This BC couple in their 40s has $3.1 million in assets, but will it be enough to retire in five years?

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Personal Finance Family Finance

If Bernie and Suzy invest what they don’t spend, they can do their own form of indexation, an expert suggests

Bernie and Suzy bring home $14,350 a month from their jobs and the rental properties. Bernie and Suzy bring home $14,350 a month from their jobs and the rental properties. Photo by Gigi Suhanic/National Post photo illustration

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A couple we’ll call Bernie, 43, and Suzy, 47, live in BC. They have a special problem figuring out when to retire and what they can afford after their work days are over. Bernie, who works for a consulting firm, has a medical problem that could shorten his life. It is a medically treatable risk, a concern but not a certainty. Suzy, who works for a technology company, has no health problems. They want to retire together in five years, but will they be able to pull the plug on their jobs? And what kind of income can they reasonably expect upon retirement?

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Family Finance asked Graeme Egan, a financial planner and portfolio manager who heads CastleBay Wealth Management in Vancouver, to work with Bernie and Suzy.

Email andrew.allentuck@gmail.com for a free Family Finance analysis.

Currently, Bernie and Suzy bring home $14,350 a month from their jobs and the rental properties. Their goal is to spend $10,000 a month when they retire.

A long horizon

The couple want to retire early because of Bernie’s health problems, but since Suzy is healthy, they will have to reckon with a pension that could last until her 95th. It is a challenge to prepare a financial plan for a period of 43 years.

On the plus side, they have built a net worth of $3.165 million primarily in real estate and diversified financial assets in registered and unregistered accounts.

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They also have $22,100 in Bernie’s registered disability savings plan that can provide withdrawals for various purposes before age 60. Regulations are broad and we include the disability plan, which can appeal if Bernie is unable to work, in retirement savings. .

In addition to their home, the couple owns two rental properties. They generate net rents of $2,390 per month. The first yields a three percent return on equity of $473,000, the second a 2.3 percent return on equity of $449,500. They are not particularly profitable, but they finance their own path, pay a steady income and are likely to appreciate in value. Total net rents for the suites in the main residence and two after-cost rents are $4,315 per month or $51,780 per year.

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They have $518,000 in unrecorded investments. They add $10,000 to these accounts annually. Assuming three percent growth after inflation, the bill would rise to $653,500 in five years. With no further contributions but a three percent revolving return after inflation, the accounts would yield an annual income of $27,250 for the next 43 years until Suzy’s age 95.

The couple’s tax-exempt savings accounts have a current value of $232,000. They each add $6,000 per year, $12,000 in total. In five years, the TFSAs that grow by three percent after inflation will be worth $332,600 and then pay $13,870 per year for the next 43 years, Egan estimates.

Finally, the pair’s RRSPs have a recent value of $788,285. That includes locked-down accounts and Suzy’s defined contribution plan. The total, growing $25,000 in total contributions per year at three percent post-inflation, will be worth $1,051,000 in five years and then support payments of $43,830 over the next 43 years to spend all of the capital and income .

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Predicting Retirement Income

While current allotments are $14,350 per month, they aim to live within a $10,000 monthly budget. Eliminating the $2,100 RRSP monthly contributions, $1,000 monthly TFSA contributions, $1,000 in contributions to taxable investments, and the sale of two or three cars, and reducing $250 in fuel and maintenance will bring spending close to target.

If, as planned, they retire in five years at the age of 48 and 52, the couple will have a taxable income of $122,860 based on $27,250 from their unregistered investments, plus $43,830 from RRSPs and $51,780 at net rent. Split and taxed at an average of 16 percent and with a TFSA cash flow of $13,870 added, they would have a total of $117,072 per year or $9,756 per month. That’s within a few hundred dollars of their target.

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At age 65, Suzy was able to add Old Age Security, currently $7,707 per month, and estimated CPP benefits of $9,000 per year for $139,567 income. Assuming a 17 percent rate, they would have $129,710 per year or $10,810 per month. That’s beyond their target. At age 65, Bernie can receive $7,707 OAS and $10,000 CPP benefits, totaling $157,274. Then with 17 percent tax, they would have $144,400 or $12,030 a month after adjustments for age and other credits.

We assume Bernie will enjoy his retirement for many years to come. He could start CPP at age 60 with a permanent 36 percent cut in payments, but there is no need for him to accept such a long-term cut in benefits. They could instead delay the start of OAS to 70 with an increase of 7.2 percent per year from 65 to 70, a total of 36 percent. They can also defer CPP until age 70 and receive an 8.4 percent increase for each consecutive year from 65 to 70, a total of 42 percent. For both benefits they would increase the basis for later indexation. However, given Bernie’s health concerns, there is a good reason for a normal onset of CPP and a reason not to delay other benefits. However, if they invest what they don’t spend, they can do their own form of indexation, Egan suggests.

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This plan is conservative, preserves liquidity and assets for both partners and does not anticipate Bernie’s untimely death. It therefore reduces the annual withdrawal of assets. That, in turn, sustains asset growth and purchasing power. The death of both partners eliminates some public benefits for the survivor and the ability to split incomes. This in turn leads to higher taxes. There may be some compensation in lower cost of living for the survivor. The plan meets the needs of the couple without adding investment risk.

Retirement stars: five ***** out of five

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