No wife, no kids, no dog and no cat. But can he re­tire?

Regina Leader-Post - - YOU - An­drew Al­len­tuck Fam­ily Fi­nance Email an­drew.al­len­tuck@gmail.com for a free Fam­ily Fi­nance anal­y­sis

“I live a spar­tan bach­e­lor’s life,” he ex­plains. “I have al­most no en­ter­tain­ment ex­penses, I have all the cloth­ing I need, I shave my head so no hairstyling costs, I have no wife, no kids, no ex-kids, no dog, no cat. My en­ter­tain­ment is singing in a church choir and some vol­un­teer work.”

In Toronto, a man we’ll call Sid, 64, has re­tired from a job in pub­lish­ing. He brings home $3,060 per month from part time prod­uct test­ing and mod­est in­vest­ment in­come. Fru­gal and thought­ful, he spends just $1,495 a month for his base­ment apart­ment, a bus pass, food and other ne­ces­si­ties and car­ing for two old mo­tor­cy­cles. He runs his com­puter on a neigh­bour’s Wi-Fi in ex­change for chores. He never goes to restau­rants. He saves half his take-home in­come.

Sid fears run­ning out of money, yet he has $1,071,000 in fi­nan­cial as­sets. $292,000 is in cash in money mar­ket ac­counts earn­ing lit­tle or noth­ing. There are other cash bal­ances in his TFSA and a chequing ac­count, all erod­ing after in­fla­tion and tax. It’s a prob­lem, but he ra­tio­nal­izes los­ing pur­chas­ing power to main­tain liq­uid­ity and to avoid po­ten­tial in­vest­ment losses.

IN­VEST­ING AND SPEND­ING

Sid is aware that he needs to boost in­vest­ment in­come if only to make his money last into very old age. He plans to do more vol­un­teer work but he’ll have to stretch his in­vest­ment in­come to travel, spend­ing time and money in Europe. The prob­lem is thus one of phi­los­o­phy — bal­anc­ing his fru­gal of life with a wish to live it up a lit­tle, aware­ness that with over $1 mil­lion in fi­nan­cial as­sets he is tech­ni­cally wealthy, and the in­tel­lec­tual chal­lenge of man­ag­ing his cash-heavy port­fo­lio.

Fam­ily Fi­nance asked Derek Mo­ran, head of Smarter Fi­nan­cial Plan­ning Ltd. in Kelowna, B.C., to work with Sid. His view — Sid has more money than he needs to live as he does but not enough to live as might wish in a trop­i­cal coun­try where is can ride his mo­tor­cy­cles year round. If he needed care, there could be a prob­lem, Mo­ran ex­plains.

Sid is set in his ways. He could af­ford to buy a condo but he re­jects the idea, pre­fer­ring to rent his base­ment suite for $800 a month. That is not much for Toronto, but rent­ing, even if fi­nan­cially ad­van­ta­geous, means that Sid is en­tirely out of the prop­erty mar­ket. If the home in which he rents were sold, he might have to move and per­haps pay more for shel­ter. His rent will rise over time.

PEN­SION MAN­AGE­MENT

Philo­soph­i­cally, Sid is a sur­vivor. He does yard work as par­tial pay­ment for his apart­ment. He plans to start CPP and OAS at 65. He could de­fer each for five years for a 36 per cent boost to OAS and 42 per cent boost to CPP. His par­ents lived to their mid-70s but did not lead healthy life styles. It’s a gam­ble. Time should be on Sid’s side, but he wants to start both at 65.

Sid could need more money one day if he re­quires care, Mo­ran notes. But if he raises his in­come too much, he will have to pay the OAS claw­back which starts at about $75,000. Care costs would be de­ductible from in­come, es­pe­cially higher in­come if his in­vest­ments pro­duced it. The higher one’s tax­able in­come, the more tax ef­fi­cient it is to in­cur de­ductible ex­penses.

What to do? Move cash to div­i­dend pay­ing stocks and lad­dered bond ETFs grad­u­ally, keep­ing cash for emer­gen­cies and mon­i­tor­ing ex­po­sure to the OAS claw­back. Run­ning in­vest­ments just for tax man­age­ment is putting the cart be­fore the horse, Mo­ran notes. Even though the claw­back dis­cour­ages in­vest­ments that pro­duce in­come which trig­ger it, the claw­back tax on its own is only 15 per cent on sums over the trig­ger point.

ES­TI­MAT­ING RE­TIRE­MENT IN­COME

If Sid were to grow his $549,000 RRSP at three per cent per year after in­fla­tion and were to spend all cap­i­tal and in­come start­ing at 65 in the 25 years to age 90, he could with­draw $31,528 per year in 2018 dol­lars be­fore tax. If he con­verts the RRSP to a RRIF, which is el­i­gi­ble for the pen­sion in­come credit, he would have a $2,000 per year tax credit.

Sid’s Tax-Free Sav­ings Ac­count has a $10,000 of con­tri­bu­tions and $1,000 of growth. He should top it up to $57,500, the present max­i­mum.

He has the cash to do that. If it the bal­ance grows at 3 per cent per year after in­fla­tion and Sid spends it over the next 25 years from age 65 to 90, it would sup­port pay­outs of $3,300 per year be­fore all cap­i­tal and in­come is ex­hausted.

For his tax­able in­vest­ment ac­count with $448,000 in var­i­ous stocks, Sid can switch into shares with sus­tain­able, strong div­i­dends. Char­tered banks, tel­cos and many util­i­ties fit the bill. Were he to in­vest and achieve a four per cent real an­nual re­turn with just a lit­tle more risk from div­i­dends and cap­i­tal growth, he could have $17,920 per year start­ing at age 65. An­nu­itized, the money would gen­er­ate $25,727 per year be­fore his cap­i­tal is ex­hausted. We’ll as­sume that he chooses straight in­ter­est and mod­est cap­i­tal gains in or­der to re­tain cap­i­tal as a re­serve for safety in later life. That way, if he lived be­yond 90, he would still have sub­stan­tial funds.

At age 65, there­fore, his in­vest­ment in­come from his in­vest­ment and reg­is­tered ac­counts would be $49,448 plus non­tax­able cash flow of $3,300 from the TFSA. His CPP would add $11,870 per year and Old Age Se­cu­rity $7,040 per year, all in 2018 dol­lars. Sid’s gross in­come at 65 would there­fore be $71,658 in­clud­ing the non­tax­able TFSA com­po­nent. De­pend­ing on the struc­ture of the tax­able in­vest­ment in­come, he could be pushed over the thresh­old of about $75,000 for the start of the OAS claw­back.

As­sum­ing that Sid does start CPP and OAS at 65, his in­come after 20 per cent av­er­age in­come tax and no tax on TFSA pay­outs would be about $4,800 per month. “He plans to leave a large be­quest to a char­ity,” Mo­ran says. “The prob­lem is what he will do with his grow­ing sur­plus. He could raise char­i­ta­ble con­tri­bu­tions now rather than leav­ing the task to his ex­ecu­tor.”

MIKE FAILLE / NA­TIONAL POST

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