In a village on Vancouver Island, a couple we'll call Ed and Teresa have a tranquil life. They have saved diligently, lived frugally and accumulated a tidy fortune that totals almost $975,000. Yet there are serious financial concerns that are making them consider quitting work and taking an early retirement.
Their gross income of $89,000 a year is comfortable enough in a place where there is not much to buy. But Ed, 52, is a logger afraid his job will be eliminated. Teresa, 50, works as an administrative assistant for a civic organization on the island. Her position is temporary and seasonal. Their incomes hang by a thread, as they see it, and they are ready to retire.
"We have an opportunity to move to Vancouver, buy into a housing co-op that would allow us to keep two-thirds of the money from the sale of our $285,000 home and invest it," Teresa says. "If we do invest, we'll have to be careful to avoid the losses we had in the past. We want to retire soon, but we also want to protect our nest egg."
What our expert says:
Facelift asked Derek Moran, a registered financial planner who runs the Kelowna, B.C., office of Vancouver-based Macdonald Shymko & Co., to work with Ed and Teresa in order to work out their priorities and find ways to achieve them.
"These folks say they want $60,000 in 2006 dollars each year for their retirement," Mr. Moran said. "Buying into a co-op for what they estimate will be $114,000 would certainly free up capital, which could increase their potential retirement income. But having substantial net worth with no real estate would be a financial mistake."
Co-op members are often expected to pay 25 per cent or more of their annual income to the organization, the planner notes. A quarter of their gross income would be $22,250. Once the share cost is factored in, they would be paying more for housing than they would have to pay owning a house in a community with reasonable home prices and access to physicians, Mr. Moran explains.
Moreover, co-op housing does not allow resident owners to capture any capital gains, Mr. Moran says. "They would miss out on what is one of the average Canadian's best investments." Selling their house in their small community of less than 2,000 people will be hard because of a lack of liquidity, he explains.
In the couple's village, house prices are linked to forestry economics and lumber politics. They would be better off to move to a more accessible community where real estate transactions are more frequent and property is more liquid, Mr. Moran says.
Planning for the move out of their hamlet should begin now with planning for equalization of retirement incomes, Mr. Moran explains. "Ed's RRSPs total $253,880. Teresa's total $203,460. It would be best to give Teresa a larger registered retirement savings plan base, so in future, all of Ed's contributions should be put into a spousal account for Teresa, the planner suggests.
Ed and Teresa have been very frugal. They have generated a non-registered portfolio of $180,000; $50,000 of that is Teresa's and she should use her own savings to build up that account while Ed's income is used to pay the day-to-day expenses.
Ed has a union pension that will pay him $1,046 a month or $12,553 a year when he reaches age 60. He can take the pension at age 55 with an 18-per-cent penalty that reduces his payments to $10,293 a year. A bridge pension of $200 a month is available up to age 65 but is not mandatory.
If Ed works to age 55, then allowing for the 0.5-per-cent penalty for each month before age 65 that the Canada Pension Plan begins, he will receive a net annual income at age 60 of $5,988, Mr. Moran says. If he works to age 60, earning maximum credits for the CPP, he would be eligible for a net amount of $8,860 a year.
If Teresa works to age 55, then with the early application penalty, her CPP will be $2,958 in 2006 dollars beginning at age 60. If she works to age 60, she would be able to receive $4,000 a year in 2006 dollars, Mr. Moran explains.
At age 65, Ed and Teresa will each qualify for Old Age Security, currently $5,850 a year. Both OAS and CPP are linked to increases in the consumer price index.
If Ed and Teresa continue to make their maximum registered retirement savings plan contributions, a total of $11,700 a year for three years until Ed is 55, they will have accumulated $547,900 in 2006 dollars, assuming a 6-per-cent annual return and 3-per-cent annual inflation. They could draw on this fund for as long as 10 years beyond Teresa's life expectancy of 82 years before exhausting it. The RRSP base could produce $25,170 a year in 2006 dollars for that period, Mr. Moran says.
Over the next three years, their $180,000 non-registered portfolio should grow to $196,700, using the 6-per-cent nominal return assumption. Over the 34-year period of retirement, the fund would generate annual income of $9,040, Mr. Moran explains.
Here is how the choices and retirement consequences work out.
If they retire when Ed is 55, the couple will have gross income of $44,503 a year, consisting of $10,293 of union pension income, $25,170 of RRSP funds and, $9,040 of income from their non-registered investments, the planner estimates. They will be far from their target retirement income of $60,000 a year before tax. But Ed and Teresa are prepared to find work to meet the shortfall.
If they retire when Teresa is 60 and Ed is 62, they will have all of their age 55 income plus Ed's CPP of $5,988 and Kate's CPP of $2,958 for a total of $53,449 a year, Mr. Moran says.
Five years later, when both are collecting Old Age Security, they will have a union pension of $12,553, $25,173 of RRSP funds, two CPP pensions as above, and two OAS pensions of $5,850 each for a total of $58,372 a year. They will be very close to their $60,000 target retirement gross income, the planner notes.
Ed and Teresa can increase retirement income by boosting their returns from their investments. They have $636,000 of registered and non-registered investments, more than enough to interest an investment counsellor who would be likely to charge a fee of 0.75 to 1.5 per cent, Mr. Moran adds. Investment counselors are among the most competent professionals in their field, the planner explains. They follow a strong code of ethics and are audited by securities regulators, he adds. An investment counselor could balance risk and desired return for them.
"This couple are better off than they think they are," Mr. Moran notes. "Even without factoring in their home equity, they can meet their retirement income target. I don't think they need to sell their home to fund that retirement."
But Ed and Teresa, thinking far ahead, are planning for the problems of old age.
"Our desire to sell our house and move to Vancouver or at least to some place no more than an hour's drive from the ferries is about getting closer to medical specialists. This won't get any easier to deal with as we get older."
Ed, 52, and Teresa, 50, live on Vancouver Island.
Net monthly income
House, $285,000; RRSPs, $253,880 (Ed); $203,460 (Teresa); taxable, $180,000; truck, $32,000; personal property, $20,000.
Home insurance, $100; property taxes, $219; house maintenance, $550; utilities, $353; food, $600; dining out, $200; entertainment, $125; vacation, $840; clothing, $250; gas and truck maintenance, $550; auto insurance, $108; life insurance, $100; charity, $100; gifts, $200; Ed's RRSP, $695; Teresa's RRSP, $353; savings, $490.
Quote: "We have an opportunity to move to Vancouver, buy into a housing co-op that would allow us to keep two-thirds of the money from the sale of our $285,000 home and invest it. If we do invest, we'll have to be careful to avoid the losses we had in the past. We want to retire soon, but we also want to protect our nest egg."
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