New Middle-aged Hubby a Retirement Plan Wrinkle

Andrew Allentuck

SITUATION Family has too many pension funds and several debts

STRATEGY Push debt payments and save interest

SOLUTION Ample money for retirement

A Toronto couple we'll call George, 52, and Marge, 51, were recently married. Marge, a career employee with a major manufacturing company, and George, who is self-employed, have a combined monthly after-tax income of $8,315. They keep a home with George's children, ages 14 and 16, from a prior marriage.

In financial terms, Marge is the family's main support. Her job and rental income from two properties contribute $5,575 to their total monthly income. George, who was cleaned out by his divorce, puts $2,740 into the family's after-tax kitty each month.

Their cash flow is sufficient to cover monthly expenses and savings, but Marge worries that their retirement income, which will have to be stretched to cover Bill, may not be adequate.

Life After Work

"My marriage has brought companionship and a lot of potential expenses," Marge says. "George brought few financial assets to our marriage, so, in effect, my retirement funds will have to cover him as well. The question is, what will we be able to afford and when can we afford it?"

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. of Kelowna, B.C., to work with George and Marge. In his view, their retirement is not in question, though what they will have to spend has been complicated by George's addition to Marge's well-crafted plans.

"Marge's plans are cluttered and thus inefficient," Mr. Moran says. "But with some reorganization, she and George can enjoy a financially secure retirement."

The foundation of their retirement will be Marge's assets: a $650,000 house, $200,000 cottage, financial assets of $347,000, for a total of $1,197,000.

Their debts, although manageable, are a roadblock between them and retirement. There are just two: a mortgage and a line of credit secured on their house that, together, add up to $265,000.

Their net worth -- $932,000 -- should be a good base for starting life after work.

But there are problems.

Marge does not want to part with the cottage, which her grandfather built and which she bought back from a previous owner. Currently financed with her $127,000 line of credit, she would be willing to work a few more years to avoid selling it. Carrying costs are paid by renting it out in summer, bringing in $5,000 per season. It's enough to cover repairs, utilities and some interest.

Pay Down Debt

Alternatively, Marge and George could invest more aggressively, with the hopes the returns would boost their retirement kitty.

Aggressive investing at their stage of life is not necessarily wise, given that they could lose much of what they might commit to stocks or equity funds.

Their pension and registered savings are already sufficient to pay their estimated retirement expenses, so they should aim for asset preservation rather than fast profits, Mr. Moran says.

The more conservative course would be to use the money in the tax-free savings account, currently $10,000, along with $67,000 in various registered and non-registered savings accounts and the $833 per month they put into their TFSAs, to pay down their mortgage and line of credit.

Little of the 4.95% interest they pay on their mortgage debt and the 2.25% they pay on their secured line of credit line of credit is tax deductible. The result of this move would be to cut amortization from the present 16.5 years to 6.7 years, allowing them to be out of debt before age 60.

The total interest savings would be $65,858, the planner estimates.

Any money taken from registered accounts would be subject to tax, but withdrawals could be spaced over a few years to reduce the tax hit and mortgage prepayment penalties.

Future Income

Marge and George will have a retirement income made up of several packets of money.

Marge has a company pension that will pay her $41,203 per year plus a $3,600 annual bridge adjustment to age 65.

She also has a secondary tax-deferred savings program through work. She puts $900 each month into the plan, which has a current value of $100,000. She has the option to withdraw the savings over whatever period she wishes. It would be best to take the money between her retirement date and age 65, before she begins to draw Canada Pension Plan benefits. If she continues her contributions and if the money grows at 3% over the rate of inflation, it would become $240,200 at age 60 and she could draw $48,040 a year from it from age 60 to 65, Mr. Moran says.

Assuming that Marge gets 90% of maximum Canada Pension Plan benefits, currently $11,210 per year, and George 80% of those benefits, the couple would have a total CPP income of $19,057 per year at age 65. If they choose to reap their benefits before age 65, under proposed rules, they would pay a penalty of 0.6% per month for each month prior to age 65, when benefits begin, or 36% if they cash in when each is 60.

Each will qualify for full Old Age Security payments of $6,222 per year, at age 65.

Marge has $170,000 in her RRSP. Her employer adds $4,800 per year and she adds $15,600 per year for a total contribution of $20,400 per year. If she maintains this pace and gets a 3% annual return for another nine years, she will have $429,060 in her RRSP. This sum, if it continues to earn 3% per year and is paid out to her age 90, would yield $21,890 per year, the planner estimates.

Marge and George will have $114,733 total income up to her age 65 and $94,594 after age 65, the difference being the loss of the $3,600 bridge, and assuming the company deferred-savings account is spent between the ages of 60 and 65. These figures assume a 3% return on invested assets. If the return were to rise to 4% after inflation, income would rise by about $3,000 per year. If the return is 2%, there would be a decline of about $3,000 per year, Mr. Moran explains.

They can boost their income by selling the cottage or downsizing their house and investing the proceeds to produce additional cash flow. But there will be no urgent need to do so. Their total expenses amount to $7,405, not including allocations to RRSPs and cash savings. In retirement, they will have reduced or paid off their mortgage and line of credit, saving $1,800 per month. Their nominal expenses will have fallen to $5,605 per month and might be less with fewer mouths to feed.

"If Marge and George can reorganize their assets in an efficient manner, they can have a retirement income more than sufficient to pay for the kind of life they live today," the planner explains. "There will be ample money for travel and for helping others, if that's what they want to do."

(c) 2010 The Financial Post, Used By Permission