Could this octogenarian widow run out of her retirement savings?

The Globe and Mail     November 23, 2018
Financial Planner:       Michael Cherney

Client situation

The person 

Millie, age 85

The problem

Will she outlive her savings?

The plan

Continue what she is doing with a view to maybe lowering some discretionary spending in time.

The payoff 

Peace of mind

Monthly net income

$4,040

Assets

Bank account $2,670; stocks $3,625; TFSA $52,660; RRIF $192,580; residence $750,000; annuity $75,445; estimated present value of defined-benefit pension plan $85,800. Total: $1.16-million

Monthly outlays 

Condo fees $810; property tax $300; home insurance $35; maintenance, cleaning $95; other $100; transportation $490; groceries $240; clothing $25; other $100; gifts, charity $185; vacation, travel $200; other discretionary $120; dining, drinks, entertainment $200; personal care $150; club membership $20; golf $160; subscriptions, art supplies $90; other $100; dentist, drugstore $50; health, dental insurance $135; phones, TV, internet $130; TFSA $300. Total: $4,035

Liabilities

None

At 85, Millie is healthy and active, but she’s worried about outliving her savings. She’s a widow with two grown children. “Do I have enough income to carry me through my remaining years?” she asks in an e-mail. Millie has about $250,000 in financial assets and owns her Toronto condo outright. Her income is made up of withdrawals from her registered retirement income fund (RRIF), monthly payments from a non-indexed annuity that she bought when interest rates were higher, her defined-benefit work pension and Canada Pension Plan and Old Age Security benefits. Altogether, this adds up to about $60,445 a year before tax. “My RRIF is getting depleted because I have to take out about 9 per cent a year,” Millie writes. She wonders if she should increase her exposure to stocks to boost her returns. Her adviser assures her she is on track. She also wonders whether her tax-free savings account is properly invested. We asked Michael Cherney, a independent Toronto financial planner, to look at Millie’s situation.

WHAT THE EXPERT SAYS

“More than half of Millie’s income – her pension and government benefits – is indexed, which gives her a nice measure of income security,” Mr. Cherney says. Of the remainder, about 18.5 per cent of her income comes from a non-indexed, registered annuity and 27 per cent from her RRIF.

“She has some concern about her minimum RRIF withdrawal rate, which will be 8.51 per cent in 2019. That rate is likely to outpace her return on investments, so she is concerned that her RRIF assets will dwindle too quickly,” the planner says.

“My advice to Millie is that there is nothing to stop her from saving some of her RRIF withdrawals in her TFSA, which is precisely what she is doing,” Mr. Cherney says.

Based on his projection, Millie is on track to maintain her current level of income. This assumes an average annual inflation rate of 2.5 per cent a year and a rate of return on her investments of 4.5 per cent. “Based on those projections, she will be fine to age 100.”

Because her annuity is not indexed, “she will likely not be able to continue saving $300 a month for much longer (to her TFSA) and may eventually have to start withdrawing from it instead,” the planner says.

Millie’s safety valve is her $750,000 condo. If her health was to take a turn and she needed assistance, she could sell the condo, invest the proceeds then rent an apartment in an assisted-living place. “Another option would be a reverse mortgage,” which would allow her to stay put.

“Another safety valve is simply reducing spending,” Mr. Cherney says. Millie currently budgets about $500 a month for her car, $160 for golf and $170 for gifts. Some of this “is likely to drop off in the future.”

Looking at Millie’s investments, Mr. Cherney notes that some carry fairly high fees. Her entire RRIF is in one income fund, an “F” class mutual fund with a management expense ratio of 1.11 per cent a year, with about 41 per cent stocks and 59 per cent bonds. “While not terrible, there are better choices, including low-cost exchange-traded funds,” the planner says. In addition to the MER, Millie is paying an annual account fee – based on assets under management – of 2 per cent, which is “very high,” he adds.

Millie’s TFSA holds a dividend mutual fund (16 per cent), a savings account (16 per cent) and a guaranteed investment certificate (GIC) whose return is linked to a stock market index. “Unless there are short-term needs for cash, I don’t agree with the savings account over the long term,” Mr. Cherney says. Instead, Millie could buy a balanced ETF.

As well, there are lower-cost alternatives to the dividend fund. Again, the planner recommends a balanced ETF.

As for the index-linked GIC, “I can see this may have some appeal, and it certainly does during market downturns,” Mr. Cherney says. His quibble is that the return is tied to price changes in a portfolio of stocks – without the dividends included – with a cap on her return that works out to 3.78 per cent a year. “So while there is no downside risk, the upside is quite limited.”

Millie has a small non-registered holding of bank shares that she has built up using a dividend reinvestment plan. “That is a wonderful way to slowly build up a nice nest egg,” Mr. Cherney says.

Millie says the money in her TFSA came from the proceeds of selling her previous home. Given how well her bank stock has done, she wonders whether she should have used the sale proceeds to invest in dividend-paying shares instead.

Millie’s question reflects a common misunderstanding about TFSAs, the planner says. Millie could have bought dividend-paying shares or ETFs in her TFSA rather than what she has now, but she might have had to move her account to a discount broker, Mr. Cherney says.

The information is used for illustrative purposes only and is based on the perspectives and opinions of the owners and writers only. It is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting, financial or other professional advice. Investors should always consult an appropriate professional regarding their particular circumstances before acting on any of the information here. It may also contain projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements. All information provided is believed to be accurate and reliable, however, we cannot guarantee its accuracy or completeness.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Prospectus or Fund Facts documents before investing. Mutual funds are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Couple have good income but are falling deeper into debt

The Globe and Mail     September 26, 2014
Financial Planner:       Michael Cherney

Client situation

The people

John, 39, Jane, 41, and their two children.

The problem

How to get back on track financially to reverse their high debt and low savings.

The plan

Jane is looking for work. Once she finds a job, her income will help to pay down the mortgage and save for the future. Cut spending where possible and consider buying a used car instead of leasing.

The payoff

No more money worries.

