A couple in Ontario that we'll call Chris and Susan are deeply involved in the arts. Chris, 57, runs a small business and heads a department at a major university. Susan, 52, has a steady income from employment in a large professional services company. Their combined incomes, $8,671 a month, give them a comfortable way of life.
They worry, however, that their financial assets may not be enough to maintain their lifestyle when they retire. In spite of their $2,196,800 in stocks, cash, home and GICs, plus an estimated $104,000 in annual flows of expected public and employment pensions, they are anxious.
"Once my wife and I become pensioners, we may have difficulty maintaining our present living standard," Chris says.
What our expert says
Facelift asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Chris and Susan. His analysis: no worries. "They are prepared for retirement, but they do have money management problems that need to be addressed."
The couple's investment portfolio is conservative: blue-chip stocks worth $100,000 and $855,800 in cash and GICs. Add in their residence, worth an estimated $715,000, plus the $135,000 they have in equity in a rental property, and it is clear that they have a solid base on which to retire. Their own investments will add to company pensions of $55,741 a year for Chris and $18,657 for Susan ($25,551 if she works to age 65).
Chris will qualify for full Canada Pension Plan benefits, currently $10,615 a year, and Susan will qualify for an estimated $7,961 a year. Chris will receive full Old Age Security, currently $6,070 a year, while Susan, who will have been resident in Canada for 37 years by age 65, will get $5,615 a year in 2008 dollars. Their annual pension incomes, apart from RRSP and non-registered cash flow, will total at least $104,659, the planner estimates. Chris will lose some income to the OAS clawback, which begins at $64,718 per person per year.
The couple has $246,000 in their RRSPs. If they add $6,000 a year and achieve 6-per-cent annual growth less 3 per cent for inflation, they will have $476,900 in 2008 dollars in 2024, when Chris has to convert his registered savings to a RRIF. If this sum were paid out evenly over 23 years to Susan's age 90, it would produce a flow of $28,160 a year. The couple's non-registered savings, $954,485 plus $135,000 in the rental condo, if invested at 3.5 per cent, would add $38,000 a year to their cash flow before tax, Mr. Moran estimates.
There are problems, however. Chris and Susan's GIC and cash holdings amount to three-fourths of their financial assets. The GICs average 4-per-cent interest a year. That interest is taxed at the couple's top marginal rates, ensuring that what is left does not even keep pace with inflation.
Chris and Susan have difficulty seeing today's stock prices as a buying opportunity, the planner says. Chris and Susan should consider hiring a professional asset manager for a fee that could be in the range of 1.0 to 1.5 per cent of assets under management per year, Mr. Moran adds.
Chris and Susan have an investment condo. Worth an estimated $240,000, it has a $105,000 mortgage at 5.7 per cent. Each month the condo brings in $1,550 in gross rent. From that, they have to pay $854 in mortgage costs, property management fees of $85, a condo fee of $357 and $163 in property tax - a total of $1,459. The addition to their equity from the mortgage payment is $520. They therefore net $611 a month or $7,332 per year from the property. That's a modest return on their equity, and the condo could become less profitable if interest rates rise. The possibility that the market could soften suggests the property should be sold, Mr. Moran says.
Chris and Susan have a tax problem inherent in the differences in their incomes.
On a pretax basis, Chris earns $112,680 a year, while Susan earns $56,340.
They can average their tax exposure if Chris pays all household expenses and makes all RRSP contributions. Susan should save and invest all of her income in accounts in her name, the planner suggests.
Chris could also make a loan to Susan at the Canada Revenue Agency's 3-per-cent prescribed rate of interest. She could invest the money, pay Chris interest and deduct the interest cost from her return.
Adding up all sources of income based on current holdings and expected contributions, the couple will have an estimated $170,685 in pension and investment income in 2008 dollars at Chris' age 72, Mr. Moran says. There will be no advantage for either partner to take CPP benefits before age 65 or to take RRIF income before age 72. Chris can base his withdrawals on the younger spouse's age to achieve maximum tax-free growth.
Upper-income couple in Toronto planning retirement.
Increasing investment returns while reducing taxes.
Sell low-yield rental property, split income.
Substantial increase in retirement cash flow.
Net monthly income
Stocks $100,000, GICs $500,000, cash $114,000, RRSPs $246,000, business cash $241,800, house $715,000, rental condo $240,000, cars & curios $40,000. Total: $2,196,800.
Property taxes $583, food & dining out $1,150, entertainment $100, clothing $300, RRSP $500, utilities $233 Car, gas, repairs & parking $470, travel $500, car & home insurance $235, charity & gifts $50, Misc. $400, savings $4,150. Total $8,671.
Rental condo mortgage $105,000.
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