This Alberta chemist’s guilt is a fleeting part of the mix in retirement

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Personal Finance Family Finance

“Julia can solve her debt problems,” says expert. ‘The complexity of the process is rewarded with a reliable pension income’

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04 February 2022 • 4 February 2022 • Read 5 minutes • Join the conversation Julia has tried to manage her affairs, but the costs of carrying debts and supporting her family weigh on her. Julia has tried to manage her affairs, but the costs of carrying debts and supporting her family weigh on her. Photo by Gigi Suhanic/National Post Illustration

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A woman we will call Julia, 58, lives in Alberta. Her home income is $10,340 a month. She has one child in her early twenties who lives at home and provides another in her mid-20s with a car and other benefits. Julia receives $6,000 annually in child support while the young person lives with her.

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Julia would like to retire in two years – if she can afford it. Her net worth is significant: She owns an $850,000 home and $1,261,796 in financial assets made up of RRSPs, mutual funds, and small TFSA and RESPs. When she retires at age 60, those financial assets, excluding the RESP funds, would be enough to generate $56,325 per year for 35 years if they continue to grow at three percent above inflation. Julia, who works as a chemist for a major energy company, also expects an annual defined benefit pension of $45,000, meaning she is currently in a position to accumulate nearly $100,000 in pre-tax earnings during her retirement.

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While that’s an excellent foundation, there are some reasons for concern. Julia still has significant debt, including a $393,554 mortgage, $113,196 in equity loans, and $15,222 in credit card debt with annual interest rates as high as 19.9 percent. She pays $2,872 a month or $34,464 a year on her mortgage. That is 28 percent of her net income.

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She has tried to manage her affairs, but the costs of carrying debts and supporting her family weigh on her. Will she be able to retire and keep her house at 60?

Finding a solution

Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Julia. His plan – sell the $850,000 house and pay the total mortgage of $506,750 and the equity loan. Without the $3,622 monthly cost of paying the mortgage and loans other than her credit cards, she would only have to replace $6,718 in monthly income upon retirement, Einarson estimates. That is something that is well within reach.

Cutting through the kids’ financial dependency, she could cut $700 a month for clothing and grooming, $900 a month for food, and $1,095 a month for utilities, kids’ cell phones and Web services and auto insurance. Under the terms of her divorce agreement, $500 in child support would end. But it’s a good financial decision. Her monthly costs would drop to about $5,000.

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The choice is to keep the big house and stay in debt or reduce it, pay off debt, and retire with financial security. Her $850,000 home would yield an estimated $807,500 after a five percent expense. If she paid off her mortgage and line of credit, she’d be left with $300,750 for a hefty down payment or even the outright purchase of a townhouse or condominium in bustling Calgary or elsewhere in the province.

She could also use her $23,000 annual job bonus to pay off $15,222 in credit card debt, Einarson suggests.

Retirement Plans

In two years, her DB pension will pay out $45,000 a year. Her RRSP will have increased to $1,048,504 with no further contributions and, with an annual growth rate of three percent after inflation, she will be able to generate $47,375 per year for the next 35 years until age 95. Her $254,280 in community funds with no further additions would grow to $269,727 and then pay $12,187 for the next 35 years. That’s $104,562 a year before CPP or OAS kicks in. After an average tax rate of 25 percent, she would have $78,421 to spend each year. That works out to $6,535 per month. That’s more than her estimated cost of living with her adult children out of the house.

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At age 65, she was able to add CPP at $13,000 per year and OAS at the current rate of $7,707 per year, for a total of $125,269 per year before 27 percent average tax. There would be OAS clawback of 15 percent of income above $79,845 – that’s about $6,800. After regular taxes and recovery, she would have $86,646 to spend per year or $7,053 to spend each month. That would cover estimated costs and leave money for travel or unexpected expenses. Even for gifts to her children.

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Starting with CPP at 60 would cost her 36 percent of the full annual payout of $13,000, so it’s worth waiting until age 65. Otherwise, she’d be missing out on nearly $200,000 in 35 years. It would also break the foundation for annual inflation increases in CPP payments. Some savings in spending — perhaps charging her child rent — are preferable to these expenses, Einarson notes.

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Whichever route she chooses, Julia must try to make the most of her financial assets. She has left the management of investments to others and has not checked what the advice of her advisors does for her. Its assets have been sold entirely in mutual funds by a chartered bank. She is unaware of the fees, how they are charged and, indeed, why she has the current mix of funds. To say the least, an active interest in her money and perhaps finding an advisor who doesn’t sell products but only gives advice could be to her advantage. At her asset level of more than $1 million, she could pay consulting fees of just one percent of assets under management. On top of the index fund fees of 10 to 30 basis points, it could pay only half of the current management fees. The fees she doesn’t pay are hers. The savings, when compounded over many years, can translate into a major increase in returns.

Finally, Julia could use the growing cash flow to pump up her desiccated TFSA with a current balance of $4,000.

“Julia can solve her debt problems. Then debt-free, increasing her disposable income when she retires,” explains Einarson. “The complexity of the process will be rewarded with a reliable retirement income.”

Retirement Stars: Three Retirement Stars *** out of five

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This post This Alberta chemist’s guilt is a fleeting part of the mix in retirement

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