B.C. couple in their 40s has $3.1M in assets, but is it enough to retire early?
Acouple we’ll call Bernie, 43, and Suzy, 47, live in B.C. They have a special problem figuring out when to retire and what they can afford after their working days are over. Bernie, who works for a consulting organization, has a medical issue that could shorten his life. It is a medically treatable risk, a concern but not a certainty. Suzy, who works for a tech company, has no health issues. They would like to retire together in five years, but will they be able to pull the plug on their jobs? And what kind of income in retirement can they reasonably expect?
Family Finance asked Graeme Egan, a financial planner and portfolio manager who heads Castlebay Wealth Management in Vancouver, to work with Bernie and Suzy.
Currently, Bernie and Suzy bring home $14,350 per month from their jobs and the rental properties. Their goal is to have $10,000 per month to spend when they retire.
A LONG HORIZON
The couple wants to retire early because of Bernie’s health issues, but because Suzy is healthy, they will have to account for a retirement that could last to her age 95. Creating a financial plan covering a 43-year span is a challenge.
On the plus side, they have built a $3.165 million net worth, mostly in real estate and diversified financial assets in registered and non-registered accounts.
They also have $22,100 in Bernie’s Registered Disability Savings Plan that can provide withdrawals for various purposes before age 60. Regulations are broad and we do not include the Disability Plan, which might be called on if Bernie is unable to work, in retirement savings.
In addition to their home, the couple owns two rental properties. They generate net rents of $2,390 per month. The first produces a three per cent return on equity of $473,000, the second a 2.3 per cent return on $449,500 equity. They are not especially profitable, but they do finance their way, pay steady income and are likely to appreciate. Total net rents for the suites in the principal residence and two rentals after costs are $4,315 per month or $51,780 per year.
They have $518,000 of non-registered investments. They add $10,000 annually to these accounts. Assuming three per cent growth after inflation, the account would rise to a value of $653,500 in five years. With no further contributions but a continuing three per cent return after inflation, the accounts would provide annual income of $27,250 for the following 43 years to Suzy’s age 95.
The couple’s Tax-free Savings Accounts have a current value of $232,000. They each add $6,000 each per year, $12,000 total. In five years, the TFSAS growing at three per cent after inflation will have a value of $332,600 and then pay $13,870 per year for the following 43 years, Egan estimates.
Finally, the couple’s RRSPS have a recent value of $788,285. That includes locked-in accounts and Suzy’s defined contribution pension plan. The total, growing with $25,000 of total contributions per year at three per cent after inflation will have a value of $1,051,000 in five years and then support payments of $43,830 for the following 43 years to expend all capital and income.
FORECASTING RETIREMENT INCOME
Although present allocations are $14,350 per month, they want to live within a monthly budget of $10,000. Elimination of $2,100 RRSP monthly contributions, $1,000 monthly TFSA contributions, $1,000 of contributions to taxable investments and selling two of three cars and cutting $250 fuel and maintenance will cut spending close to their target.
If they retire in five years at the ages of 48 and 52 as planned, the couple will have taxable income of $122,860 based on $27,250 from their non-registered investments plus $43,830 from RRSPS and $51,780 in net rent. Split and taxed at an average of 16 per cent and with TFSA cash flow of $13,870 added, they would have an after-tax total of $117,072 per year or $9,756 per month. That is within a few hundred dollars of their goal.
At age 65, Suzy could add Old Age Security, presently $7,707 per month, and estimated CPP benefits of $9,000 per year for $139,567 income. Assuming a 17 per cent rate, they would have $129,710 per year or $10,810 per month. That is over their target. At 65, Bernie can receive $7,707 OAS and $10,000 CPP benefits, total $157,274. Then with 17 per cent tax, they would have $144,400 or $12,030 per month after adjustments for age and other credits.
We assume that Bernie will enjoy his retirement for many years. He could start CPP at age 60 with a 36 per cent permanent reduction in payments, but there is no need for him to accept such a long-term cut in benefits. They could instead delay start of OAS to 70 with a 7.2 per cent boost per year from 65 to 70, total 36 per cent. They might also delay CPP to an age 70 start and receive an 8.4 per cent boost for each successive year from 65 to 70, total 42 per cent. For either benefit, they would raise the base for subsequent indexation. Given Bernie’s health issues, however, there is a good reason for a normal start to CPP and a reason not to delay other benefits. However, if they invest what they do not spend, they can do their own form of indexation, Egan suggests.
This plan is conservative, preserves liquidity and assets for both partners and does not anticipate Bernie’s premature death. It therefore reduces annual asset drawdowns. In turn, that preserves asset growth and purchasing power. Either partner’s death eliminates some public benefits for the survivor and the ability to split incomes. That in turn leads to higher taxes. There could be some compensation in reduced living costs for the survivor. The plan meets the couple’s needs without adding investment risk.
THEY HAVE A SPECIAL PROBLEM FIGURING OUT WHEN TO RETIRE.