Henry and Juliet, both approaching 50, want new challenges. Their home is near Toronto and both have worked for large companies, Henry in jobs leading up to his current position as national manager for a manufacturing company, and Juliet in a banking job from which she retired to homemaking several years ago. Their two children, ages 21 and 19, are one year and two years, respectively, from finishing university.
They want to leave city life and move to British Columbia's Gulf Islands, as Henry says, "to live, eat, breathe and exist in the element of an artistic lifestyle."
Henry thinks he might be able to work for his company, running its national operations from their new home, before retiring at 55 or earlier if possible. But he would rather not keep working for the company, he says. He and Juliet have committed themselves to making art, even if it means a drastically reduced standard of living.
What our expert says:
Facelift asked Derek Moran, a registered financial planner who heads Smarter Financial Planning in Kelowna, B.C., to work with Henry and Juliet to determine if their plan to devote themselves to art and culture is feasible.
Breaking from their current suburban existence means selling their $400,000 house and paying off or transferring their $109,000 mortgage at an interest rate of 5 per cent. They have $323,000 of retirement savings, almost all in RRSPs, except for $30,160 in a savings account.
Henry and Juliet want to finance their new life by using the $291,000 equity in their house. They figure that life in the Gulf Islands will be less expensive than in Toronto. The $1,000 a month they give to their children for university expenses will terminate in two years. They will also end their $1,100-a-month mortgage payments if they buy their new home for cash from the sale of their Toronto home.
In British Columbia, they can also save the $348 a month they now pay in property tax. B.C. allows people over 55 to defer property taxes at low interest rates, currently just 4 per cent a year. The deferred tax has to be paid when the property is sold, Mr. Moran explains. With no kids to support, no mortgage to pay, no current property taxes, no travel plans, nor illusions of grand living, the couple probably could get by in a modest house they could buy for cash. Current living costs of $5,049 a month will fall to $2,601 a month or less if they give up cellphones and cable TV.
If Henry quit work and moved to the Gulf Islands this year, the couple's only source of funds would be savings. They might be able to downsize their house and capture some equity to add to his retirement capital, but that's an unknown. Without that capital, their $323,000 of savings would generate $19,380 at a 6-per-cent nominal return before tax. They would have no other income until he and Juliet applied for early Canada Pension Plan benefits at age 60, taking a reduction of 0.5 per cent a month for each month prior to age 65 at which benefits begin.
CPP would add $4,396 a year to his income. He and Juliet would have a modest existence for a decade. Art sales, if any, would add to income.
If Henry were to work for his company in the couple's new home, his net income of $60,588 a year would continue. He would be able to generate a surplus of $29,376 each year, the planner says. On a cash basis, ignoring such things as ferry costs from their island home to the mainland, potential costs of owning a boat for local commuting, and potentially taking vacations in the future, they would be able to live on their more than adequate cash flow.
The large cash surplus, were it to materialize, should be added to their retirement funds. Up to the end of 2007, Henry earned 54.5 per cent of the maximum CPP retirement benefit, currently $10,615 per year. Juliet has earned 30.2 per cent of that benefit. As of the end of 2007, they were entitled to combined annual CPP benefits of $8,991 at age 65 if they do no further work. At age 65, each will qualify for full Old Age Security benefits, currently $6,028 per year. All figures are in 2008 dollars.
For the past seven months, Henry has been in a defined contribution pension plan to which his employer adds $4,560 a year. Henry plans to add $13,000 a year from his bonus.
If Henry and Juliet can add $17,560 a year and grow their current $323,00 retirement savings by 6 per cent a year, then, allowing for 3-per-cent annual inflation, they could have $467,700 in 2008 dollars at age 55, or $635,440 in total retirement savings by age 60. If Henry works to age 65, though that's not his plan, he would have $829,800 in his RRSP, Mr. Moran says.
If Henry works to age 55, this capital plus future flows of income from CPP and OAS could provide an average annual income of $33,000 a year to age 90, though before those pensions begin, they would have to get by on much less cash flow. If they work until age 60, their savings and pensions could generate average future income of $45,600 a year. By working and saving to age 65, they could have $63,400 a year from their savings and pensions, the planner says.
"Henry and Juliet can afford a rustic life in an artist's colony," Mr. Moran says. "If Henry can stay with his company or replace its income, then the couple can make their plan work. If not, they could find that even with reduced living costs, their plan is not workable. If that happened, then, late in life, Henry or Juliet would have to find work to supplement their retirement income. The safe and conservative course is for Henry to work to age 60."
Henry and Juliet, both nearing 50, tired of suburban Toronto life.
Financing life in an artist's colony.
Ensure retirement funds are adequate by delaying the move for five years.
A secure retirement.
Net Monthly Income
$5,049 plus non-guaranteed performance bonus.
House $400,000, RRSPs $292,840, cash $30,160. Total: $723,000.
Mortgage $1,100, property taxes $348, food $780, entertainment $250, clothing $100, car fuel, repairs $40, vacation $140, pet $50, life insurance $202, car, home insurance $162, charity, gifts $100, utilities, phones $477, university costs $1,000, savings $300. Total: $5,049.
© The Globe and Mail, Used by Permission.