Retirement For this Couple Means a Few Sacrifices
Their expenses, including $2,000 a month for golf and curling and $700 for restaurants, are high in relation to income.
In Ontario, a couple we’ll call Helen and Bruce contemplate retiring from their work, his in management consulting, hers in the hospitality industry. Helen, 50, brings home $6,528 a month from her job but feels that she has risen as far as she can in her company. Bruce, 57, has been forced to work part-time for the past 14 years. His income fluctuates but averages $3,000 a month after tax. Both would like to continue to work, but times are tough and the reality they see is that the clock is ticking on their careers. They have no financial obligations to their only child, now in his thirties and independent, but they do have a way of life with frills they may not be able to support in retirement.
They still have $122,000 of debts to pay that cost them $2,658 a month. They have $766,000 of financial assets that will have to produce income to supplement government pensions from Canada Pension Plan and Old Age Security. Their problem is figuring out how much longer they have to work to build up enough savings to maintain their way of life.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with the couple. In his view, saving for their retirement will be dependent on Helen’s $20,000 annual bonus.
“There are several problems in planning retirement income for this couple,” Mr. Moran says. “Their expenses, including $2,000 a month for golf and curling and $700 for restaurants, are high in relation to income. It will be difficult to maintain this spending in retirement, even if they can liberate $1,950 a month when their home is paid off in March 2015 and one car loan for $518 a month ends in December 2013. That’s $2,468 of additional liquidity they will have.”
Debts and Taxes
Use the $2,468 a month of former debt-service charges to pay off the $65,000 line of credit, Mr. Moran advises. If they do this diligently, the line of credit would be gone in 26 months.
Neither Helen nor Bruce use RRSPs efficiently. Their tax advisor has cautioned them that RRSP payouts in retirement could propel them into higher tax brackets in future. Indeed, tax rates years from now could be higher and the couple could be pushed into them just by bracket creep — the process by which income rises faster than bracket tiers, driven by inflation. They have $455,000 in RRSPs, but they have not made contributions to them recently. That has cost them substantial tax savings. Helen’s 2011 gross income, $115,000, and a similar figure for 2012 will create a significant tax liability that needs to be reduced. Helen has $97,637 of RRSP room and should fill it. If she does, the tax savings could be used to pay down debts. In effect, they are letting the government do their debt reduction, Mr. Moran points out.
In lieu of cash, the couple can use some of their taxable stocks to fund RRSPs. Accrued gains on transferred stocks would be taxable at half of the rate for ordinary income. Helen would receive an average refund of 34% on her RRSP contributions, more than offsetting tax on shares sold for her contributions. If she contributes $72,300 to fill most of her RRSP space, her $24,582 refund at an average 34% deduction would allow them to cut their $65,000 mortgage to about $40,400. That way, they would be mortgage-free in just 20 months.
If Helen continues to work another 10 years, adds $72,300 this year to RRSPs and another $23,000 each year from her bonus and regular paycheque to non-registered assets and grows these funds at 3% over the rate of inflation, their combined assets will grow to $1,130,300 in 2013 dollars. This capital, if it continues to generate 3% returns over the rate of inflation, would pay $45,500 for the 35 years after Helen is 60 to her age 95, Mr. Moran estimates.
Bruce has not contributed to CPP for two years. He prefers to take lower-taxed dividends instead from his private corporation. He should receive $10,560 a year from CPP. At age 67, Helen can expect the maximum CPP benefit, $12,150 a year in 2013 dollars.
They also have $32,000 in a tax-free savings accounts to which they each plan to contribute $5,500 a year. In 10 years, the accounts, growing at 3% over the rate of inflation, should have $172,900. If paid out at the same rate, the accounts would generate $5,187 a year.
From Bruce’s age 65 to Helen’s age 65, the couple will therefore have income composed of Bruce’s $10,560 CPP, $6,553 of OAS, $45,732 from registered assets and $5,187 from TFSAs for total pre-tax annual income of $67,800. At 65, Helen will receive CPP of $12,150 a year. At 67, she will start receiving OAS benefits of $6,553 a year, pushing total income to $86,503. After careful splitting of pension income, including RRSP payouts through RRIFs and — given that TFSA income is not taxable — the couple will have about $5,400 a month to spend after paying tax at an average rate of 25%. That will not support present spending net of debt service charges of $6,870 a month. However, if the couple can pare $1,500 a month from golf, curling and dining out, their retirement will be financially secure, Mr. Moran says.
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