Monthly net income

$8,800

Assets

Home $800,000; bank account $3,060; term deposits $550; RRSPs $11,215; RESP $6,390; present value of his pension plan $81,200. Total: $902,415

Monthly disbursements

Mortgages $2,855; utilities, insurance, maintenance $445; auto lease $785; other transportation $270; groceries $1,000; clothing $280; line of credit $395; student loan $80; credit cards $140; gifts, charitable $250; vacation, travel $335; children’s activities $230; grooming $200; other personal discretionary $205; doctors, dentists $250; life insurance $145; drugstore $20; telecom, TV, Internet $210; his pension plan contributions $700. Total: $8,795

Liabilities

Mortgage $372,865 at 2.79 per cent; mortgage $212,840 at 2.2 per cent; line of credit $73,850 at 4.5 per cent; credit cards $5,690; loan $14,150 at 7.65 per cent. Total: $679,395

Jane and John seem to be sliding ever deeper into debt and don’t quite know what to do about it. He is 39, she is 41. They have two children, four and three. Given John’s $165,000-a-year salary, they should be okay. But living in one of Canada’s most expensive cities on one income – if only for a few years – can be challenging. They’ve had to refinance their house and take out a line of credit. They also have a car loan. They have little in the way of savings. Fortunately, John has a partly indexed defined-benefit pension plan that will pay him about $86,000 a year in current dollars if he stays with his current employer until he retires. In the meantime, Jane is casting about for solutions. “Should we live in a less expensive house?” she asks in an e-mail. “Are we spending exorbitantly? It feels like we never have extra money. “We still have an assortment of hand-me-down and university furniture, we don’t fly anywhere on trips, we can’t afford to do landscaping in the yard. I don’t really buy expensive clothes – I buy many things second-hand,” Jane writes. “I do need to get a job, but will this solve the problems?” We asked Michael Cherney, an independent financial planner in Toronto, to look at Jane and John’s situation.

What the expert says

Jane and John are just making ends meet, Mr. Cherney says. John’s take-home pay is entirely eaten up by monthly expenses. Some changes are in order.

The easiest solution is for Jane to go back to work, Mr. Cherney says. She is looking for a part-time job in marketing that would pay from $18,000 to $39,000 a year for a four-day week.

“This would be especially invaluable to the family given Jane’s low tax rate,” Mr. Cherney says. “This would bring in between $15,700 and $30,900 a year and would allow a range of savings options” – paying down the mortgage, saving for retirement, saving for the children’s education and taking advantage of tax-free savings accounts.

If Jane does not find work, they could consider selling their home and downsizing to a less expensive one, preferably with a basement apartment, the planner says.

They have about $215,000 of equity in the house, which could easily be whittled down to $150,000 after all the costs involved in moving to a new house are factored in, Mr. Cherney says.

“But if they could add a basement apartment to the mix, perhaps getting $1,000 a month in rent, that would be worth it,” he says.

Regardless, Jane and John “would benefit from reviewing their monthly expenses,” the planner notes. With so much of their income going to debt repayment, they are “particularly vulnerable to interest-rate increases.”

To lower their heating and electricity bills, they could “time-shift” laundry, dishwashing and other “electricity gobblers,” turn lights off, and put heating and air conditioning on a timer, he says.

They are paying $786 a month to lease a late-model car.

“They have expressed concern about car safety, though I would point out that there are many low-cost options that have five-star safety ratings,” Mr. Cherney says.

He suggests they get someone to take over their lease and buy a good used car that is still under warranty.

Gifts and vacations could also be pared. Instead, the family could enjoy “staycations” or lower-cost camping trips, he says. Grooming, too, could be reduced.

The payoff will be worthwhile, Mr. Cherney says.

“Assuming they can achieve some combination of the above, they will have no problem achieving their goal of retiring at John’s age 60 with an income of $70,000 a year after tax,” he says. “In fact, they should be able to achieve an indexed income of $94,000 in current dollars” when Canada Pension Plan and Old Age Security benefits are included.

Jane and John are good candidates for income splitting, Mr. Cherney notes. John can transfer up to half of his pension income to Jane and benefit from her lower marginal tax rate. This should also allow him to avoid the OAS clawback, and allow Jane to claim the $2,000 pension income credit. They can also split their CPP benefits.

The information is used for illustrative purposes only and is based on the perspectives and opinions of the owners and writers only. It is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting, financial or other professional advice. Investors should always consult an appropriate professional regarding their particular circumstances before acting on any of the information here. It may also contain projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements. All information provided is believed to be accurate and reliable, however, we cannot guarantee its accuracy or completeness.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Prospectus or Fund Facts documents before investing. Mutual funds are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Are they on the right path to reach their lofty goals?

The Globe and Mail     April 3, 2015
Financial Planner:       Michael Cherney

Client situation

The people

Marge and Myron, both 40

The problem

How can they achieve their many goals? Can they afford a big family vacation? Should they sell their home or renovate?

The plan

Postpone major outlays such as expensive vacations until Marge returns to work full-time in a couple of years. Shift stock investments to TFSA and continue to pay down mortgage.

The payoff

All their aspirations realized.

Monthly net income

$9,805

Assets

His two defined-contribution pension plans $47,150; his group RRSP $61,370; estimated present value of her defined-benefit pension plan $179,780; cash $4,000; stocks $28,335; her TFSA $1,000; RESP $33,780; residence $690,000. Total: $1.05-million

Monthly disbursements

Mortgage $1,950; property tax $285; utilities $265; insurance $75; security $35; transportation $660; groceries $900; child care $40; clothing $200; gifts $175; charitable $1,005; vacation, travel $600; other $750; dining, drinks, entertainment $475; grooming $100; pets $50; sports, hobbies $450; subscriptions $25; dentists, drugstore $100; telecom, TV, Internet $250; RRSPs $360; RESP $150; pension plan $850; professional association $55. Total: $9,805

Liabilities

Mortgage $228,000 at 3.02 per cent.

As they approach their 41st birthdays this year, Marge and Myron are wondering whether they are on the right path. They want to travel, save for their children’s university education, fix up their house and enjoy a “reasonable” retirement lifestyle. Their children are ages 9 and 11. Myron brings in $117,500 a year from his management job, while Marge earns $47,355 teaching part-time. She plans to return to work full-time in a couple of years. They can’t decide whether to renovate their older house at a cost of $35,000 or move to one that has already been done. They are making extra payments to their mortgage, hoping to have it paid off in 11 or 12 years. Ideally, they’d like to take one “significant” family vacation each year ($10,000) and one or two smaller trips costing $2,000 to $3,000 each. When their car and van need replacing in a few years, they plan to buy used again. “We always purchase used vehicles and budget $20,000 to $25,000 for our primary vehicle and $10,000 for our secondary vehicle,” Myron writes in an e-mail. They have no idea how much money they should save for retirement, what income they will need “or whether we’re on track to meet a reasonable goal.” We asked Michael Cherney, an independent financial planner in Toronto, to look at Myron and Marge’s situation.

What the expert says

With their current savings plan and Marge working part-time, they could retire at age 65 with before-tax income of $98,000 a year in today’s dollars, Mr. Cherney says, “which in most books would be a comfortable retirement indeed.” Their retirement income would come from government benefits, Marge’s teacher’s pension ($44,000 a year), Myron’s two defined-contribution pension plans and his group registered retirement savings plan (RRSP).

The forecast assumes they retire at age 65 and live to be 95, inflation of 2.5 per cent, and a rate of return of 4.5 per cent.

