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Max and Tess could sell one unit and put proceeds into a Canadian equity exchange traded fund with hefty weights on banks, pipelines and railroads with an estimated return of five per cent to seven per cent per year before inflation and with no leverage at all. That would provide diversification and liquidity. If they keep the condos and continue to finance them for the two decades to the time their mortgages are paid off, they can accrue modest income and perhaps capital gains. We will assume that they keep the condos but continue to add to their RRSPs for retirement income and current tax savings.

Retirement income

When they retire, Max and Tess will have their own savings including income from their condos, OAS and QPP to support them. Their QPP pension should be $589 per month for Max and $447 for Tess. Their OAS benefits at age 65 based on 34-years residence for Max and 33 years for Tess will be $6,258 and $6,074, respectively, using 2020 rates.

Net rent from their condos adds up to $4,054 per year. When their mortgages are paid off in two decades, the units will generate gross rents of $30,000 per year and net rents after mortgage and other costs of about $20,000 per year. Were they to sell both condos, they could use their RRSPs to absorb gains and defer taxes. Price appreciation, though hard to estimate, will add to their wealth.

The couple’s RRSPs have a current balance of $285,000. They add $30,000 per year. If they continue this rate of saving and grow the account’s value at three per cent after inflation for the 13 years to Max’s age 65, they will have a value of $887,065. That sum, still growing at three per cent per year after inflation, would produce an income of $50,942 per year for 25 years to their ages 90/91 at which time all capital and income would be paid out.

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Assuming that they do not tap their RRSPs with a combined balance of $246,000 plus $74,000 added, totalling $320,000, invested for nine years to Bill’s age 60, then with a three per cent annual return based on five per cent gross return less two per cent inflation, these accounts would grow to $417,500. That sum would generate $18,285 per year or $1,523 per month to Cindy’s age 95 assuming that all capital and income are paid out.

Retirement income

Using only savings known to the present and excluding any income from unknown future work, the couple would have paid for their house and have $80,000 per year or $6,670 per month before tax from non-RRSP sources. At 60, Bill and Cindy could add RRSP income of $1,523 per month and his CPP at $6,396 per year or $533 per month before tax for total income of $104,712 per year or $8,726 per month. Two years later, Cindy can start her CPP at $888 per year or $74 per month before tax for total pre-tax annual income of $105,600 or $8,800 per month. Each partner can add $7,362 from OAS in 2020 dollars to income at 65 thus making annual income before tax of $112,962 when Bill is 65, and $120,324 when Cindy is 65. Split and taxed at an average rate of 15 per cent, they would have monthly incomes for the three stages of $7,420, $7,940 and $8,500.

Bill and Cindy must decide: cash in a great investment or hold the Apple shares and sell them as needed. It’s the safety of diversification vs. potential future gains of an extraordinary stock. It is a decision of exceptional difficulty, for in capital markets, past performance does not always predict future returns.

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

Financial Post

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Were Nellie to add the taxable portion of life insurance proceeds to her RRSPs, she would save some tax for now and bring her RRSP balance to $231,780. The $13,135 post-tax remainder could go to a TFSA. This move would raise her retirement savings and eliminate her $104 monthly life insurance premium.

The enhanced RRSP balance with a three per cent annual return after inflation could pay $11,480 per year for 30 years to her age 95 when all income and principal would be exhausted. If the RRSP is left to grow six more years to her age 71, then with the same assumptions, it would rise to $276,764 and then pay out $15,866 per year of taxable income to her age 95.

Nellie’s TFSA with a value of $13,135 from investing money from cashing in insurance policies and growing at three per cent per year would generate $651 of tax-free income from ages 65 to 95. If left to grow for six years with the same assumptions to her age 71, the TFSA balance would rise to $15,690. That sum would generate $900 per year of tax-free income to her age 95.

Nellie receives $7,300 per year from the Canada Pension Plan. She can take Old Age Security at $7,362 per year starting this year or wait five more years and get a 36 per cent boost to $10,012 if she starts at 70. We’ll assume she starts this year and should get a one-time $300 COVID-19 relief payment.

Restructuring retirement income

Adding up the components of future income based on full retirement before 66, Nellie can have $11,480 from RRSPs, $651 from TFSAs, $7,300 from CPP, $7,362 from OAS and $1,920 per year from her work pension. That adds up to $28,713 before tax. With no tax on $651 TFSA payouts and 10 per cent tax on other income, she would have $2,160 per month to spend. A reduction in future savings or anticipated travel would be required to make spending match income. She would still have to pay her $58,000 mortgage. If she renews at an available floating rate of 2.1 per cent, which is about mid-market on the date this report is written, she would pay $217 per month for 30 years. Rates may rise, but the amount to be financed will fall over time. Her income would support present expenses without life insurance premiums or loan costs but not much more.

