ual stocks.

They should build up their Tax-Free Sav­ings Ac­counts. At present, they have just $400 in each ac­count, $800 to­tal. We’ll as­sume that they do build up each ac­count by $57,100 each this year and $6,000 each for fol­low­ing years — the TFSA limit is ex­pected to rise in Jan­uary. But we’ll not in­clude the pay­outs in in­come. The cash to pay con­tri­bu­tions and re­turns from that money is in the com­pany ac­count de­tailed above and al­ready counted.

Each have a de­fined-ben­e­fit pen­sion, Henry’s for prior work for an­other com­pany, Ju­lia’s for her present job. Henry’s would be $4,308 per year plus a $1,044 bridge, and Ju­lia’s $53,124 plus a $9,420 an­nual bridge. The bridges end at age 65 for each.

Their RRSPs have a bal­ance of $361,000. There is scant con­tri­bu­tion room. If the ac­counts grow at three per cent a year af­ter in­fla­tion, they will be­come $485,150 in 10 years in 2018 dol­lars when they are 66 and 68 and the com­pany has been wound down. If they start pay­ing out the money then, it would pay a tax­able in­come in 2018 dol­lars of $27,812 per year for 24 years to Henry’s ago 90. We’ll as­sume that RRSP ben­e­fits are paid through RRIFs and evenly split.

They can ex­pect Canada Pen­sion Plan ben­e­fits — $9,384 for Henry and $13,128 for Ju­lia at age 65. Each would re­ceive Old Age Se­cu­rity ben­e­fits of $7,212 per year. OAS could be clawed back if the sum of their in­di­vid­ual gross in­come ex­ceeds about $74,000.

With these num­bers, the cou­ple could have $50,352 for Henry and $62,544 for Ju­lia each to age 65 or more if they want to ac­cel­er­ate com­pany with­drawals. At 65, their bridges dis­ap­pear but their reg­u­lar pen­sions plus OAS and CPP be­gin.

At 65, their in­comes would be, for Henry, a $4,308 pen­sion, $45,000 of in­vest­ment in­come, RRSP in­come of $13,906, OAS of $7,212 and CPP of $9,384, to­tal $79,810 be­fore tax. Some of Henry’s in­come would be re­turn of cap­i­tal and he might be able to avoid the OAS claw­back.

Ju­lia’s post-65 in­come would be a $53,124 pen­sion, $13,906 RRSP ben­e­fits, $7,212, OAS and $13,128 CPP, to­tal $87,370. Her claw­back would cost her 15 per cent of in­come over the thresh­old, a cost of about $2,000 per year. Her net tax­able in­come would be $85,370.

With in­comes to­talled and el­i­gi­ble pen­sion in­come di­vided, they would pay av­er­age tax of about 20 per cent for Henry and 21 per cent for Ju­lia, leav­ing them with $11,000 per month to spend.

They could post­pone draw­ing down RRSP in­come to age 72, thus length­en­ing the time for growth and re­duc­ing the pay­out pe­riod. They would have ad­di­tional money later in life, but even with age 65 starts to tak­ing RRSP pay­outs, they will have more money than they are ac­cus­tomed to spend­ing. With no chil­dren, the cou­ple could en­dow good causes when they pass on. If they im­prove their records, they will un­der­stand how good their for­tune is.

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