With Marge at half-pay, the couple don’t have much in the way of extra funds to finance pricey vacations or renovations, Mr. Cherney says. They should postpone these outlays until Marge returns to work full-time. “The extra income will bring them $2,100 a month after deductions.”

Marge’s increased income will give them more options, including moving their retirement up by four years to age 61. They could better afford to renovate their house or move to a larger one, contribute more to their children’s registered educations savings plans (RESPs), travel or even increase their already generous charitable donations. Once the mortgage is paid off, the $1,950 a month currently going to mortgage payments also could go toward these goals.

“Events like a return to work or mortgage payoff are important inflection points in the financial life of a family,” Mr. Cherney says. Such events “put a bonus of unallocated after-tax income in their pockets.”

Myron and Marge have been using their non-registered investment account as a source of temporary funds. It is a margin account, allowing them to borrow small amounts of money without having to sell the underlying stocks. The planner recommends they transfer these investments to a tax-free savings account – provided they intend to hold the stocks as part of their retirement savings.

“They will lose the margin account, but they could borrow from a home line of credit at a lower rate, or even better, don’t borrow at all.”

Ideally, Marge and Myron can save enough money to replace their vehicles in a few years. They could keep the money in a savings account or term deposit either within or outside of their TFSAs. “However, these funds shouldn’t replace funds for long-term investment,” the planner says. Their stocks stand to benefit more from being in a TFSA than would low-yielding term deposits. They could also consider drawing on a line of credit for a car purchase as long as they are able to pay back the debt within a year.

He recommends they renovate rather than move to avoid paying moving costs (commissions, legal fees, land transfer tax, actual moving expenses, etc.) that could easily approach $100,000 when improvements to the new house are included. For the children’s education, he recommends they take full advantage of the Canada Education Savings Grant. The government kicks in 20 per cent of the first $2,500 saved in a child’s RESP each year, up to a lifetime limit of $7,200 for each child ($14,400 for two). This would require total contributions of $72,000.

The information is used for illustrative purposes only and is based on the perspectives and opinions of the owners and writers only. It is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting, financial or other professional advice. Investors should always consult an appropriate professional regarding their particular circumstances before acting on any of the information here. It may also contain projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements. All information provided is believed to be accurate and reliable, however, we cannot guarantee its accuracy or completeness.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Prospectus or Fund Facts documents before investing. Mutual funds are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Can this couple afford to retire comfortably in their late 50s?

The Globe and Mail     November 27, 2015
Financial Planner:       Michael Cherney

Client situation

The people

Mike, 56, and Mary, 57

The problem

Should they quit work now, like Mike wants, or stick with another three or four years, like Mary wants?

The plan

They can afford to quit next spring, but just barely. It would be a compromise. If they do, they should take advantage of pension splitting.

The payoff

An appreciation of the tradeoffs involved in whatever decision they make.

Monthly net income

$11,500

Assets

Cash in bank $5,000; short-term deposits $10,000; his TFSA $38,000; her TFSA $38,000; his RRSP $100,000; her RRSP $300,000; estimated present value of her DB pension plan $594,000; estimated present value of his DB pension plan $522,000; residence $180,000; cottage $150,000. Total: $1,937,000

Monthly disbursements

Condo fee $255; land lease on cottage $200; property taxes $250; heat, hydro $350; insurance for two properties $285; auto $500; telecom, Internet, TV $300; grocery, drugstore $1,200; clothing $250; gifts $300; personal discretionary (dining, drinks, entertainment, grooming, sports and hobbies, travel) $2,260; pension plan contributions, other payroll deductions $2,850. Total: $9,000. Surplus available for spending or savings: $2,500

Liabilities

None

Mike, who works in the health-care field, wants to retire now. He is 56. Mary, a teacher, thinks they should both work a few more years so they can retire without having to crimp their spending too much. She just turned 57. “I think that if we both work four more years, until age 60, we can enjoy retirement without much fiscal restraint,” Mary writes in an e-mail. “We are not used to fiscal restraint.” Adds Mary: “We have never had a budget and frankly do not spend much time worrying about money. We do live within our means as we have annual savings of about $30,000. Although we do not spend extravagantly, when we do travel or make the odd discretionary purchase, we do not want to scrimp.” They have a suburban condo and a cottage not too far away. When they retire, they plan to sell their current condo and move downtown, either buying or renting. They figure buying a downtown condo would cost about $30,000 more. They would spend half the year at the cottage and the other half at home. “I would like to be able to enjoy the downtown lifestyle (theatre, restaurants, etc.) and possibly be a snowbird for one month of the year,” Mary writes. She wonders if they should rent or buy. This year’s $30,000 surplus is earmarked for a new car for Mike. If they keep working, the next year’s surplus could go to cottage renovations, Mary adds. “I feel the following years’ savings of $30,000 to $60,000 – if we continued to work full time (until age 60) – would allow us to retire without money worries,” Mary writes. Mike wants to retire now “because you never know what might happen.” Both have defined-benefit pension plans but wonder if they should add annuities to their investment mix. We asked Michael Cherney, a Toronto-based financial planner, to look at Mary and Mike’s situation.

What the expert says

Mary and Mike are both fortunate to be part of the dwindling number of workers with defined-benefit pensions, Mr. Cherney says. They are asking whether they can retire on May 31, 2016 (Mike’s preferred retirement date), with an income of $6,000 to $7,000 a month after tax. Mike would settle for $6,000 a month, while Mary would be more comfortable with $7,000.

In his calculations, the planner assumes a life expectancy of 95 years, an inflation rate of 2.5 per cent a year, with pensions indexed at 75 per cent of inflation, and an average annual rate of return on investments of 4.5 per cent. He assumes they convert their registered retirement savings plans to registered retirement income funds when they retire.

The result? “They can, just barely, meet their retirement goals if they retire next spring,” Mr. Cherney says. They would have an indexed income of $92,000 a year before tax, or $78,500 a year after tax, “near the midpoint of their respective targets.”

Mike would get $30,336 a year in pension income in 2016, falling by 15 per cent at age 65 when the bridge benefit ceases. Mary would get $32,880, falling by 12 per cent at age 65. To supplement their income, Mike would draw $5,454 a year to start from his RRIF and Mary $18,702. They would draw the balance from their tax-free savings accounts.

At age 60, they would begin collecting Canada Pension Plan benefits of $8,179 a year each. At age 65, they would get Old Age Security (currently $6,839 a year each).

But, they might have to buy a used car and scale back on the cottage renovations if they retire in 2016. Working another year or two would give them more pension income and fewer years in retirement for which to provide.

To keep their taxes to a minimum, the planner suggests the couple take advantage of pension income splitting, dividing their retirement income in half. “Even though they are only in their late 50s, they can take advantage of this immediately because these are pension payments,” he says. They will also have the $2,000 a year pension income deduction.

