In Toronto, a couple we'll call Mary, a 52-year-old flight attendant, and Jack, 42, a school teacher, are reconstructing their lives from former marriages.
Mary took a financial loss in ending her marriage, but as a long-term employee of her airline, she has job security. Jack's divorce was costly and a subsequent investment in a family business ended in a personal bankruptcy that took all his assets. In the effort to reshape their financial lives, the couple face an uphill battle in a difficult time for the economy.
"I want to pay off my credit line and mortgage and I have just a few years to do it before retirement," Mary explains. For his part, Jack, who pays support for two children from his former marriage, says: "I do not make enough money to save or to plan for the future."
What our expert says
Facelift asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Mary and Jack.
"They have good assets in their training and careers, defined-benefit pensions, and capacity for higher incomes in future," he explains. "On the other hand, they have substantial debts to pay. In spite of having secure incomes, they are really living from paycheque to paycheque."
Restructuring the couple's finances is less difficult than they fear, Mr. Moran notes. Their goal should be to pay their debts before they retire and, in turn, not to retire before they have eliminated their debts. Their defined-benefit pension plans, which effectively take up their RRSP contribution space, make it unnecessary for them to save for retirement, he adds.
The couple have debts including a $26,500 mortgage and a $51,000 line of credit. Jack has student loans outstanding of $14,000, a car loan of $17,280 and there is a roofing bill of $4,500 to pay. Total debts of $113,280 substantially exceed the couple's annual after-tax income of $66,792. However, Mary and
Jack should be clear of these obligations in 10 years, the planner estimates.
Servicing those debts over time should get easier, the planner notes. Jack's income should rise from $40,400 a year today to $90,000 in 10 years provided that he takes additional training at a cost of $3,200 to $4,000. He will have to pay a quarter of his increased pay in support payments, but tax credits for the training programs he needs will cut their cost by a fifth.
Mary has considered retiring in three years at age 55, but should defer retirement until debts are paid off when she is 60, Mr. Moran cautions. If she works to age 60, her defined-benefit pension, which is not indexed, would be $24,612 a year.
Jack's defined-benefit, indexed pension will be based on 2 per cent of his highest five years of earnings multiplied by years of service. If he retires at age 60, he would receive $34,200 a year in 2009 dollars assuming that he gets his promotions and income boosts. He would also be eligible for a bridge payment of $5,670 per year to age 65, Mr. Moran estimates.
In addition to their pensions, Mary and Jack would each qualify for full Old Age Security, currently $6,204 a year, and for 90 per cent of maximum Canada
Pension Plan payments of $10,905 a month or $9,815 each a year. Assuming that each waits to age 65 to take benefits, thus preserving indexation of the full amount of pension payable, the couple would have public pensions of $32,038 a year.
Jack has no RRSP, but Mary's RRSP currently totals $20,000. If she adds nothing to it and it grows by 3 per cent per year after inflation adjustments, it would add up to $25,335 in eight years. Income from that sum would add $1,255 a year to her retirement income from her ages 60 to 90, Mr. Moran says.
From Jack's age 60 to 65, Mary will be 70 to 75. In this period, they would have Mary's CPP of $9,815, OAS of $6,204, and her pension of $24,612. Adding
Jack's pension of $34,200 and his $5,670 bridge, the total would be $80,501 a year.
When Jack turns 65, they will lose the $5,670 bridge but gain his OAS of $6,204 and his CPP of $9,815 for a pretax total of $90,850 a year, a little more than their present $89,284 annual gross income.
This is more than enough retirement income for their way of life, Mr. Moran says.
By the time they retire, their debts will be paid and the $1,480 in monthly debt service costs they now pay will be available for other things. The majority of their combined pensions will be indexed. However, when one dies, even if each has chosen a survivor's benefit on the public pensions, the survivor will lose a CPP benefit and one of the two monthly OAS cheques. Some or all of the gap could be covered with a first-to-die joint term life insurance policy, he notes.
"This couple can achieve a comfortable retirement through their public pensions and defined-benefit employment pensions," Mr. Moran says. "They want to enjoy sports and travel, but the cost of quitting work in a period during which they have been rebuilding their finances would be high. They should defer retirement in each case to age 60 and postpone taking CPP benefits to age 65. That's the wise and prudent thing to do."
Couple, each divorced, in midlife
Major debts stand in the way of retirement
Pay down debts, rely on defined-benefit employment pensions, CPP and OAS
A pleasant retirement with gross income not far from six figures
After-tax monthly income:
House $420,000; RRSP $20,000; Pensions (est.) $150,000; Total: $590,000
Mortgage $550; Property tax $293; Credit line $220; Car, home ins. $360; Car lease $130; Car payment $360; Cars (2) gas $270; Phones, cells $253; Food $800; Entertainment $350; Clothing $170; Travel $320; Charity $40; Gym $75; Child support $683; Student loan $125; Roof payment $225; Misc. $342;
Mortgage $26,500; Credit line $51,000; Student loan $14,000; Roofing loan $4,500; Car loan $17,280; Total: $113,280