Situation: Unexpected layoff from engineering job cast’s shadow over couple’s retirement plan
Solution: A timely inheritance, conservative spending and lack of debt save the day
A couple we’ll call Roger, 61, and Judy, 58, live in Quebec. Roger was laid off from his former job in engineering after 28 years with the same company. Judy works in an administrative position with a regional government. She earns $26,400 per year before tax and has a $6,000 annual pension from a government unit including a $1,500 annual bridge to age 65. She plans to retire this year. They are financially secure for now but worry that Judy’s pending retirement will reduce their standard of living.
Roger received a termination package of $131,000 and put $28,000 into his RRSP. He gets a small bridge pension of $2,880 per year to 65 and will have QPP benefits of $1,144 per month at 65.
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When working, Roger earned $97,000 per year with annual bonuses averaging $6,000. Today he gets $2,880 per year from the former employer to age 65. Their present annual income before tax totals $35,280. The couple allocates $50,900 per year including $12,000 for TFSA savings. The gap is made up with income from $1.47 million in financial assets.
They wonder if they can retire as soon as possible. They will have to rely on their pensions, investment income and a $170,000 inheritance they expect to receive within a few months.
“Can we have $50,000 per year after-tax income including travel at $6,000 to $7,000 per year, do a kitchen reno for $25,0000 and spend $15,000 for a deck and hot tub?” Roger asks. “We will need a new car in four or five years and we want to have six months’ worth of expenses in cash at all times, say $24,000.”
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. In Kelowna, B.C., to work with the couple.
“They have done all the right things,” he explains. Each has an RRSP. Their home is just 19 per cent of total assets, which leaves 81 per cent for generating cash flow. In full retirement, some expenses, such as $375 per month for what will be a fully paid whole life policy will end in a few years, reducing expenses by $4,500 per year.
The couple’s combined RRSPs have a balance of $744,324. If this money returns three per cent per year after inflation, it would provide an indexed income of $35,443 for 32 years to Judy’s age 90.
They have made full use of Tax-Free Savings Account space and generated substantial gains in their combined balance of $145,480. If that capital is invested to yield three per cent after inflation, it can support tax-free income of $6,927 per year for the 32 years to Judy’s age 90. That income, plus the inheritance due in a few months can provide a bridge to Quebec Pension Plan benefits and Old Age Security benefits that can start when each is 65.
Funds available add up to $347,671 in their taxable portfolio, $62,000 of cash on hand and their $170,000 inheritance. Reserve $24,000 for a cash balance in savings. That leaves $555,671. Take off $25,000 for a kitchen reno and $15,000 for other home improvements and $515,671 is left. Assuming that capital generates three per cent after inflation, it would provide $24,555 per year for 32 years to Judy’s age 90.
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Starting from the time in 2020 that Judy retires, the couple’s income should consist of her $4,500 pension, bridge pensions with annual values of $2,880 for Roger and $1,500 for Judy, RRSP payments of $35,443 per year, TFSA payouts totalling $6,927 per year and $24,555 taxable income from non-registered investments. That’s a total of $75,805. After splits of eligible income less TFSA income and 15 per cent average tax plus restoration of TFSA income, they would have $5,456 per month (that’s $65,472 per year) to spend. That’s above their $50,000 after-tax annual target and more than present allocations with $1,000 monthly TFSA savings and $375 monthly life insurance premiums. The surplus, $1,290 per month, would allow them to buy a new car in several years.
The total will rise with expected Quebec Pension Plan benefits of $13,855 for Roger when he reaches 65 and his Old Age Security benefit of $7,362. He will lose his $2,880 bridge for total income of $94,142 per year. After removing TFSA cash flow, splits and average tax of 18 per cent, they would have $6,540 to spend each month.
Finally, when Judy reaches 65, their total income will rise once more with her QPP benefit of $4,577 per year and her OAS of $7,362 per year less loss of her $1,500 bridge for final income of $104,580 per year. After elimination of the TFSA cash flow and 21 per cent average tax and then restoration of TFSA cash flow, they would have $7,000 per month to spend.
Roger and Judy’s pensions are not large, their savings fairly average and their taxes not insignificant, but given their modest spending and lack of debt, their retirement looks secure, Moran explains.
They can, however, do better with their capital. All of their investments are in mutual funds sold by chartered banks and all have significant management fees. They could raise their investment just by switching the same categories of assets, such as foreign equity or Canadian equity, to low-fee exchange-traded funds.
They have about $1.47 million in financial assets, which is more than enough to engage a portfolio manager who could organize assets and income for their own needs and not just the needs and concerns of many thousands of investors in some large mutual funds. The fees for such management services could range from .5 per cent to one per cent of assets under management. It would pay for them to shop for managers. The fee savings alone, as much as one per cent or $14,695 per year depending how much money they give the manager to handle would provide a significant boost to their retirement spending, Moran notes.
They will exceed their $50,000 post-tax spending goal. “They can have the retirement they want,” Moran concludes. “Their surplus of income over spending gives the plan resilience. They have the time and capital to make the most of their retirement.”
Retirement stars: 5 ***** out of 5
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