Mr. Cherney has grossed-up Mike and Mary’s projected withdrawals from their TFSAs to pretax amounts to put all retirement income on an equal footing.

Looking at their investment portfolios, the planner finds that Mike’s is overly conservative “with very little foreign exposure.” Mary’s in contrast, is aggressive. “Considered together, it isn’t a bad mix,” he says. Even so, they should adjust their holdings so that they each have similar investments. “Otherwise, their withdrawal plans will become skewed and unnecessarily complicated.”

Mary and Mike asked whether they should include annuities in their retirement income plan, Mr. Cherney says. Because interest rates are so low, annuities are not paying a lot at the moment. If they do want to include annuities, he suggests they “wait for some time before buying them.”

They also wonder whether they should rent downtown or buy again after they retire. “The answer depends on many factors,” the planner says: rental rates; the purchase price of a downtown condo, including legal fees and tax; the carrying costs of a new condo; what rate of return they could get if they rented and invested the sale proceeds of their current condo; the expected rate of appreciation of the downtown condo; and “personal preference, for example, pride of ownership.”

The information is used for illustrative purposes only and is based on the perspectives and opinions of the owners and writers only. It is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting, financial or other professional advice. Investors should always consult an appropriate professional regarding their particular circumstances before acting on any of the information here. It may also contain projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements. All information provided is believed to be accurate and reliable, however, we cannot guarantee its accuracy or completeness.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Prospectus or Fund Facts documents before investing. Mutual funds are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Can this 51-year-old newlywed retire early with her older spouse?

The Globe and Mail     March 27, 2016
Financial Planner:       Michael Cherney

Client situation

The people

Stan, 64, and Shelley, 51

The problem

Can she retire early so they can spend more time travelling without finding herself short of savings in her later years?

The plan

Work another five years, making maximum contributions to RRSPs and TFSAs. Plan to sell the rental house and invest the net proceeds. Split income in retirement.

The payoff

A secure retirement with money to spare.

Monthly net income

$16,465

Assets

Bank $3,000; her RRSP $333,362; her locked-in RRSP $78,142; her DC pension $307,802; her stocks $25,570; his RRSP $175,548; estimated present value of his DB pension plan $352,500; her TFSA $40,425; his TFSA $19,337; RESP $8,000; her residence $1,000,000; his rental house $550,000. Total: $2.89-million

Monthly outlays

Mortgage $970; property taxes $750; water, sewer $300; property insurance $215; hydro, heat $450; maintenance $300; garden $60; transportation $795; grocery store $1,400; daughter’s apartment $1,400; clothing $705; bank fees $50; gifts, charitable $470; vacation, travel $1,250; other $200; dining, drinks, entertainment $1,875; grooming $125; club membership $60; sport, hobbies $1,200; pet expenses $800; subscriptions $50; dentist $25; drugstore $40; telecom, TV, Internet $215; RRSPs $150; TFSAs $917; pension plan contributions $1,678; professional association $15. Total: $16,465

Liabilities

His mortgage $235,000; line of credit $50,000. Total: $285,000

Shelley and Stan have been married less than a year and already they’re thinking about retiring, mainly because of the 13-year difference in their ages. She is 51; he is 64. “I had always planned to retire at 60 or later,” Shelley writes in an e-mail. She has a good executive-level job, earning more than $235,000 a year including a bonus. She also has a defined-contribution pension plan at work. “However, with an older spouse, I want to be able to travel while he is still able,” Shelley writes. Although she would like to retire earlier if possible, “I don’t want to run out of money,” she writes. “I could live 40 years in retirement.” Stan works in education, bringing in $95,000 a year. He contributes to a defined-benefit pension plan. They each own their own houses, his with a mortgage, hers without. Stan is a generous father, renting his house to his son at cost to help him get a start in the tough Toronto market. Stan also is paying $1,400 a month for his daughter’s apartment while she is in university. “As we prepare for retirement with such lofty goals, we wonder if we need to sell that house (Stan’s) soon and reinvest the equity sooner rather than later,” Shelley writes. She also worries about having to carry two places if one of them requires nursing home care in future. “Can we afford to retire early in 2021 and live the lifestyle we want?” Shelley asks. Their retirement spending goal is $130,000 a year after tax. We asked Michael Cherney, an independent Toronto financial planner, to look at Shelley and Stan’s situation.

What the expert says

From a financial planning perspective, Shelley and Stan do some things well and some things not so well, Mr. Cherney says.

What they do well: They max out their registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), the planner notes. “That is rare.”

As well, Stan “has done a great thing” simply by being part of a defined-benefit pension plan. Mind you, he has only 16 years of service under his belt because of a mid-life career change. They own two detached houses in Toronto’s “very rich” housing market.

What they could improve on: “To the extent Stan is helping his son save enough money for his own down payment in today’s crazy market, he may just be a generous dad [by renting his house at cost], which is pretty hard to fault,” the planner says. “But from his and Shelley’s perspective, they are missing out on some valuable rent.”

They are also paying that $1,400 a month for Stan’s daughter’s apartment while she is in school.

Their lifestyle expenses are higher than they need to be, Mr. Cherney says. “They budget $15,000 a year for travel, $14,000 for golf and $10,000 for dog walking and other pet expenses.”

They both plan to keep working until Stan turns 70 in 2021, “which will significantly increase the value of his pension,” the planner says. He would be entitled to a pension of $35,076 a year. His Canada Pension Plan and Old Age Security benefits will also be higher. Shelley would be 57.

The planner assumes they live to age 95, the annual rate of inflation is 2.5 per cent and their annual rate of return on their investments is 4.5 per cent.

He further assumes they continue to max out their RRSPs and TFSAs as long as they are working, and that they sell Stan’s rental house in 2018 and net $275,000 after mortgage, taxes and expenses. When they retire, they sell the home they share now, buy a two-bedroom condo and net $400,000 after expenses. Then “they invest the net proceeds of these home sales in a diversified portfolio of exchange-traded funds.”

Mr. Cherney recommends the couple take advantage of pension income splitting, which allows them to divide their retirement income in half. They would also take advantage of the $2,000 federal pension income deduction.

Even working another five years, they won’t quite meet their $130,000 spending goal, but they come close, the planner says. If Shelley works an extra 16 months and retires at the end of 2022, when she will be 58, they can expect $166,000 a year in effective pre-tax income, which would give them the desired $130,394 after tax (in 2016 dollars).

Their current spending outlays will be much lower by the time they have retired, Mr. Cherney says. They will no longer be paying Stan’s daughter’s rent and tuition, or carrying the losses on the second home. They will stop contributing to their RRSPs and TFSAs, and typical work-related expenses such as transportation, clothing and lunches will drop. If they could get by on less, they could put up their feet a little sooner.

