A couple we'll call Vivian and Susan have a good life in British Columbia. Their home is far from the urban rat race, but their village offers few ways to make money. The result is their combined incomes, about $45,000, barely cover expenses.
Things are looking up, however. Vivian has a new job and may eventually qualify for a pension. Susan has returned to university to pursue a graduate degree and could eventually get a government job complete with pension. They have a house worth an estimated $150,000, $17,500 in registered retirement savings plans and a truck that will be paid off in a few years. Yet they wonder if they can retire in 16 years when Vivian, 43, and Susan, 44, reach their sixties.
"We have had many changes," Vivian says. "I want to know how to pay for my partner's school and we want to know if, on our modest incomes, we will wind up destitute. We have to come to terms with our futures."
What our expert says
Facelift asked Kelowna, B.C., financial planner Derek Moran, a partner in Vancouver's fee-only planning firm Macdonald Shymko & Co., to help Vivian and Susan.
"A lack of consistent income and savings makes planning challenging.," Mr. Moran says. "What these women should do is make their present low income part of their financial strategy."
Vivian and Susan had $39,700 in their RRSP accounts before Susan withdrew $2,500 to finance studies through the Lifelong Learning Plan. As well, Vivian borrowed $6,700 and Susan $13,000 from their RRSPs for the Home Buyers' Plan. Their combined RRSP balance is currently $17,500.
There is no rush for Susan to repay her Lifelong Learning Plan or Home Buyers' Plan RRSP loans, Mr. Moran says. While she is in school, her income will be less than her non-refundable tax credits, so there will be no taxes due, he says.
Vivian can also use her low income to reduce the tax on the Home Buyers' Plan repayments she fails to make. Her 2004 gross income will be $30,337, less unused education credits transferred from Susan. Sums not repaid become income, but with their low incomes, the couple will still be able to receive full goods and services tax rebates, he notes.
The largest issue in Vivian's and Susan's planning is their savings strategy. In their case, RRSPs are not suitable, because their tax brackets are too low to generate significant tax savings, Mr. Moran says, so it is better to wait.
If and when either woman's income rises above $35,000 a year, she can use RRSP contribution space carried forward for income in excess of $35,000. That's where RRSP contributions begin to generate significant tax savings.
Mr. Moran estimates the two women need $19,164 a year in 2004 dollars for retirement. Their inconsistent rates of income will allow them to receive partial Canada Pension Plan payments.
If Vivian never works again, she will receive 31 per cent of the maximum CPP payout of $814.17 in 2004 dollars or about $252 a month at age 65 -- also in 2004 dollars. On the same basis, Susan would receive 26 per cent of the maximum payout or $212 a month at age 65. Each will receive full Old Age Security of $5,592 a year in 2004 dollars. OAS and reduced CPP would create an annual pension base of $16,644 in 2004 dollars. Assuming Vivian and Susan continue to work, they could qualify for payouts of 60 per cent of the current CPP maximum of $9,770, adjusted for their income histories. That would boost their pension base to $22,872 or $3,708 over the $19,164 minimum required, Mr. Moran estimates.
Vivian and Susan can add a financial cushion to their retirement once Susan begins work at what she hopes will be a middle-level income. If the women can save $3,800 a year and obtain a 3-per-cent real annual return, they can obtain an additional $5,000 a year in 2004 dollars between the time retirement begins in their sixties and termination of payouts when each reaches age 90, Mr. Moran estimates.
Vivian and Susan expect to inherit $100,000 each within the next few decades, Mr. Moran says. If that sum produces a 3-per-cent real annual return, they can add $6,800 in 2004 dollars to their retirement spending. They can live in retirement much as they have lived before it, Mr. Moran concludes. "We are thrilled with this analysis," Vivian says. "It's clear that we will be able to retire with some comfort."
Client situation
Vivian, 43, and Susan, 44, live in rural British Columbia. Vivian is employed and Susan is going back to university.
Incomes: Vivian: $30,337 gross a year; $2,528 a month or $1,600 take-home. Susan: $15,000 gross a year; $1,250 a month or $833 after business expenses.
Assets: House, $150,000; truck, $22,000; car, $2,000; cash, $8,974; RRSPs, $17,500 cash plus $22,200 due from Home Buyers' Plan and Life Long Learning Plan loans.
Monthly expenses: Truck loan at zero-per-cent interest, $525; electricity, $50 (main heat from wood stove burning own timber); gasoline, $175; food, $400; house and auto insurance, $220; entertainment, $50; phones, $50; repairs, $73; travel, $100; charity, $20; tuition and savings, $770. Total: $2,433.
Liabilities: Truck loan, $14,700; Home Buyers' Plan repayment, Vivian $6,700, Susan $13,000; Lifelong Learning loan repayment, $2,500.
© The Globe and Mail
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