How Two Friends Can Save Money by Sharing a Home, Expenses and a Plan
In Alberta, two women we’ll call Virginia and Elora, both 53, have shared a home for 30 years. They have successful careers in telecom management and healthcare administration and are weighing the timing and the style of their retirement, with a target age of 57 for leaving their work behind.
In a financial sense, Virginia and Elora are not just sharing a house. They keep their finances separate but share expenses, save on living costs and make their future plans together.
Living together and saving living costs has helped them generate their substantial assets
Their incomes are not equal, for Virginia earns far more in her telecom job than Elora, but in planning ahead they can increase both their income and their security in retirement. They are well-prepared, for Virginia is in a company pension plan that will pay her $75,000 a year before tax if she retires at 55 or later. They also have $905,500 in cash and various investments.
Yet they are not sure they are ready to pull up the anchors of their careers and take off and hit the road in a $125,000 motorhome they want to buy. After all, what could be four decades of roaming allows a lot of financial uncertainties to wreck plans.
“The big issue we need to understand is when we can retire with security,” Virginia says. “We don’t want to act prematurely. Nor do we want to act dishonestly.”
Since they are not a conjugal couple in the eyes of the Canada Revenue Agency, they don’t qualify for tax breaks that married or common law couples are entitled to. But there are financial advantages to sharing a home and living expenses, says Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., who Family Finance asked to help Virginia and Elora with their retirement goals.
“Living together and saving living costs has helped them generate their substantial assets,” he says. “As well, they plan to continue the intrinsic financial advantages of sharing costs in retirement. It is an interesting case about the financial advantages of friendship.”
In terms of readiness for retirement, they are well prepared, Mr. Moran says. In their mid-fifties with ample income, Virginia and Elora have done a good job of putting together both taxable, TFSA and RRSP accounts. Virginia has been the guiding hand, assembling assets over time. She and Elora have never used investment advisors, choosing instead to do research herself based on study of the financial press and use of online data. She and Elora maintain and trade their separate accounts online.
It has been a successful process, building capital gains of about 6% a year on average on top of dividends averaging 4% a year. There have been losses in a few resource companies, but they have been more than made up for by gains on chartered banks, telecoms and balanced mutual funds. Their gains have been methodical if not consistent, given the downturns in markets in 2000 and 2008, but they have built wealth on top of the company pension Virginia expects and the government pensions — OAS and CPP — both will receive.
It comes down to a question of need for gains. Apart from spending $9,600 a year on travel, there is nothing in their spending that could be considered lavish. Frugality got them to their present state of security and it will see them through retirement. Thus there is no justification for elevating the risk level of their portfolio, Mr. Moran says.
For now, the women, with Virginia’s guidance, have been successful investors. They should keep doing what works, Mr. Moran suggests.
In the four years to the time when both women plan to retire completely, they should continue monthly savings of $5,000 to non-registered savings and $666 to Elora’s RRSP. Their present RRSPs total $222,000. If they continue to add $8,000 a year to registered savings and grow it at 3% over the rate of inflation, the registered accounts should rise to $283,000 in four years. If they also add $60,000 a year to $558,500 of non-registered and TFSA accounts, as they are doing, and grow those balances at the same 3% rate over inflation, they would have about $880,000 in four years at the eve of their retirement. They should leave their RRSPs to grow until they take money out of their RRIFs when each is 72, Mr. Moran suggests, spending income from the non-registered portfolio as needed.
This strategy will give them $75,000 of pre-tax income from Virginia’s company pension, payable as early as age 55, from age 57 to 65. They will also have potential taxable income of $26,400 a year at 3% a year from non-registered savings.
It would be easy to resent the women’s affluence, but this is what happens when hard work is accompanied by diligent savings and frugal living.
From age 65 onward, they will have the $75,000 company pension, two Canada Pension Plan cheques of an average of 86% of the maximum $11,840 benefit, or about $20,400, two Old Age Security benefits of $6,540 each and a potential draw of as much as $42,400 from non-registered savings if they choose to withdraw at a rate at which all capital will be exhausted at age 90. They could add $13,600 from registered savings for total income of about $164,400 a year before tax in 2012 dollars.
Virginia, who will have the larger share of income, will face the OAS clawback, which, in 2012, starts at $69,562. If her annual income is $100,000, she would lose about $4,600. After 25% average tax, the two women would have $9,150 to spend each month, far more than they spend now if savings, $5,666 a month, are taken out of the picture.
“It would be easy to resent the women’s affluence, but this is what happens when hard work is accompanied by diligent savings and frugal living,” Mr. Moran says. “Even if inflation eats up some if Virginia’s unindexed company pension, they will remain affluent in retirement.”
(C) 2012 The Financial Post, Used by Permission