The information is used for illustrative purposes only and is based on the perspectives and opinions of the owners and writers only. It is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting, financial or other professional advice. Investors should always consult an appropriate professional regarding their particular circumstances before acting on any of the information here. It may also contain projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements. All information provided is believed to be accurate and reliable, however, we cannot guarantee its accuracy or completeness.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Prospectus or Fund Facts documents before investing. Mutual funds are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Should this couple take the lump sum or the pension?

The Globe and Mail     December 9, 2016
Financial Planner:       Michael Cherney

Client situation

The people

Lana, 57, and Lloyd, 49.

The problem

Should he take the lump-sum cash value of his pension plan or the monthly income?

The plan

Work another five years and take the pension.

The payoff

Financial security for life without having to worry about investing the pension money and the ups and downs of financial markets.

Net income

Employment $9,550. Rental: $1,200. Total: $10,750

Assets

Cash in bank $15,000; his TFSA $50,000; her TFSA $90,000; his RRSP $103,000; her RRSP $71,000; commuted value of his defined benefit pension plan $1,072,000; estimated present value of her DB pension plan $529,500; RESP $35,000; residence $725,000; two rental properties $780,000. Total: $3.47-million

Monthly disbursements

Mortgage payments $500; property tax $400; water, sewer $150; property insurance $100; electricity $200; heating $70; maintenance $100; car insurance $175; fuel $450; vehicle maintenance $150; transit and parking $50; groceries $350; clothing $150; line of credit payment $275; credit card payment $1,000 (gifts, charity, vacation); dining, drinks, entertainment $750; grooming $50; pets $100; sports, hobbies $100; other personal $125; cellphones $250; cable, Internet $150; professional association $90; his pension plan contributions $860; her pension plan contribution $365; group benefits $730. Total: $7,690. Unallocated surplus: $3,060 (goes to TFSAs, debt repayment, savings)

Liabilities

Residence mortgage $117,000; rental mortgage $230,000; cottage mortgage $240,000; line of credit $87,000. Total: $674,000

Lloyd has to make a big decision soon: A bird in the hand or a lifetime pension. His wife, Lana, is planning to retire next year from a job that requires some heavy lifting. Lana is 57, Lloyd is 49. They have two children, one of whom still lives at home. Both Lloyd and Lana have government jobs with defined benefit pension plans. She makes $62,000 a year, he makes $94,000. They also have rental income. The offer Lloyd’s employer is making is enticing: the commuted value of his pension – $1.1-million in cash. But to get it, he has to make the decision to retire when he turns 50. “If I do not take it out, I will retire in five years’ time with a pension of $4,340 a month, plus a bridge benefit of $1,130 a month for 10 years” (for a monthly total of $5,470), Lloyd writes in an e-mail. “If I do take it out, I will need to find another job for five years at least.” “This commuted value option, which I never thought about until recently, has made things very interesting,” Lloyd writes. “Is it worth taking the commuted value, or should I stick to the game plan and the company and retire happily in five years?” We asked Michael Cherney, an independent Toronto financial planner, to look at Lloyd and Lana’s situation. Mr. Cherney holds the certified financial planner (CFP) designation.

What the expert says

Lloyd has been offered $389,052 that can be transferred to a life income fund (LIF), plus a taxable lump sum of $670,022. “Together, these payments exceed $1-million and therefore seem attractive,” Mr. Cherney says. However, the lump sum will be reduced to $320,000 after income tax, leaving $709,052.

To compare the two, the planner calculated how much the lump sum would have to grow to provide the same monthly benefit as the pension without running out before Lloyd dies. At an investment return rate of 4.5 per cent, and with a 4 per cent withdrawal rate, this would yield income of about $30,000 a year. About half of this would be tax-preferred because it would come from a non-registered portfolio, Mr. Cherney says. Income from the non-registered portfolio is a combination of capital gains, dividends, return of capital and some interest income, only the last of which is fully taxable. With the registered portfolio, all income is taxable.

Lloyd would be much further ahead by waiting and taking his unreduced pension at the age of 55, Mr. Cherney says. In year one, Lloyd’s age 55, his pension income, including the bridge benefit, would be $76,098 in 2022 dollars. His income from investing the commuted value of his pension would be $42,071 in 2022 dollars. He has until March to make his decision about his retirement.

“This percentage loss would increase over the years,” the planner says. His calculations assume inflation of 2.5 per cent, return on investments of 4.5 per cent and an actuarial life expectancy for Lloyd of the age 84.

To do a fair, apples-to-apples comparison, the planner assumed Lloyd would retire in March, 2017, and immediately find a job that pays him a salary of $94,000 with full benefits. Even if he were able to do this and he made maximum pension or RRSP contributions for the extra five years to the age of 55, “the comparison isn’t even close,” Mr. Cherney says.

There are other issues to consider as well. Lloyd may well live longer than his actuarial life expectancy.

Of course, a lot depends on the assumptions. “If Lloyd is able to earn a significantly higher return than 4.5 per cent [a year], the commuted value could be better, but I would not recommend it,” the planner says.

Assuming that Lloyd and Lana choose the pension route, they wish to know whether they can afford to retire at the relatively early age of 55 (for Lloyd). Lana is eight years older than Lloyd and plans to retire in 2018. “In 2022, when Lloyd retires, the couple will be able easily to meet their retirement spending goal of $6,000 a month or $72,000 a year after tax,” the planner says.

In addition to Lloyd’s pension, Lana will be entitled to a pension of $1,838 a month plus a bridge benefit to the age of 65 of $965. Both Lana and Lloyd qualify for very nearly the maximum Canada Pension Plan benefit, though it will be reduced by 36 per cent if they start collecting it at the age of 60.

The couple can split their pension income under the federal pension income splitting rules, Mr. Cherney notes. “This allows you to assign 50 per cent of pension income to your spouse starting at age 55, and 50 per cent for RRIF [registered retirement income fund] or LIF income starting at age 65.” As a result, Lloyd will preserve his Old Age Security benefits rather than having them clawed back because of his high income.

In his plan, Mr. Cherney assumes the couple does not sell their real estate holdings, providing “a nice nest egg for their children.”

The information is used for illustrative purposes only and is based on the perspectives and opinions of the owners and writers only. It is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting, financial or other professional advice. Investors should always consult an appropriate professional regarding their particular circumstances before acting on any of the information here. It may also contain projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements. All information provided is believed to be accurate and reliable, however, we cannot guarantee its accuracy or completeness.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Prospectus or Fund Facts documents before investing. Mutual funds are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Big dreams, big mortgage for millennial couple who hope to retire by 60

The Globe and Mail     July 14, 2017
Financial Planner:       Michael Cherney

Client situation

The people

Rose and Rusty, both 29

The problem

Finding a balance between paying off the mortgage and saving for retirement while planning to have a child.