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Present spending

At present, the couple has $8,500 to spend each month. A decent portion of that goes to savings: They allocate $500 to their TFSAs, $800 to RRSPs and $1,000 to cash savings. Melissa’s company provides no pension but she receives a bonus, $90,000 in company stock and cash in one recent year, that goes into her non-registered investments.

The couple’s expectation is that they will need $6,000 per month when Melissa is retired. They can draw that income from RRSPs, non-registered investments and their TFSAs. But when to retire — in two years or five — is the issue.

Their present RRSPs with a value of $415,000 and growing at $9,600 per year will increase to $460,350 in two years assuming a return of three per cent per year after three per cent inflation. That sum would then generate $18,636 per year for the 43 years from retirement at 47 to her age 90 with all income and capital paid out at that time. Alternatively, if her RRSP grows for five years with $9,600 annual additions, it would increase to $533,600 and then generate $22,410 per year to her age 90.

The non-registered account with a present value of $680,000 with $90,000 annual additions would grow to $909,600 in two years and then support annual payouts of $36,825 to exhaustion of all income and capital. If it grows with $90,000 annual additions for five years, it would rise to $1,280,460 and then support payouts of $53,100 for the following 40 years.

Melissa’s TFSA with a present balance of $58,000 and $6,000 annual contributions would grow to $74,077 with the same assumptions and then support payouts of $3,000 per year. If maintained for five years with $6,000 annual additions, the account would grow to $100,050 and then support tax-free cash flow of $4,200 per year.

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She is likely to get full Old Age Security, currently $7,362 per year, and less than maximum Canada Pension Plan benefits. We’ll conservatively estimate she gets 25 per cent of CPP or $3,528 per year. We’ll estimate rent after costs at $12,000 per year. She will have $18,000 investment income. That’s a total of $40,890 before tax. After 13 per cent average tax, she would have $2,975 per month to spend. B.C. property tax subsidies may change so we’ll not include them in this analysis.

She would have a paid up house generating rent, income from her financial assets, no debts, and costs as low as $2,000 per month. Her discretionary income, $1,975 per month, would pay for $20,000 annual travel or a new or newer car as needed.

Over a three decade time period, Autumn may face unemployment, health or other issues. Maintaining a substantial rate of saving, as she is doing, is the least expensive way of having insurance for bad luck or bad times.

As Autumn’s mortgage is paid down, free cash flow should rise. She will have the choice of investing in property or financial assets. Her savings plan will support her retirement, Moran concludes.

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

Retirement stars: Three retirement stars *** out of five

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Cost management

Before she makes a commitment to move, Katie can cut costs. She could put $10,000 into an RRSP, which would just be transferring cash from a $62,000 bank account. But it would generate a $4,600 tax savings. Otherwise, the planner says, she would have to reserve $7,800 for taxes due on income she generated before COVID-19.

Once Katie sells her house and pays a former husband his share, she should have $150,000 cash. Next year, at 65, her monthly income without her professional income would be $749 from the Canada Pension Plan and $613 from Old Age Security plus perhaps $800 from investments. That’s before tax. Her after-tax income would be $2,162 and her expenses $2,400 per month. At best, she would break even.

Katie could cash in her investments and use the proceeds to buy a $300,000 house in Nova Scotia; she would have no mortgage. After sales and moving costs, she might have $163,000 left in non-registered investments, $53,500 in her TFSA and $21,330 in her RRSP, assuming she makes a $10,000 contribution from non-registered savings this year to reduce her taxes.

Income supplements

If Katie receives only $613 OAS and $749 CPP, her pre-tax income would be $1,362 per month. She would qualify for a Guaranteed Income Supplement payment of $400 per month, lifting her total monthly pre-tax income to $1,762. She would pay no income tax. In order to avoid reducing the GIS, she would not draw from her RRSP.

With the GIS benefit, her income would be $1,762 per month or $21,144 per year. She would be able to support a budget of $2,333 per month assuming no RRSP or TFSA savings and no mortgage payments, reduced house taxes and reduced car and home insurance. There might be months of cost overruns, but they would be transitory and coverable with a few economies. Were she to sell her car, she could save a few hundred dollars per month, but the cost of public transit would reduce those savings.

