In Toronto, a couple we'll call Imad, 55, and Elizabeth, 58, have built successful lives. Imad, born in Lebanon, works as a manager in a machinery business. Elizabeth is self-employed in marketing. They maintain two homes, one in Canada, one in Lebanon. They have a son, age 22, who will finish his first university degree by next June. Their problem, in a nutshell, is that it costs a great deal to live in two places separated by the Atlantic Ocean and the Mediterranean Sea.
"Our retirement plan is to split time between our home in Toronto and our condo in Lebanon," Elizabeth explains. "We need to know if we can afford to do it. Can we maintain our way of life after we retire?"
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with the couple. "As long as they grow their assets at a rate in excess of inflation, there should be no problem maintaining their way of life," he says.
Imad and Elizabeth currently have a combined gross income of $150,000 a year and after-tax income of $92,640 per year. But when they retire, their income will drop.
They can adjust to a lower level of disposable income, but it will take tailoring their lifestyle, the planner notes.
Cost of Living
There is nothing lavish in the couple's budget. However, their infrequent trips to Lebanon will be more frequent in retirement. Expense adjustments, such as their $1,000-a-month budget for food and wine, will happen quite easily, given the lower cost of living in Lebanon. Were they to spend a great deal of time in Middle East, they might want to sell their Toronto car.
The couple has $961,100 in total assets and liabilities of just $41,000. They want to spend $60,000 upgrading their Toronto house. They could borrow the money but hesitate to add debt. Yet this problem is easily fixed, Mr. Moran says. They could use some of the $89,350 they hold in cash and cashable GICs to pay off the line of credit, leaving a balance of $48,350 for renovations. Early cashing of the GICs means they will get no interest, but a zero return is still cheaper than paying 4% interest on a line of credit for the house renovation. Moreover, even if they keep the GICs intact for the full two-year term, they will get only 1.75% a year, which is fully taxable. Paying off the line of credit would cut $1,700 a month out of their budget.
They can use the line of credit for the balance of renovations or postpone the work for about two years until their $775 a month of savings ($9,300 a year), added to the cash balance, covers the estimated cost of renovations. Or, they could do the renovations in stages in order to capture the federal Home Renovation Tax Credit, which expires Feb. 1, 2010.
Imad and Elizabeth have conservative portfolios built with the products of one of the big banks. The portfolio is heavily weighted in low-interest, income-producing assets. That allocation will limit their ability to keep pace with inflation when it picks up. They should consult an independent financial advisor to discuss rebalancing and reducing fees, perhaps by use of exchange-traded funds, Mr. Moran says. The group plan to which Imad belongs restricts investment choices, but he should check with his pension administrator to determine if a switch of advisors is possible, Mr. Moran suggests.
Retirement should be comfortable for the couple. As of the end of 2009, Elizabeth will have earned 68% of maximum Canada Pension Plan credits and Imad 76% of those credits. When Elizabeth has reached 65, she will have 85.6% of maximum credits. When Imad is 65, he will have 100% of credits. Those credits will entitle them to Canada Pension Plan benefits of $9,335 and $10,905 a year, respectively. At age 65, each will be able to receive full Old Age Security benefits of $6,204 a year. Both partners will have met the residency requirement of having been in Canada for a full 40 years after age 18.
On top of their public pensions, Elizabeth has an indexed Ontario civil service pension plan that will pay her $3,577 a year when she is 65. Imad has a defined-contribution company pension plan with a present value of $285,000. They also have RRSPs with a present value of $97,050.
Assuming that Imad's company plan continues to add $19,500 a year through payroll deductions to his RRSP and that Elizabeth continues to put $9,000 a year into her RRSP and that they achieve a 3% average annual return on these assets, then by the time Elizabeth is 65, they will have a balance of $682,500. Three years later, when Imad is 65, these registered assets will have increased in value to $836,526, Mr. Moran estimates.
If they postpone drawing on these funds until Imad's age 65, they can generate an average annual return of $32,648 from CPP and OAS, $46,641 from registered savings and $3,577 from Elizabeth's defined-benefit plan, for an annual pre-tax total of $82,866 in 2009 dollars. Returns from non-registered savings could add perhaps $10,000 to the total. That $92,866 pretax income, adjusted for reduced expenses for savings and retirement, will have the purchasing power of what they now have to spend after tax. They would need to use pension splitting to avoid the clawback.
While their plan is to stay in Canada for retirement, the Lebanon condo could be sold. Or, for that matter, they could elect to live in the condo and sell the Toronto house, adding a substantial amount to their financial assets.
A financial shortfall will arise on the death of the first spouse. While alive, Imad and Elizabeth can divide their incomes and stay in moderate tax brackets. If Elizabeth predeceases Imad, her reduced survivor benefit would reduce his total income. There is also the possibility that either, or both Imad and Elizabeth, could work part time after retirement, though that will not really be necessary to maintain their pre-retirement way of life.
"This couple has a base for a pleasant if not lavish retirement either in Canada or in Lebanon," Mr. Moran says. "Provided that they avoid large financial risks, they should have a very comfortable life."
Two homes, continents apart, result in high costs of living
Use liquid assets to cut debts, reduce living costs
A more affordable life and a comfortable retirement
MONTHLY AFTER-TAX INCOME $7,720
Toronto House $400,000, Lebanon condo $50,000, Car $11,500, Imad's pension $285,000, Elizabeth's pension $28,200, RRSPs $97,050, Term deposits & cash $89,350
Line of credit $41,000
Food & wine $1,000, Property $300, Car & home insurance $340, Gas for car, tolls, repairs $560, Clothing & grooming $460, Entertainment & gym $300, Phone & utilities $435, Home maintenance $300, Miscellaneous $300, Business expenses -- Elizabeth $500, Travel $300, Line of credit $1,700, Charity and other gifts $150, RRSPs & other non-registered saving $1,075
Used by Permission (c) 2009 Globe and Mail