A Couple's Plea: Can We Please Get Out of the Rat Race?

ANDREW ALLENTUCK

 

In Vancouver, a couple we'll call Louis and Elizabeth have eased into retirement. Louis, 51, recently was downsized out of a six-figure job. However, he has exceptional foreign language skills and advanced academic training that includes a PhD. He has migrated among teaching, diplomacy and international consulting. Two of their children are prodigies in the performing arts. A third child remains at home with a disability and is looked after by Elizabeth, 54.

In financial terms, the family's situation is a mixed bag of expensive Vancouver real estate, exotic non-registered investments, locked-in and regular registered retirement savings plans and, given Louis's investment in his PhD and the children's remarkable abilities, large amounts of human capital.

"I want to know if I can make a break from the rat race and live on our investment income and perhaps some contract work without endangering our future," Louis says. "Or will I have to drag my middle-aged self back to the job market?"

What our expert says:

Facelift asked Derek Moran, a registered financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Louis and Elizabeth in order to resolve Louis's main concern: Can he remain retired at his relatively young age? Or will he have to return to work in order to generate the money he and Elizabeth need to pay their bills during three or more decades of retirement?

"Louis is like a lot of baby boomers I meet these days," Mr. Moran explains. "After decades of hard work, he is tired and wants to know, since he is between contracts, if he can stay at home and remain retired."

The couple has the basis for retirement already in a house with an estimated value of $800,000, $385,000 of RRSPs, and $380,000 of non-registered investments.

They accumulated and then expended registered education savings plans for the two children in postsecondary education. Here ends the simple part of the story, for Louis's finances are finely balanced on risks.

First, Mr. Moran notes, there is a matter of debt. They owe $515,000 on their house at a blended rate of interest of about 5.5 per cent. Then there is the problem of risk in two companies in their non-registered investments. One of the businesses channels money to non-profit organizations and another buys companies and takes them public. The two companies in the non-registered portfolio make up nearly 24 per cent of the couple's total assets and 36 per cent of their net worth, the planner points out.

The first business pays no income. The second pays a 12-per-cent dividend. Louis sees it as a low-risk undertaking.

"If so, why does it pay triple the five-year government bond yield?" Mr. Moran asks. The second could be a winner, but it floats on investment fashions. In any event, as a non-public business, its own value and true level of risk is not easily determined, the planner points out.

Louis's registered investments include successful mutual funds variously invested in commodities, financial services and a diversified mix of Canadian companies. The fees for some of the funds are at the high end of the normal range, Mr. Moran says.

An RESP that paid for postsecondary education has been expended on the children's tuition. One child will graduate this spring but may go on to postgraduate studies. Whether the kids will require further financial support is therefore unknown.

If the family's bundle of public and private investments works out well, Louis would probably not have to go back to regular work. But he would have to watch his expenses, Mr. Moran notes.

Out of their $5,833 of monthly expenses, 44 per cent or $2,570 goes to debt service. What their income will be in 2007 is unknown, though it ballooned in 2006 to $200,000 with a $160,000 severance package from a previous employer. It had been $70,000 net in 2005, a figure which we have used in projecting 2007 income.

For now, expenses of $70,000 a year require at least that much cash flow. What's more, Louis is nine years away from the earliest date that he can receive Canada Pension Plan benefits. He and Elizabeth are 14 and 11 years, respectively, from the years when they can receive Old Age Security. They have many years before their public pensions begin.

Louis and Elizabeth need to bridge their finances, at least to age 60, the earliest they can apply for Canada pension plan benefits. At age 65, CPP benefits, based on prior income, will be at least $6,942 for Louis per year in 2007 dollars. He may have a higher payout if he continues to work. Early application will cut those benefits by 0.5 per cent for each month prior to age 65 at which benefits begin. If he starts benefits at age 60, he would receive a maximum benefit of $4,859 a year in 2007 dollars. Elizabeth, a stay-at-home mom for most of her life, would receive only $52 a year at age 65 in 2007 dollars, if she does not return to the work force.

At age 65, Louis will receive Old Age Security, currently $5,903 a year and indexed to the consumer price index. Elizabeth, who has been resident in Canada for 15 years, will receive about 40 per cent of the full amount. They are not likely to suffer any loss to the OAS clawback. It currently begins at $62,144.

Until their public pensions begin, Louis and Elizabeth will have to rely on their RRSPs. If one assumes that the assets will grow at 6 per cent a year and that inflation runs at 3 per cent a year, the RRSPs would support annual payments of $18,540 a year until Elizabeth's 87th birthday, five years beyond her life expectancy, Mr. Moran estimates.

Whether Louis can continue to be out of the labour force at his relatively young age of 51 comes down to the outcome of his non-registered investments. They are potential cash cows if they work and tragedies if they do not, the planner says.

Not only are family finances balanced on this precarious fulcrum, but also Louis and Elizabeth are seriously underinsured. Louis has $500,000 of term life; Elizabeth has no life insurance. Moreover, their disabled child will require support for many decades.

The couple should buy life insurance for Elizabeth. Premiums could be as low as $100 a month, depending on the structure of the policy. In the event of the death of either parent, or both, the house could be sold and the proceeds directed by a will to support the disabled child. As well, a specialized trust that does not cause a clawback of payments of public benefits to the child, while retaining discretionary authority to make or withhold money, would be of use. Louis and Elizabeth should discuss this device, often called a Henson trust, with a lawyer who specializes in estate planning, Mr. Moran suggests.

What should Louis and Elizabeth do about their finances? Mr. Moran suggests that, on a balance of risks, Louis should return to work. His family is likely to need the money.

"I think it is back to the grind," the planner says. "If Louis pays off his mortgage, then early retirement might work. Except under extraordinary circumstances, you can't go into retirement with large personal debt. What is more, Louis has a huge investment in himself. Retirement at his age amounts to squandering his personal capital . . . He should find some endeavour that he likes and get additional payback on his glittering résumé," the planner insists.

"I agree entirely," Louis says. "What I would like is to blend indolence with contracts. I just don't want to be a wage slave."


Client situation

Louis, 51, and Elizabeth, 54, live in Vancouver with three children. Two are in postsecondary studies, one is disabled.

2007 net monthly income

(estimated): $5,833.

Assets: House $800,000; RRSPs $385,000; non-registered $380,000; two cars $5,000.

Total: $1,570,000.

Monthly Expenses

Mortgage $1,670; line of credit $900; property taxes $304; food $600; entertainment $400; clothing $200; auto fuel, repairs $600; life insurance $85; car and home insurance $250; charity and gifts, $30; miscellaneous $400; savings $394.

Total: $5,833.

Liabilities

Mortgage $325,000; line of credit $190,000.

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