The plan

Devote their $2,500 a month in savings to their retirement plan, realizing they will have to suspend savings for the time Rose is on mat leave. Catch up with Rusty’s unused RRSP contribution room. Considering lowering their retirement spending target.

The payoff

A clear road map to get them through the next several years.

Monthly net income

$12,415

Assets

Bank accounts $21,000; her TFSA $17,000; her RRSP $8,000; market value of defined contribution pension $8,000; estim. present value of DB pension $65,000; residence $1,700,000. Total: $1.8-million

Monthly outlays

Mortgage $3,900; property tax $585; water, sewer $30; home insurance $70; heat, hydro $220; security $45; maintenance, garden $155; lease payment $440; insurance $290; fuel, maintenance $310; parking, transit $230; grocery store $250; clothing $100; gifts $265; vacation, travel $420; other discretionary $40; dining, drinks, entertainment $700; grooming $100; hobbies $700; life insurance $50; disability insurance $25; Internet $70; TFSA $1,000; pension plan contributions $920. Total: $10,915 Surplus: $1,500

Liabilities

Mortgage $830,000 at 2.09 per cent. Total: $830,000

Although they are only 29 years old, Rose and Rusty are already thinking about retiring. They’d like to hang up their hats at the age of 60. Before that distant event, they plan to have a child soon (Rose would take an extended maternity leave), give their child a private-school education, pay off their mortgage and indulge “their love for travelling.” Both work two jobs, bringing in a combined $212,000 a year. Rose has a defined benefit pension plan that will pay her about $63,240 a year at the age of 65. Rusty has a defined contribution pension plan to which both he and his employer contribute. They have a house in a Toronto suburb with a big mortgage. “I am having a difficult time determining how much my husband and I will need for our retirement,” Rose writes in an e-mail. She is concerned about striking a balance between savings and paying down the mortgage. They hope to leave their child a substantial inheritance. “Are we on track to meet our retirement goals?” Rose asks. We asked Michael Cherney, a Toronto-based financial planner, to look at Rose and Rusty’s situation.

What the expert says

After all deductions, including both of their pension plan contributions, they take home about $12,000 a month. “But they spend only $9,500 per month, leaving $2,500 per month, or more than 20 per cent of their income, for saving (including a tax-free savings account),” Mr. Cherney says in an e-mail. “This is an excellent ratio.”

But by far the best thing that these two have going for them, besides their excellent earnings potential, is their young age of 29, he says. “The fact that they are planning this early bodes very well for them.”

Thus far, the couple has been putting $1,000 a month into a TFSA to fund the buyout of a car lease. “This will end shortly.” Their goals, in no particular order, include retiring at the age of 60 with a joint income of $150,000 before-tax; funding a private-school education for their future child or children; paying off their mortgage; and leaving an inheritance.

Mr. Cherney starts with their retirement plan. In addition to Rose’s DB plan, Rusty has a combined DPSP (deferred profit sharing plan) and RRSP. His employer contributes 3 per cent of his salary to the DPSP as well as matching up to 3 per cent of his RRSP contribution.

Rose has $17,000 in her TFSA, which is earmarked to exercise the purchase option on their leased car. Once that goal is reached, they can devote their TFSA contributions to their retirement plan.

“An early hitch is that Rose plans to take 18 months off work to have their first child,” the planner says. Between EI and her work mat leave coverage, they will be able to pay their bills, but they will not be able to save anything.

When Rose returns to work in January, 2020, they should start saving aggressively, putting the majority into Rusty’s RRSP to use up his $35,000 in unused contribution room. He should contribute the maximum amount each year thereafter. There will still be $4,000 available each year to contribute to each of their TFSAs.

Continuing along this route and assuming a rate of return of 4.5 per cent and inflation at 2.5 per cent, they will be able to retire at the age of 65 with before-tax income of $160,000 (current dollars), indexed to inflation, to the age of 95. The planner has adjusted TFSA withdrawals to their before-tax equivalent amounts in order to put all sources of income on an equal footing.

If they retire at the age of 60, they will not be able to meet their spending goal without further belt-tightening and “at this point I don’t think it is particularly realistic,” Mr. Cherney says.

However, with this projection as a starting point, they can make adjustments from time to time. One of them might be promoted, for example. Their mortgage is scheduled to be paid off in about 22 years, freeing up about $47,000 a year. “If they decide to devote some or all of that to their retirement goals, they could advance their retirement dates,” the planner says. On the other hand, the money they are saving will be reduced once they have a child. Finally, they could downsize their house in time, “freeing up lots of cash for their spending goals.”

The information is used for illustrative purposes only and is based on the perspectives and opinions of the owners and writers only. It is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting, financial or other professional advice. Investors should always consult an appropriate professional regarding their particular circumstances before acting on any of the information here. It may also contain projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements. All information provided is believed to be accurate and reliable, however, we cannot guarantee its accuracy or completeness.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Prospectus or Fund Facts documents before investing. Mutual funds are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Nearing retirement, this couple is seeking best route to a comfortable future

The Globe and Mail     December 8, 2017
Financial Planner:       Michael Cherney

Client situation

The people

Brad, 61, and Bonnie, 57.

The problem

Can they afford for Brad to retire at the age of 65 without risking their goals?

The plan

Pay off the mortgage, contribute as much as possible to Brad’s RRSP and take the plunge at 65 if he wants to.

The payoff

A clear understanding of their retirement options.

Monthly net income

$6,320

Assets

Cash $5,000; his RRSPs $66,706; her RRSP $93,146; estimated present value of his pension plan $666,000; residence $2-million. Total: $2.8-million.

Monthly outlays

Mortgage $750; property tax $587; home insurance $118; utilities $348; maintenance, garden $235; transportation $353; groceries $878; clothing $115; gifts, charitable $125; vacation, travel $295; dining, drinks, entertainment $168; personal care $143; subscriptions $59; dentists $14; prescriptions, vitamins $145; health, dental insurance $18; life insurance $160; disability $102; phones, TV, internet $117. Total: $4,730. Surplus of $1,590 goes to savings.

Liabilities

Mortgage $40,753

Brad likes his job, but at 61, he wonders at what point it would be realistic for him to plan to hang up his hat. Brad brings in about $97,740 a year before tax working in the media field. His wife, Bonnie, has been earning pocket money doing occasional jobs, bringing in about $7,000 a year. They have three children who are beginning to be established in their careers, Brad writes in an e-mail. “We want them to learn from our mistakes, so they are not in the position we find ourselves in.” Brad and Bonnie are not in a bad position. Their Toronto house is valued at $2-million. Still, he seems worried they haven’t built up enough of a nest egg. They have tried to manage their debts, but they “haven’t had much luck investing,” Brad writes. He has a defined benefit pension plan that will pay him about $45,400 a year at age 65. Because he has reached full pension, he no longer contributes to the plan. “As well, in the last few years we haven’t contributed to RRSPs, but rather we’ve done pre-payments on our mortgage,” Brad adds. “We’re not sure what is the best financial route. Can we learn to manage our funds?” Their retirement spending goal is $60,000 after tax. We asked Michael Cherney, an independent Toronto-based financial planner, to look at Brad and Bonnie’s situation.

