In Alberta, a man we’ll call Fred, 55, has thrived in his career as a marketing researcher, building up net worth of $952,500 on a salary of $8,150 per month before tax and $5,298 after tax and benefits deductions. He lives in a $250,000 condo and has a foreign rental property with an estimated value of $200,000. Fred has planned well for retirement, but worries about the durability of his job.
Fred would like to retire at age 60 but is unsure of his future income. His company might terminate his job with little notice and just modest, if any, termination pay.
Fred’s financial problem is to balance the choice to retire with the fact that he could be without a job. But, as we’ll see, it is a very manageable dilemma.
Fred has no debt at all. Money for the nearly complete foreign rental is already designated for the builder. He has $142,000 cash and, given his frugal way of life, he should be able to add to savings as long as he is working. The unusual thing about Fred’s situation is his very precise view of what he has and where he wants to be. The issue is how he will get there.
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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Fred. The baseline for developing his retirement plan is in his numbers. His residence makes up just 26 per cent of his net worth. That gives him room to move around the pieces on his financial map.
Fred’s cash is piling up because he saves just about half of his after-tax income. His living expenses are a modest $2,792 per month. He contributes the maximum (now $6,000 per year) to his Tax-Free Savings Account, puts $2,400 per year in his RRSP and about $22,300 annually into non-registered savings. He invests in broadly diversified, low-fee exchange traded funds which average out the many risks of investing. Were he to lose his job before planned retirement, he could maintain his way of life. His ample savings are a solid financial lifesaver.
The only significant risk in the portfolio is his $200,000 reserve for a foreign condo that will rent to net around $1,200 per year. That is less than one per cent of his capital cost before inflation. If the money were to be invested at 3 per cent after inflation, it would generate $6,000 per year. The foreign condo is a speculation on rising property values, but it is remote from Canada. Fred could use it as his holiday resort, but the distance, a 20 hour flight from Vancouver, means it is not going to be for weekend jaunts. He could sell it, take the money and add it to $142,000 savings in the bank. His family lives near the condo and they might be a resource for care in his old age or even a way to leave wealth to the next generation.
Assuming that Fred’s job lasts to age 60, he could retire with substantial benefits. He would receive $1,890 per month from a defined benefit pension and $800 per month from a foreign pension.
Fred’s RRSP, with a present balance of $92,000 and additions of $2,400 per year growing at 3 per cent per year after inflation would rise to $119,400 by age 60 and support payouts of $508 per month in 2019 dollars for 30 years to his age 90.
His TFSA with a $72,000 balance and additions of $6,000 per year growing at 3 per cent per year after inflation would become $115,322 at age 60 and support a tax-free cash flow of $476 per month for 30 years.
Fred’s taxable investments with a present value of $195,000 plus a $142,000 cash balance total $337,000 gaining at $22,296 per year will grow to $512,600 in 2019 dollars by age 60 and support payouts of $2,115 per month for 30 years.
He can expect $260 per month from the Canada Pension Plan at age 60 and, at 65, $330 per month from Old Age Security based on 22 years residence in Canada after age 18 by his age 65.
At Age 60, that would combine to provide him with $6,049 per month. After 20 per cent average tax excluding TFSA payouts, Fred would have $4,934 per month to spend.
At 65, he could take his OAS benefit, $330 per month based on his years of residence in Canada. His permanent income after tax would then be about $5,200 per month. With no savings for his RRSPs, TFSA or taxable investments, Fred would have much more money for discretionary spending than he has today.
If Fred lost his job tomorrow, his present $501,000 of financial assets would grow to $580,796 in five years with no further contributions and support 35 years of payouts of $2,186 per month, a reduction of about $900 per month in his investment income, but only an 18 per cent cut in total income after tax. What makes his present retirement plan work even with loss of job is the many sources of income he will have, Moran notes.
If Fred wants to live in his foreign condo in the months it is not rented out, he might want to buy a travel health insurance plan at a cost of perhaps $200 per month, depending on benefits, deductibles and exclusions. Permanent health insurance abroad to provide care at a level comparable to that in Canada would be very costly, perhaps tilting the question of where to live to Alberta more of the year.
“If, however, Fred retires to live in his distant condo at least part of the year, his investment in the property will have turned into a valuable asset,” Moran concludes. “His security is his modest lifestyle and aggressive saving. His refuge is ultimately an anchor in a foreign country with a low cost of living and his own supportive family. Retirement plans don’t get more bulletproof than that.”