Chris and Adele will be able to stretch their income to buy a $300,000 condo in Portugal, too.
A couple we’ll call Adele, 57, and Chris, 63, live in Ontario with their two children, ages 19 and 22, both of whom are pursuing post-secondary degrees.
Chris was forced to take early retirement due to the pandemic, but is due a $61,000 payment as part of a termination package on top of a $60,000 bonus covering his last year of work. He has already started drawing his pension, which pays $3,300 per month after tax and is topping that off with savings.
Adele, meanwhile, has recently seen her income slashed, but plans to stick with her publishing industry job until she turns 60, then work part-time until age 65.
For the time being, they are bringing in $7,200 per month after tax, including the use of savings.
The couple would like to have $85,000 before tax in three years when Adele expects to retire, but that income will have to stretch a long way: they face a cumulative total of $80,000 in university costs through 2025 and would also like to buy a $300,000 condo in Portugal, if they can.
That’s a tall order for a family with shrinking income.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Adele and Chris.
“The financial base is secure with the pension and savings,” Moran explains. “But there is an issue with a $150,000 investment in idle land that produces little income, though good growth potential.”
Making assets work
Looking ahead, the couple can raise income by selling the land for as much as $150,000 (they initially paid $90,000.)
If they sell for $150,000 and cover $10,000 of expenses for legal fees, they would have $140,000. That would be a $50,000 capital gain. Each partner would have $25,000, half taxable.
Tax might be $5,000 for each partner, so they would be able to direct about $130,000 to top up TFSAs, pay off debt and cover education costs.
Chris has a $3,300 defined benefit pension with no reduction at 65 and with a 60 per cent survivor benefit for Adele. The work pension has no inflation indexation, but CPP and OAS are indexed and stock returns are indexed.
Chris will have an estimated $12,700 annual Canada Pension Plan benefit and Adele can expect $8,466 per year from CPP. Each will qualify for full OAS benefits of $7,384 per year at age 65.
Their TFSAs with a present balance of $90,500 growing eight years at three per cent per year after inflation to her age 65 to $114,650 would generate tax-free income of $5,678 per year for the 30 years from Adele’s age 65 to her age 95. That’s $475 per month, starting when Adele turns 65.
The couple’s RRSP’s, $625,000, can be enhanced. Chris, already retired, has $18,000 of room and he could fill that space from his his bonus. Adding $18,000 will boost total RRSP value to $643,000, which will grow modestly until Chris retires. If it then generates three per cent per year for the 30 years from Chris’s age 65 to his age 95, it would pay $32,800 per year to exhaustion of principal.
For the next year and a half until Chris turns 65, the couple will have to survive on Chris’s pension and Adele’s reduced $19,000 annual pre-tax salary, using the soon to be paid retirement package and bonus to cover any shortfalls.
When Chris is 65, family income will be his $39,600 pension, his $12,700 CPP, $7,384 OAS, and the couple’s $32,800 RRSP income for total pre-tax income of $92,484 — plus whatever Adele is still bringing in. Split and taxed at an average 15 per cent rate, they would have at least $6,550 to spend and could rebuild some of their savings.
When Adele is 65, the couple’s income will be Chris’s $39,600 job pension, his CPP of $12,700 and her CPP of $8,466, two OAS benefits of $7,384 each, RRSP income of $32,800 for combined total before tax of $108,334. Split and taxed at an average 16 per cent rate, they would have $7,583 per month. Adding $475 in newly triggered TFSA cash flow would bring the total to $8,050.
When their mortgage is paid off in a few years and they are no longer saving for their RRSPs, the couple’s spending will have fallen to at most about $5,635 per month.
Surplus based on these figures will be about $1,000 per month after Chris is 65 and $2,400 per month after Adele is 65.
That could cover some or all of $948 monthly payments on a 30-year, three per cent, $225,000 mortgage on a $300,000 property. A $75,000 down payment could come from remaining cash from the land sale or savings.
Retirement stars: Four **** out of five
Written by Andrew Allentuck and published in the Financial Post April 1, 2021