What the expert says

“Brad and Bonnie say they have made mistakes, but I don’t see many,” Mr. Cherney says. “Brad loves his job and is not in a rush to retire. But he wants to know his options.”

Brad and Bonnie are excellent savers, the planner says. They have been able to set aside about $19,000 a year now that their children are finished their education. “In recent years, much of that has gone to paying down their mortgage, although they have also made some improvements to their home.”

In addition to his pension of $3,783 a month (current dollars), Brad will get full Canada Pension Plan benefits, currently $1,114 a month, at the age of 65. Bonnie will get only a negligible amount ($28 a month) at 61. This assumes they start drawing benefits at the same time. They both qualify for full Old Age Security benefits, currently $585.49 a month. Brad has two RRSPs totalling $66,706. Bonnie has a spousal RRSP of $93,146.

Before Brad retires, Mr. Cherney suggests the couple pay off the remaining mortgage balance of $40,753. As well, Brad should contribute as much as possible to his RRSP while he is still working. He would get a “handsome” tax deduction of anywhere from 37.9 per cent to 43.4 per cent. Because he is no longer paying into his pension plan, Brad has unused contribution room of $17,800 a year.

“Here is an opportunity to leverage the difference in marginal tax rates in pre-retirement (a 40-per-cent range) versus post-retirement (a 22-per-cent range),” Mr. Cherney says. In his calculations, the planner assumes Brad contributes $17,500 to his RRSP in each of 2018, 2019 and 2020. “This would yield tax savings in the neighbourhood of $7,000 a year, which they could put toward the mortgage, retiring it by the end of 2020.”

If they prefer, Bonnie and Brad can “pull back” from this aggressive savings plan by extending Brad’s retirement date, Mr. Cherney says. “After all, he does enjoy his job.”

In his calculations, the planner assumes Brad and Bonnie will live to the age of 95, the inflation rate will average 2.5 per cent a year and their investments will yield 4.5 per cent a year net of fees. Based on these assumptions, the couple will have gross monthly income of $6,250 when Brad retires.

“Due to pension income-splitting and CPP pension sharing, they will be able to split most of their retirement income, resulting in a lower tax bill,” Mr. Cherney says. Their net after-tax income will be $5,312 a month, which surpasses their $5,000 target. “Income-splitting and CPP pension-sharing are particularly beneficial in this situation, where one spouse earns most of the income and would otherwise be taxed much more highly during retirement.”

Now for their investments. Brad’s two RRSP accounts have done well, but one is invested solely in a Canadian stock fund. Diversifying internationally could lower risk, Mr. Cherney says. The other holds only two stocks. “As a general principle, it makes sense that if you are going to invest in individual stocks, you should have more diversification.” In addition, bonds should always be included in a well-diversified retirement account.

Bonnie’s self-directed spousal RRSP needs work. She is holding $28,286 in cash, which will end up being a drag on returns, the planner says. She also has several high-risk investments that have not turned out well. “All three of these accounts could stand to be transferred to a robo-adviser” or online portfolio manager.

Finally, “it would be negligent not to mention the couple’s largest asset by far – their home,” Mr. Cherney says. “An asset worth $2-million, tax-free, is the ultimate safety valve. They could downsize and with all the freed-up cash, meet any challenge that comes up.”

The information is used for illustrative purposes only and is based on the perspectives and opinions of the owners and writers only. It is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting, financial or other professional advice. Investors should always consult an appropriate professional regarding their particular circumstances before acting on any of the information here. It may also contain projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements. All information provided is believed to be accurate and reliable, however, we cannot guarantee its accuracy or completeness.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Prospectus or Fund Facts documents before investing. Mutual funds are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Can self-employed contractor, 50, retire at 60?

The Globe and Mail     May 30, 2014
Financial Planner:       Michael Cherney

Client situation

The person:

Lionel, 50

The problem:

Determining whether he is on track to retire in 10 years with $4,500 a month after tax, and whether he should sell his rental property then.

The plan:

Plow as much as possible into saving and hang on to the income property. Be willing to trim costs now and later, and to do some odd jobs when he retires.

The payoff:

Financial security.

Monthly net income:

$7,100

Assets:

Cash in bank $1,000; non-registered investments $112,715; TFSA $34,442; RRSP $173,048; residence $540,000; rental real estate $570,000. Total: $1.43-million

Monthly disbursements:

Property tax $148; home insurance $127; utilities $184; security $34; maintenance $100; transportation $25; groceries, clothing $440; child support $750; car loan $700; other loan $450; gifts, charity $140; vacation, travel $500; dining, drinks, entertainment $1,200; sports, clubs $300; grooming $40; other personal $215; dentists, drugstore $65; health, dental insurance $128; life insurance $29; telecom, TV, Internet $165; RRSP $1,000; TFSA $450. Total: $7,190

Liabilities:

Rental mortgage $415,000; line of credit (for down payment) $112,000; loans $52,000. Total: $579,000

Lionel is a 50-year-old, self-employed painting contractor who lives in British Columbia. He is single again, owns his $540,000 home outright and has a rental property that brings in enough money to more than carry itself in spite of the fact that he took out a line of credit – and a substantial mortgage – to buy it. In three years, when his truck is paid off and he no longer has to pay child support, Lionel will have an extra $1,450 a month. “Will I accomplish my retirement monthly income goals by the time I’m 60?” Lionel asks in an e-mail. He is targeting $4,500 a month after tax. By then, he figures he will have whittled the debt on the rental property down to $408,000 (mortgage and credit line). “Should I sell the house [then] or keep renting it out?” he asks. Because he is in business for himself, Lionel is able to write off some household expenses, “hence the low transportation and phone amounts,” he adds. We asked Michael Cherney, an independent Toronto financial planner, to look at Lionel’s situation.

What the expert says

Lionel hopes to retire at age 60 without having to trim his lifestyle and vacation expenses, Mr. Cherney says. Cut he must if he hopes to approach his $4,500 a month target, the planner says. “Perhaps some combination of cuts now, freeing up some more money for savings, and some cuts later, reducing his retirement expenses, will be the way to go,” the planner says.

Perhaps the most important step Lionel has taken to achieve his goal is to buy rental real estate. Not only does he rent out a basement apartment in his home, he also has the separate rental property.

“This yields him a cash flow of $20,000 per year, which can reasonably be expected to increase at the rate of inflation,” Mr. Cherney says. Lionel has unused RRSP contribution room of $96,705, which he plans to use up when he eventually sells his rental property.

