In Alberta, a couple we’ll call John, 50, and Jane, 48, have two children in their early 20s. One is an apprentice welder. The other has a disability and is likely to require financial assistance for the rest of his life. In the present COVID-19 driven crisis, they fear their savings could evaporate through job layoffs or asset loss. The couple’s current income, $170,000 a year before tax, is precarious. John gets $150,000 in base pay in his management job plus variable, non-guaranteed bonuses that will probably be discontinued. Jane’s income, $20,000 per year, comes from part-time administrative work. They take home $9,625 per month after taxes and benefits.
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They have a house with a $340,000 estimated value that would carry a seven-figure price tag were it in Toronto. John is in a high tax bracket for now but he fears what could happen if the Alberta economy continues to suffer amid the pandemic and roller coaster oil prices.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with John and Jane.
“Hard work and diligent savings have given them a strong financial base,” Moran explains. “They have no liabilities other than the potentially ongoing need to help their dependent son for the rest of his life.” Their net worth including their house, cars and financial assets is $1,908,000. Their house is just 18 per cent of their net worth. Their financial assets add up to $1,508,000 even after the virus-driven meltdown.
The couple’s investment portfolio is divided roughly into thirds: Canadian equities (mostly shares in John’s employer), international equities and bonds. John has been working at reducing the heavy weighting toward his company’s stock. The allocations are sensible and the picks relatively solid.
Because they are in different tax brackets, with Jane’s being much lower, the couple can achieve savings if John lends her money to invest. She has to pay him interest at the CRA’s prescribed rate, but that done, her gains would be taxed at her lower rate.
Jane can take up to $47,000 in eligible dividends (those from public companies) and pay close to nothing courtesy of the dividend tax credit. John’s dividend rate would be about 15 per cent in his tax bracket.
Providing for their disabled son has two parts. He gets a $1,585 monthly provincial disability allowance. He also has a Disability Savings Plan with a $14,000 balance to which his parents contribute $1,500 per year and add a government match.
The son already receives a supplement from the Alberta Income for the Severely Handicapped (AISH) program. John and Jane can create a testamentary trust to provide discretionary income for their son. This device was recently reviewed by the Government of Alberta and can be a part of planning for the disabled. It allows the recipient to have assistance from other sources. John and Jane should take advice from their lawyer, Moran cautions.
Estimating retirement income
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John and Jane hope to retire at John’s age 60. They have diversified financial assets. Neither will have a defined-benefit pension. They have $908,000 in RRSPs including spousal plans and one locked-in retirement account. If they continue to add $26,500 per year including a company match up to 15 per cent of base salary for 10 years to John’s age 60 and it grows at three per cent after inflation, they would have $1,533,000. That sum, annuitized for the following 32 years to Jane’s age 90 would generate $73,000 per year.
They have $181,000 in Tax-Free Savings Accounts to which they add $12,000 per year. In 10 years at the eve of their retirement, assuming three per cent growth after inflation, they would have about $385,000. That sum, still growing at three per cent per year after inflation, would produce $18,330 per year for the following 32 years.
The couple also has $400,000 in taxable investments. If they add, as they do now, $11,500 per year for another decade, the accounts, growing at three per cent after inflation, would rise to $673,400. That sum, if paid out for the following 32 years to Jane’s age 90 would generate $32,100 per year.
John can be expected to earn 90 per cent of maximum Canada Pension Plan benefits if he retires at 60. That would give him $12,700 per year. Jane could qualify for 50 per cent of the maximum or $7,055 per year. Each will get Old Age Security at 65 at a 2020 rate of $7,362 per year. John’s OAS may be subject to the clawback which begins at $79,910 per year in 2020, but the amount will depend on tax strategies he and Jane may use. We’ll ignore the clawback for now.
The couple’s retirement income will be a progression toward the time both are 65. We’ll assume they each start OAS and CPP at 65.
After John retires at 60 and Jane at 58, they will have income consisting of $73,000 from RRSPs, $18,330 from TFSAs, and $32,100 from taxable investments. The total, $123,430, split and taxed at an average rate of 17 per cent but with no tax on TFSA cash flow would leave them with $8,800 per month to spend. That is sufficient if the kids are gone. When John is 65, he can add estimated $12,700 CPP and $7,362 OAS. That would boost gross income to $143,492. After 20 per cent average tax but no tax on TFSA cash flow, they would have $9,870 per month to spend.
When Jane reaches 65, they could add her estimated $7,055 CPP and $7,362 OAS. That would push retirement income to $157,909. After 21 per cent average tax they would have $10,700 per month to spend.
Their present prosperity should continue over into retirement — provided they keep their jobs.
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Retirement stars: Four retirement stars **** out of five
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