Situation: Former exec worries seven-figure savings may not be enough for forty years without work
Solution: With spending cuts, teens off to university in a couple of years, savings should be sufficient
A couple we’ll call Charles and Agnes, both 53, live in Alberta. Recently laid off from his job managing industrial product sales in the petroleum industry, he survives on savings. Formerly, while employed, he brought home $7,900 per month after tax. Agnes continues to do part-time clerical work for which she is paid $1,200 per month. Their three mid-teens children live with them.
Their dilemma, like that of many people who have seen their prospects dimmed by troubles in the energy industry, is financial survival. They have financial assets of about $1.37 million (not including educational savings) to tide them over, but at their age, they cannot access early Canada Pension Plan benefits for another seven years. Agnes’ part time work doesn’t support their $8,743 monthly allocations.
“Do I need to go back to work after my EI benefits run out?” Charles asks. “Or can I retire and still be reasonably confident that our money and future government benefits will be enough?”
Family Finance asked Eliott Einarson, a financial planner with Exponent Investment Management Inc. in Ottawa, to work with Charles and Agnes.
Couple left devastated by stock market crash of 1987 still trying to escape its long shadowHow this woman can find the extra $10,000 per year she needs to make her retirement plan workWith $2.8 million in assets, biggest question surrounding this couple’s retirement is when can it start
“Despite having a high net worth, their relatively young age will make it difficult for Charles to remain in his current state of retirement after losing his job,” Einarson says. “Even with adjustments to the family budget, it would be wise for him to go back to work at least part time to age 60 or full time for a few years in order to prepare for the retirement they want.”
There won’t be any need for Charles to go to work immediately. His $660,000 house is fully paid for as are his two cars worth a total of $30,000. He has no debts. And by mid-2019, he will be able to receive Employment Insurance benefits of $537 per week for about 37 weeks. We’ll leave this income out of our analysis, for Charles could get a job and, in any event, the EI income is temporary.
Their first spending priority has to be seeing their three children through post-secondary education. The present RESP has a balance of $89,830. If contributions continue at $500 per month for two years, by which time all kids will be past the age 17 limit of the Canada Education Savings Grant’s annual contribution of the lesser of $500 per beneficiary or 20 per cent of contributions, the fund would have $104,230. If divided three ways, the kids would have about $35,000 each for post-secondary studies. It would be sufficient for four years of tuition at any post-secondary institution in Alberta if the kids live at home.
A survival budget
At present, the couple is living off $19,000 cash in a savings account and Agnes’s $1,200 monthly salary. Their $8,743 monthly budget will have to be adjusted downward if Charles does not find another job. There is not a lot of fat in it, but RRSP contributions of $1,200 per month should stop. Charles no longer has a salary and Agnes’ salary is too low to be taxable. The food budget, $2,400 per month, could be trimmed by $1,000. Dining out at $375 per month could be cut down to $175. Clothing and grooming could drop $100 to $250 per month. Travel could drop by $100 to $150 per month. These adjustments could bring allocations down from $8,743 per month to $6,143.
To support expenses in future after their cash runs out, the couple has $279,000 in a non-registered investment account. If they set aside $50,000 for a motorhome they would like to buy, they would have $229,000. If that sum, invested to generate 3 per cent after inflation, were annuitized to pay out all income and capital over the 37 years to their age 90, it would generate $10,330 per year.
The couple’s RRSPs totaling $947,163 if annuitized to pay out all capital and income over the next 37 years would generate $42,730 per year.
Their TFSAs, boosted by successful investments, currently total $144,836. With the same assumptions they would generate $6,533 per year.
The sum of these income streams, about $59,600, if split with no tax on TFSA payouts and 10 per cent average tax on other income would provide about $54,293 per year or $4,525 per month. As long as that income is supplemented by Agnes’s $1,200 monthly salary, total family income would be about $5,725 per month. Another $1,000 of monthly income from part time work would close the gap.
At 60, when Agnes would like to stop working, she would lose her $1,200 month salary. Then they could add Charles’s Canada Pension Plan benefits of $700 per month and Agnes’s CPP of $321, per month plus a small company pension from prior employment of $365 per month. These additions at age 60 would bring their total after-tax monthly income up to $5,910. After nominal 10 per cent tax on all income other than TFSA payouts and excluding part time work, they would have $5,440 per month to spend. It would support about $4,000 of spending with no savings and reduced expenses as indicated.
At 65, their pre-tax income would rise with two taxable $601 monthly Old Age Security benefits, making total, permanent monthly income to age 90 about $6,400.
Charles and Agnes are fortunate to have hefty financial assets. They can raise their income early in Charles’s forced retirement by dipping into savings or starting withdrawals from their RRSPs. The cost, of course, is reduced time for tax-free growth in RRSPs mitigated by a longer period of withdrawal and resulting tax averaging.
The alternative for raising income is to push the risk and return equation into more risk in the hope that their returns will rise. That’s inappropriate for mid to late life investors with dwindling earned income. At present, they are invested 20 per cent in a Canadian equity exchange traded fund, 40 per cent in global equities, and 40 per cent in a bond index ETF. That’s a fairly conservative and appropriate mix, Einarson notes.
Charles and Agnes have the resources to cope with unemployment and retirement. If pinched, they could skip buying the $50,000 motor home to maintain capital and income.