In Toronto, a couple we'll call Peter, who is 59, and Cynthia, who is 47, want to figure out a way to pay for the university educations of their children and still be able to afford to retire. One, age 20, is in the second year of university at a cost of $7,000 a year. Another, 18, will start the first year of university this fall.
The couple's combined gross incomes of $197,000 are substantial, but their net incomes, which include a sabbatical reserve taken from Cynthia's paycheques, total $115,000 a year.
"I don't want my children to graduate from university with any sort of debt," Cynthia explains. "I am not sure when I will be able to retire and how much money we will need to live comfortably. We would like to spend half the year in Canada and maintain use of the health care system, and the other half in the U.S., if at all possible."
What our expert says:
Facelift asked Derek Moran, who heads Smart Financial Planning Ltd. in Kelowna, B.C., to work with Peter and Cynthia.
"They have a financial dilemma of the classic type," he explains. "She is the saver, he the spender. Cynthia has a job with a pension and modest inherited wealth in her non-registered investments. Peter is self-employed, has no pension and little savings. The couple have no current debt, but an expensive way of life and no plan."
The couple would like to retire with a net income of $55,000 to $60,000 in 2008 dollars. But that income may not be sufficient to maintain two houses.
Cynthia has a partly indexed pension. At age 55, it will be $30,473 a year for life plus a bridge of $4,537 to age 65 when the Canada Pension Plan begins. If she works to age 60, the pension will grow to $48,628 plus the $4,052 bridge to age 65. These are 2008 dollars. Peter has earned about 61 per cent of the maximum Canada Pension Plan retirement benefit credits, currently $10,615 a year, and by age 65 could earn as much as 76 per cent of the maximum benefit or $8,067 a year. If Cynthia works to age 55, she will receive 62 per cent of the CPP maximum or $6,581 a year.
At age 60, she will have earned 86 per cent of the CPP maximum or $9,129 a year. CPP benefits can begin to flow at age 60 with a penalty of 0.5 per cent a month of the age 65 benefit for each month prior to age 65 at which they begin. All figures are in 2008 dollars. The public pensions will be the only income sources certain to be indexed. To maintain the greatest value in them, the couple should wait until each is 65 to start CPP, Mr. Moran advises. Peter, with a British passport, and Cynthia, an American, each moved to Canada in 1983. If they stay, then by age 65, Peter will have 32 out of the 40 years required for the maximum Old Age Security benefit of $6,028 a year and therefore receive $4,822 a year in 2008 dollars. Cynthia will have the full 40 years by her age 65 and will therefore get the full benefit, the planner says. Cynthia's employment pension precludes her making much of a contribution to her own registered retirement savings plan. But Peter generates RRSP space. He should do his utmost to make use of it, adding 18 per cent of his taxable income or $11,700 a year to her RRSP. He will get a third of those contributions back as tax refunds. Cynthia can transfer money from her non-registered assets to help Peter make his annual contribution in full. Advice from a tax professional is essential before making transfers, Mr. Moran says.
By the time Cynthia is 55, the couple will have retirement income of $12,889 from Peter's CPP and OAS, her own pension of $30,474 and the $4,537 bridge. Add to that the $37,200 a year she can draw from their combined investment portfolios for a total annual income of $85,100. It will last until Cynthia is 65, at which time she will lose her $4,537 bridge and add $6,028 of OAS benefits and $6,581 from CPP for a total annual income of $93,171, the planner estimates.
Peter and Cynthia have to make a decision about carrying two homes when her children are going through the most expensive phase of their education. The $300,000 (U.S.) house in the United States could be sold to pay for the children's university education, an estimated $250,000 (Canadian) cost Cynthia would otherwise have to finance by dipping into her own non-registered capital or by borrowing. Selling in today's troubled U.S. housing market may not be opportune. The couple could rent it then sell. Sale of their Ontario house and a move to the U.S. could cost them their health care benefits, Mr. Moran warns.
"The couple can have a fine retirement, but they have to choose," he says. "One house they can handle, two could be financial peril."
Peter, 59, and Cynthia, 47, are planning retirement.
High expenses, maintaining two houses on a moderate after-tax income.
Decide which house to keep, which to sell, and plan for disposal.
A comfortable retirement, and funds for kids' post-secondary education.
Net Monthly Income
Toronto house $475,000, U.S. house $300,000; Cynthia's RRSP $250,000, Cynthia's holdings $400,000, Peter's RRSP $39,500, RESPs $34,000, car $8,000, cash $9,000. Total: $1,515,500.
House repairs $592, property taxes $409, utilities $620, food $960, house cleaning $300, pets $200, clothing $300, entertainment $150, university $900, gas & tolls $600, car care $460, insurance $430, medical $1,167, charity & gifts $310, U.S. house upkeep $585, travel $1,000, misc. $600. Total: $9,583.
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