A way for­ward amid ‘mul­ti­ple de­mands’

The Globe and Mail (BC Edition) - - REPORT ON BUSINESS - DIANNE MALEY

Cou­ple can ex­pect to carry debt into re­tire­ment as they jug­gle cash flow chal­lenges

Acou­ple of years ago, life was look­ing good for Bob and Betty. They had a nice house, nice cars, good jobs and three chil­dren in pri­vate school.

Then Betty was down­sized by her em­ployer of 25 years, cut­ting the fam­ily in­come roughly in half. “It took me 15 months to land my cur­rent role,” Betty writes in an e-mail. The start­ing salary in her new job is 40 per cent less than she was mak­ing be­fore, although she ex­pects it to rise fairly quickly. “That has caused a strain on our cash flow.”

Bob is 54, Betty 48. Their chil­dren are in their teens. She’s a mid­dle man­ager, he’s a teacher.

All the while, they’ve been pay­ing thou­sands of dol­lars to put their chil­dren through pri­vate school, although schol­ar­ships and bur­saries have helped. Uni­ver­sity is a cost the cou­ple also want to shoul­der. So far, they have about two years of post­sec­ondary tu­ition saved for each child in a reg­is­tered ed­u­ca­tion sav­ings plan.

They hope to re­tire early with a spend­ing tar­get of $87,200 a year af­ter tax, plus $8,400 a year for travel. Betty would re­tire in 10 years, Bob in six. “With mul­ti­ple de­mands and some cash flow chal­lenges, and chil­dren en­ter­ing post­sec­ondary school, what should be our pri­or­ity?” Betty asks. Bob has a work pen­sion that will pay $53,290 a year at the age of 60, partly in­dexed.

We asked Ja­son Pereira, a fi­nan­cial plan­ner at Woodgate & IPC Se­cu­ri­ties Corp. of Toronto, to look at Betty and Bob’s sit­u­a­tion.


If they re­tire when Bob is 60 and Betty is 58, they will have to carry debt into re­tire­ment, Mr. Pereira says. Also, they will need to draw on their line of credit on and off over the next few years un­til their chil­dren have fin­ished uni­ver­sity, pay­ing it down in years when they have sur­plus cash flow.

If all goes well, they will be able to meet their early re­tire­ment goal – pro­vided they can earn a rate of re­turn on their in­vest­ments of 6.3 per cent, or 4.3 per cent af­ter sub­tract­ing in­fla­tion, the plan­ner says. He rec­om­mends a bal­anced port­fo­lio with a tar­get re­turn of 6.4 per cent un­til they re­tire, and an in­come port­fo­lio earn­ing 5.6 per cent a year af­ter they are no longer work­ing.

If, by com­par­i­son, they earn 5 per cent a year on their in­vest­ments, or 3 per cent af­ter in­fla­tion, they would each have to work two more years to meet their spend­ing goal or cut their tar­get by $6,000 a year. This year, the plan­ner has them sell­ing some stocks and cash­ing out Betty’s taxfree sav­ings ac­count to pay down their mort­gage and line of credit.

Here’s where the money will come from this year. Bob earns $103,000 a year, Betty $52,500. She also got a fi­nal profit-shar­ing pay­ment from her for­mer em­ployer of $12,000. Their com­bined in­come tax is $30,312, tak­ing into ac­count tax sav­ings from pen­sion plan and reg­is­tered re­tire­ment sav­ings plan con­tri­bu­tions. Canada Pen­sion Plan and em­ploy­ment in­sur­ance con­tri­bu­tions of $6,904 leave them with af­ter-tax cash flow of $130,284.

A small in­her­i­tance, the sale of non-reg­is­tered in­vest­ments and liq­ui­da­tion of Betty’s TFSA, plus a with­drawal from the chil­dren’s RESP ($82,529 in to­tal) lifts avail­able cash flow to $212,813 af­ter tax.

Here’s where the money will go this year. Bob’s de­fined-ben­e­fit pen­sion plan con­tri­bu­tion is $12,396, Betty’s de­fined­con­tri­bu­tion pen­sion plan $4,200, Bob’s spousal RRSP $17,764 and RESP $10,000. This leaves them with $168,453 to cover their liv­ing ex­penses, mort­gage, in­sur­ance and a small amount for fix­ing up the house. Noth­ing is left over.

Mr. Pereira rec­om­mends Bob and Betty max­i­mize their RRSP and pen­sion con­tri­bu­tions and Bob should con­tinue to con­trib­ute to a spousal RRSP in Betty’s name. Be­cause Betty is younger, this strat­egy will en­able them to put off when they will have to start tak­ing funds from their reg­is­tered sav­ings – that is, the year the younger spouse turns 72. They should con­tinue to con­trib­ute to the RESP un­til the youngest child turns 17. The plan­ner es­ti­mates post­sec­ondary ed­u­ca­tion costs at $30,000 a year for the two younger chil­dren for four years, and $20,000 a year for the child who is al­ready in uni­ver­sity.

When Bob re­tires in six years, they will have com­bined in­vestable as­sets of about $1.4-mil­lion and debt of $260,960. By the time Betty re­tires four years later, they will have about $1.7-mil­lion in in­vestable as­sets and debt of about $106,320. The plan­ner rec­om­mends they ap­ply for Canada Pen­sion Plan ben­e­fits at the age of 60 and be­gin draw­ing Old Age Se­cu­rity ben­e­fits at the age of 65. Af­ter they have quit work­ing, they could take ad­van­tage of their lower in­come tax rate by draw­ing an ad­di­tional $10,000 to $12,000 from their RRSPs each year to pay off the mort­gage. Once they are debt free, they should es­tab­lish an emer­gency fund to cover six months’ of ex­penses, and then be­gin to con­trib­ute the max­i­mum each year to their TFSAs.

Want a free fi­nan­cial facelift? E-mail fin­facelift@gmail.com. Some de­tails may be changed to pro­tect the pri­vacy of the per­sons pro­filed.


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