Instead, Mr. Cherney suggests Lionel roll most of his non-registered investments into his RRSP because he is paying higher taxes now than he will when he retires. It could be years before he sells the property. As well, half of the capital gain on the sale will be taxable, so it is “uncertain if he will be able to use the entire amount,” the planner says.

Lionel could roll $87,715 of his non-registered savings into his RRSP, leaving out his $25,000 investment with a private real estate company. Rather than using all of the contribution room in one year, he should spread it out over several years to keep his income tax rate lower, the planner says.

Starting in 2017, Lionel will be able to double his current monthly savings of $1,450, allowing him to contribute the maximum to his RRSP and TFSA, with the remainder going to a new, non-registered account. “By doing this, he will be able to build his financial assets to a total of $935,618 in 2024, when he would like to retire,” Mr. Cherney says. That assumes an average annual return of 4.5 per cent a year.

At age 60, Lionel can begin drawing Canada Pension Plan benefits, which will be 64 per cent of what he would get at age 65. Lionel estimates this will be $545 a month. At age 67, he will begin drawing Old Age Security benefits of about $550 a month.

“Taking all of these sources of income together, Lionel can expect an effective annual income of $62,000 a year, indexed by a 2.5-per-cent inflation rate, until age 95,” the planner says.

Based on current B.C. tax rates, Lionel’s after-tax income will be $50,000 a year, or $4,167 a month – “within shooting distance of his desired $4,500,” Mr. Cherney says. He could pick up some odd jobs to cover the shortfall.

As for whether Lionel should sell the rental property, “my answer is no, unless he is in need of a large lump sum all at once,” the planner says. If Lionel were to sell, it is doubtful whether he could earn as good a return elsewhere.

The information is used for illustrative purposes only and is based on the perspectives and opinions of the owners and writers only. It is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting, financial or other professional advice. Investors should always consult an appropriate professional regarding their particular circumstances before acting on any of the information here. It may also contain projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements. All information provided is believed to be accurate and reliable, however, we cannot guarantee its accuracy or completeness.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Prospectus or Fund Facts documents before investing. Mutual funds are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Frugal present, bright future: Single young man should catch his breath

The Globe and Mail     November 15, 2013
Financial Planner:       Michael Cherney

Client situation

The person

Alexander, 28

The problem

Is his single-minded focus on paying off his mortgage the best strategy?

The plan

Ease up a bit on the mortgage repayment, directing some savings to his RRSP and TFSA as well.

The payoff

He still pays off the mortgage in good time but has substantial savings as well.

Monthly net income

$5,025

Assets

Cash in bank $6,400; RRSP $27,110; present value of pension plan $18,070; residence $425,000. Total: $476,580

Monthly disbursements

Mortgage $3,300; property tax $270; insurance $75; utilities $350; maintenance, garden $145; groceries $250; clothing $100; gifts, charitable $50; vacation, travel $50, personal discretionary (dining out, entertainment, sports, grooming) $125; dentist, drugstore $50; telecom, Internet, TV $50. Total: $4,815

Liabilities

Mortgage $155,000 at 3.05 per cent.

At 28, Alexander seems destined to be financially secure sooner than most. After all, how many young people work three jobs, live in their own basement and live on roughly $1,500 a month excluding mortgage payments? His goal is to be mortgage-free at 33. Then he can move upstairs, rent out the basement of his suburban Toronto home and spend more time working on his personal finance blog. When he bought his home in August, 2012, for $425,000, he plunked down $170,000 in cash as a down payment, money he had been saving since university. “I worked three jobs in university to graduate debt-free and started saving for my house while I was still in school,” Alexander writes in an e-mail. He was inspired by Scott McGillivray from HGTV’s Income Property television show to rent out the main floor of his bungalow and live in the basement to bring in as much rental income as possible. His full-time job in the financial industry brings in $48,825 a year including bonus. He gets another $18,600 a year in rental income, about $10,000 a year working part-time as a store clerk and another $10,000 or so from freelance writing, for total gross income of $87,425. He has been doubling up on his mortgage payments, paying $3,300 a month. In addition, he has earned significant extra freelance income in the past 12 months, putting it all to his mortgage, and has whittled his mortgage balance down to $155,000. “Once my mortgage is paid off, my plan is to freelance full time and perhaps … tap into the equity in my house to buy a rental property,” Alexander adds. Does his strategy make sense? We asked Michael Cherney, an independent financial planner in Toronto, to look at Alexander’s situation.

What the expert says

“Of all the Financial Facelifts I have done, Alexander’s shows the lowest level of spending,” Mr. Cherney says. “This is likely to change, perhaps drastically, if and when Alexander gets married and starts a family.” For the moment, though, Alexander is more focused on paying down his mortgage than getting married.

Mr. Cherney thinks Alexander could ease off a bit on the mortgage, which has an interest rate of 3.05 per cent and comes up for renewal in 2017, and devote some of his savings to both his registered retirement savings plan and his tax-free savings account.

“This way, he can still have his mortgage paid off within an impressively short period of time (by 2021), but have a more substantial nest egg at that time as well.”

If, instead of directing all his savings to his mortgage, he devotes $20,000 a year to his RRSP and TFSA (evenly at first, then more to his RRSP as he hits his TFSA contribution limit), Alexander will have $158,005 in his RRSP and $79,075 in his TFSA by 2021, Mr. Cherney says.

(Alexander has a defined benefit pension plan at work, but because it is not clear how much longer he will continue with his current employer, Mr. Cherney has assumed a maximum value for the pension of $50,000, which would be rolled into Alexander’s RRSP in five years.)

“After the mortgage is paid off, he can devote his full savings program to the investment vehicles. His RRSP would grow to $1,108,010, his TFSA to $446,305 and his non-registered account to $1,207,340 by age 55,” the planner says. That’s when Alexander hopes to retire with a before-tax effective income of $65,000 a year in current dollars. The calculations assume 2.5-per-cent inflation, 2.5-per-cent annual increase in contributions, average annual investment returns of 4.5 per cent a year and a life span of 95 years.

As for buying a second property, Alexander is top-heavy in real estate, Mr. Cherney says. He doesn’t recommend rushing into another property, although he wouldn’t rule it out at some future date when Alexander’s assets are more diversified.

Finally, the planner cautions Alexander against letting financial issues outweigh his life plans. “I am not suggesting he is doing that, but rather just keep the issue in the back of his mind.”

Given his age, Alexander is likely to change his plans more than once over his lifetime. Drawing up a financial plan now is a good starting point, allowing him to change one variable or another to see the effect on his other goals.

“We have established that Alexander is an excellent saver,” Mr. Cherney says. “That will bode well no matter what twists and turns his life takes.”

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