Ted, as we’ll call him, earns a good income at age 53 as a corporate information systems manager in British Columbia. With his wife — we’ll call her Mary, 49, who works part-time for a few thousand dollars a year — the family has gross annual income of $104,000.
Yet, at the end of the month, they are strapped for money.
What we’ll do in retirement to maintain our way of life — it’s all up in the air
They spend $1,450 a month for food, which is high for a couple with two children aged 12 and 20, both living at home. Still, they are not extravagant. After taxes and other fixed expenses, they are left with little for basics, just $200 a month for dining out, $75 for entertainment and $300 to clothe four people.
With little spare cash to add to their retirement funds and six figures of debt, they wonder if Ted can quit work when he is 58 or 60 at the latest.
“We have a large line of credit that is incurring more interest charges,” Ted says. “What we’ll do in retirement to maintain our way of life — it’s all up in the air.”
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Ted and Mary. “It’s true that even with more than $100,000 annual income, this couple barely gets by. As a salaried employee, Ted has little room for flexibility. That affects the key question — can Ted and Mary retire when Ted is 58 or 60?”
In two years, in preparation for retirement, Ted and Mary can add to their cash flow by choosing to defer property taxes. The option is available to B.C. homeowners over age 55. Simple interest at 2% below prime accrues and is collected when the property is sold by the owner or the estate. This move would add $245 a month to the family budget.
Ted and Mary owe $134,350, most of which is $132,000 for their 3.5% homeowner line of credit. The balance, $2,350, is on credit cards at 19% a year. They can easily clear the credit-card balances by using their credit line. The family’s registered education savings plans and money held in accounts for the children will provide tuition and books for the children if they live at home while doing their post-secondary education. The parents have suspended RESP contributions but will resume them when cash flow permits.
To pay off their line of credit, Ted should stop contributing to Mary’s spousal $71,500 RRSP. The balance can be withdrawn slowly with a view to tax liability, staying under the B.C. threshold for tax. It will be taxed in her hands after three calendar years and subject to withholding, but if the amounts withdrawn are less than about $11,000 a year, tax will be negligible. The remaining balance could be reduced by using money Mary liberates from her $34,048 of regular RRSPs. That will cut the balance owing to about $28,000, depending on interest still charged on the declining but still outstanding balance. The cost of carrying this balance at 4% would be about $82 a month, Mr. Moran estimates.
Ted’s company pension will be $59,436 a year if he retires after age 58, growing at about $3,000 a year before tax for each year of additional work. His $153,700 portfolio of RRSPs and non-registered stock has an average annual growth rate of 6% before 3% inflation adjustments for net 3% indexed growth. The couple’s retirement income at his age 60 would be his $65,436 company annual pension plus cash he could withdraw from his RRSP. If paid out in the years from retirement to age 65 and allowing for continuing growth of capital in the account, his RRSPs alone would add approximately $21,000 a year, bringing total income up to age 65 to $86,436 before tax. Assuming pension splitting and a 15% average tax rate, the couple would have about $6,100 a month to spend. Their $432 current debt-service charges will be mostly gone save for those on the remaining line-of-credit balance, so they will have a net spending gain of about $1,400 a month. There will be no need to take Canada Pension Plan benefits at age 60 with a 36% reduction in age 65 benefits.
At Ted’s age 65, joint income will be $59,436 company pension plus $6,000 additional benefits for two years more work, one Old Age Security benefit of $6,540 a year, and Ted’s $11,016 estimated Canada Pension Plan benefit, based on the assumption that he ceased to work at age 58, plus $3,000 annual dividend income from company stock assuming a 4% yield and dividend tax treatment if it has not been sold to pay debts or to subsidize pre-65 income. The total, about $86,000 before tax, would provide after-tax income of $6,100 a month after 15% average tax.
When Mary is 65, annual income will grow to about $97,230 with the addition of Mary’s $6,540 OAS and her estimated $4,692 CPP. After 15% tax, the couple would have about $6,900 to spend each month in 2012 dollars.
“Ted and Mary may be able to maintain a way of life comparable to the one they have now, but they would have more security if they work a couple of years beyond Ted’s age 58,” Mr. Moran says. “Another two years of work and saving would add a valuable margin of security, for Ted’s company pension, which will be more than half of their total income, will not be indexed to inflation.”
(C) 2012 The Financial Post, Used by Permission