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At present, Lucy saves $1,767 per month. When her pension bridge ends at 65, her pension will drop by $600 per month and be replaced by OAS which has a present payment rate of $614 per month. That will keep her pensions other than CPP at about $3,700 for life. She plans to take CPP later this year, adding $731 per month before tax to her income.

Lucy’s net worth at present consist mainly of $6,000 of savings, $30,000 in her TFSA and $156,000 in RRSPs. She has a $5,000 line of credit. Her car has an estimated value of $5,000. Her financial assets total $192,000, not including the cash value of her permanent life insurance, which is valued at $70,000. If she were to retire later this year and pay off the line of credit with cash and trade in her old car for a new $30,000 model with money from her TFSA, her net worth apart from the life insurance would be $157,000, which is just about the value of her RRSP.

Retirement finances

If Lucy works at least part-time from 60 to 65, the balance of her RRSPs could grow at three per cent after inflation to $180,850 without any new contributions. That capital with the same growth rate could then generate $8,958 per year before tax for the following 30 years.

She could also delay the start of CPP from 60 to 65 and receive a boost of payouts from $730 per month, which is the age 65 payout cut by 36 per cent for an early start, to $1,140 per month or $13,680 per year. Those changes would raise her income to $8,958 RRSP, $7,362 OAS and $37,200 company pension for total taxable income of $67,200 before tax. After 20 per cent average tax, she would have $4,480 per month to spend.

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Tess’s present portfolio of financial assets in her RRSP, taxable accounts and chequing account add up to $427,000. She used up all of her former TFSA balance for a down payment for her B.C. property and is now rebuilding the TFSA at $2,000 per month. Her equity in her properties is growing at approximately $3,000 per month, Moran estimates.

Asset-value projections

Using present asset values and assuming that Tess’s annual $15,000 stock bonus is used to pay down her mortgages, her assets at age 60 would be as follows.

The $400,000 in her RRSP growing with Tess’s contributions of $8,750 plus the company match, total $17,500 per year, for eight years to her age 60 at three per cent over the rate of inflation would have a value of $667,000 and then support payouts of $54,245 for the following 15 years. If the payouts run from retirement at 60 to age 90, they would support payouts of $33,000 per year to exhaustion of capital and income.

If Tess makes $24,000 in annual contributions to her TFSA — which is possible given her current space and the additional annual $6,000 contribution allowance — that sum growing at three per cent would reach $77,500.

Then with reductions of contributions to $6,000 per year for the next five years it would continue to grow to a value of $122,650. That sum, assuming continued three per cent growth, would support payouts of all capital and income of $9,975 to age 75 or $6,260 to age 90.

By age 60, Tess’s residence in Alberta will be paid for in full. We assume that she sells the unit for its present value of $350,000 and uses that sum to pay off the balance of her B.C. mortgage, with about $100,000 left over for moving costs, legal fees and potential capital gains taxes. We cannot predict rates, so we do not include the sum in our calculations.

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In two years, when Trish is 60 and Ellis is 62, they can begin drawing on their investments. Their registered assets, which should hold $360,225 at retirement, will be growing at an estimated rate of just one per cent over inflation due to their high investment fees. That would give them $12,250 per year for 35 years starting in 2022 to Tracy’s age 95, Winkelmolen estimates.

The couple’s TFSAs, with a present value of $172,000 and growing with contributions of $12,000 per year for the next two years would increase to $195,426 with the same assumptions to a value of $199,820 and then generate a non-taxable return of $6,725 per year to Trish’s age 95.

On top of their investment income, Trish will have a defined-benefit pension of $39,480 per year and Ellis a DB pension of $57,876 per year.

Retirement income projections                

In the first two years of retirement they will have total income of $12,250 from RRSPs, $6,725 from TFSAs, and $97,356 from pensions. That adds up to $116,330 per year. With splits of taxable income and no tax on TFSA cash flow and a 16 per cent rate on the rest, they would have $8,235 per month to spend. That’s more than their after-tax goal of $7,600 per month.

After Ellis reaches 65, his pension loses his bridge benefit of $9,780. He will gain Old Age Security, currently $7,362 per year, and estimated Canada Pension Plan benefits of $14,156 per year. Their pre-tax cash flow would have risen to $128,070. With splits of eligible income and no tax on TFSA cash flow, they would pay tax at an average rate of 18 per cent and have about $8,850 per month to spend.

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