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