Situation: Couple with solid income and hefty savings worry that unemployment would wreck plans
Solution: Stress test employment and investment income to find total income in tough times, trim spending
A couple we’ll call Tom, 53, and Sylvia, 51, live in Alberta. They have two children in their twenties studying at post-secondary institutions in the province. Tom, an engineer whose current job does not come with a pension, and Sylvia, a local government employee who will have a job pension, bring home $16,000 a month but worry that the state of the energy industry will not support Tom’s job much longer. Recovery of the Alberta economy to its pre-oil-price-collapse level seems distant, Tom admits. Would retirement income without his job, and potentially even the loss of Sylvia’s job, support the retirement they imagined before the energy industry entered its time of troubles?
“We want to make sure we have enough money to maintain a comfortable way of life in retirement,” Tom says. “Our minimum requirement for retirement is what we spend now, but without adding to savings. Will that work?”
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Tom’s gross pay is as much as $240,000 a year, but there is no assurance it will continue. If he does lose his job, Sylvia’s $80,000 annual pay before tax would be a lifesaver.
There are no debts, but the uncertainty of Tom’s job and of the entire industry raises the question of whether they can buy a bigger house, as they have planned, and how long Tom has to work or will be able to work. He figures another dozen years, but much hinges on his job security and a plan to move up from their present $675,000 house to something with a $1 million-plus price tag. A larger house would have higher property taxes and perhaps higher utility costs.
Family Finance asked Eliott Einarson, a financial planner with Ottawa-based Exponent Investment Management, to work with Tom and Sylvia. His view – they are secure, but Tom’s loss of a previous job several years ago has left him justifiably apprehensive about the future. “We have to run the numbers to see what job loss would mean to the couple’s plans,” he explains.
Their plan, for now, is to retire in 12 to 13 years with a secure income of $10,000 a month in 2018 dollars before tax. That goal is challenged by a plan to renovate or buy a more expensive house. That is entirely feasible on paper, for they have about $2.2 million in financial assets of which $1,099,000 is in non-registered investments. They can sell some assets, pay their taxes and spend the money.
What would happen to the plan to move up if Tom lost his job and family income were to shrink to Sylvia’s plus what they could take out of savings?
Their budget has a lot of internal flexibility. Within a few years, $2,000 a month in gifts to their adult children for university costs will end. That would provide additional cash for travel, now $1,000 per month, or entertainment, now $200 per month. Clothing spending, now $500 per month, might decline if less office wear had to be purchased.
Their survival income with no job for Tom would, in the worst case with Sylvia also out of a job, be what their financial assets would support. We don’t know when job losses would occur, but their ample non-registered assets would be a bridge to Tom’s age 65. If those assets remain substantially intact after spending cuts and if their financial assets are annuitized so that all income and capital is paid out in the 44 years from today to Sylvia’s age 95, family financial assets would provide an income of $90,700 a year before tax. $16,250 of that would be annuitized non-taxable TFSA payout assuming that contributions are maintained to Tom’s age 65. Even if they did not maintain TFSA contributions, they could get by with spending cuts.
If they pay tax on non-TFSA income at an average 15 per cent rate, they would have $6,630 a month to spend. By cutting $800 per month on food and restaurants, ending the $2,000 monthly subsidy to their adult children, taking $300 per month out of travel, $3,789 out of non-registered savings, $300 out of clothing and grooming, and ending $2,500 per month RRSP savings that would no longer be allowable with Tom out of a job, their $16,000 present monthly allocations would drop to $6,311 per month. They would be solvent and have some spare change at the end of each month, Einarson estimates. The longer Tom works, the smaller the cuts would have to be, Einarson notes.
If Sylvia still has her job, family income would be $171,100 a year before tax. Either way, they would still have incomes sufficient to sustain their way of life. If they were to sink another $600,000 into a newer home, their financial assets would drop to $1.6 million and their annuitized income to $66,000 a year on total financial assets alone. On top of that income with a new house, Sylvia will be entitled to a $30,000 yearly job pension at age 62, Tom to a $3,600 annual pension at 65 from a previous employer. That’s $99,600 before tax.
The best case
If Tom keeps his job to the end of age 65 and if they take $600,000 out of their financial assets, then, assuming a savings rate of $6,000 per month, their retirement kitty would total $3.5 million, assuming a 3 per cent rate of return after inflation. That sum, starting to pay income out for 30 years to Sylvia’s age 95, would generate $178,600 per year.
CPP started at 65 for each would provide a combined yearly cash flow of $26,740, allowing for a few drop out years for Sylvia, plus $33,600 combined job pensions for total income of $238,940 before tax. The Old Age Security benefit, $7,040 each in 2018 dollars, would be almost or completely clawed back by the recovery tax. Assuming that eligible pension income is split, each person taxed at an average rate of 20 per cent with zero tax on TFSA payouts, they would have about $16,000 to spend each month after tax. If they are no longer subsidizing their children with $2,000 monthly gifts, their income would be all the more sufficient for their way of life, Einarson.
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Retirement stars: Five retirement stars ***** out of five