In the Maritimes, a couple we'll call Jack and Robert are struggling. Robert, 46, has a chronic illness while Jack, 32, shares their home and contributes about half of their $123,000 annual gross income.
In spite of their above-average incomes and lack of dependents, the men find themselves in a financial bind. They have two houses, two mortgages, travel a good deal, wine and dine often and, as a result, they are broke.
"We have no money!" Robert explains. "I can't make any sense out of what is right, wrong, good or bad."
What our expert says
Facelift asked financial planner Caroline Nalbantoglu, a registered financial planner with PWL Advisors in Montreal, to work with Jack and Robert in order to sort out their priorities and help them deal with the financial implications of Robert's illness.
"Unless they get a handle on their cash flow, their debts will grow larger," the planner says. "They have no breathing room, not even an emergency fund. In the event of a crisis, they will need to dip further into their line of credit, starting a spiral from which it will be difficult to get out."
Robert and Jack have every reason to live well, of course. What's more, given Robert's illness and the chance that his life expectancy has been reduced, it may be downright wise for him to accelerate his consumption spending. Last year, he was gravely ill. Today, with new drugs, he is well, employed, and looking forward to a long, bright future.
In financial terms, the men have a serious problem. Their net income, a total of $6,600 a month, is less than their expenses of $7,464 a month. According to their own figures, they are going into debt at a rate of $864 a month or $10,368 a year.
Reducing red ink has to be the men's priority, Ms. Nalbantoglu insists. She notes that they spend $650 a month on groceries and $700 a month for dining out and wine. That's $1,350 a month for food and drink, surely an expense that can be reduced, she suggests. They spend $160 a month on house cleaning services, something they could do themselves.
Robert and Jack like to take two major vacations a year. The cost exceeds the $400 they set aside each month in their vacation reserve; the difference is financed on their line of credit. Ms. Nalbantoglu suggests that they cut back to one major trip or two minor trips a year and save perhaps $4,000 annually.
By a combination of reducing spending on food and drink, maid service or vacations, Robert and Jack can create a surplus of $600 a month. Their $4,000 line of credit can be reduced by paying it down at $400 a month, the planner suggests. Then their surplus can be put into a fund for expenses that could arise in connection with Robert's illness. Their goal should be to build a cash balance of at least $10,000, the planner says. If they save $500 a month, they can reach this goal in less than two years, she says.
Other costs will be harder to manage. Robert has full coverage now through Jack's employee family benefits, but when he retires, he will be responsible for drug costs that are likely to remain high. Private insurance may cover some drug costs, but would likely be quite costly in view of Robert's condition, she says. For now, a combination of public and private insurance covers most of his $36,000 a year drug bill, he says.
Robert and Jack have a condo on the East Coast and a house in British Columbia. The two dwellings cost a total of $3,369 a month just for mortgage costs, taxes, insurance and certain utilities. They want to keep their B.C. house for their planned retirement. Currently, the B.C. house costs are covered by rental income of $1,250 a month. Were they to sell it, they fear that prices could rise out of their reach when Robert is ready for retirement in nine years.
Moving to B.C. could be financially risky. Jack, who works for a large corporation, has a drug plan provided by the employer that pays for many of Robert's drug expenses. It is essential that an employer in B.C. cover Robert's drug bills as a spousal benefit.
Robert would like to retire at age 55. If he and Jack sell their East Coast house at that time and use the proceeds to pay off the mortgage on the B.C. house, they will have what Ms. Nalbantoglu estimates will be a surplus of $126,000 that can be invested.
By the time of Robert's planned retirement when he reaches age 55 in 2014, Jack's salary should have grown to $78,286 in 2014 dollars, the planner estimates. That will leave $4,854 a month after taxes. Reduced expenses and elimination of mortgages will leave $666 a month after expenses of $4,188 in 2014 dollars, the planner says. Robert will have retired and, unless he works part-time, the men's total income will consist only of Jack's salary.
At age 60 in 2019, Robert should apply for Canada Pension Plan benefits, Ms. Nalbantoglu says. Robert can expect $9,185 in 2019 dollars even after a reduction of 0.5 per cent for each month prior to age 65 that application is made for benefits. If he has no other income, then he will likely be able to avoid income taxes entirely, Ms. Nalbantoglu says.
In 2019, therefore, their total income will be Jack's salary of an estimated $90,755 in future dollars, assuming a 3-per-cent average annual increase in keeping with inflation, plus Robert's CPP for a total of $99,940. This will yield after-tax income of $7,356 in future dollars, the planner says. Robert can add to this income by converting his RRSPs to registered retirement income funds with withdrawal rates based on Jack's age. In the first year, Robert's RRIF would add $2,025 a month after tax, so that total family income would be $9,381 a month. That sum would be well in excess of the men's estimated monthly expenses of $8,177, Ms. Nalbantoglu says.
When they move to B.C., the men can add to their registered retirement savings plans with the surplus funds realized from sale of their East Coast house after paying off their mortgages, Ms. Nalbantoglu says. She notes that Jack has $34,430 RRSP space and Robert $61,600. They have to be careful that the RRSP deductions do not bring their income so low that they have very little tax benefit. Since Jack will still be working full-time, Robert may want to make spousal contributions. That way, Robert will get the tax benefit of contributions should he be working part-time. Jack, who will have a lower base retirement income, will be able to withdraw funds at a lower tax rate, provided no spousal contributions were made for at least three years, the planner notes.
"If Robert and Jack follow my suggestions, they can have a comfortable retirement," Ms. Nalbantoglu says. "The risk here is that because of the age difference, if the men deplete their capital too quickly, then Jack could be left with insufficient funds. The solution is for Jack to work part-time and to postpone conversion of his RRSP to a RRIF for as long as possible."
"We expected Caroline's suggestion to cut expenses," Jack says. "We see that our spending on food and wine is out of line with our other expenditures. And we understand that we have to build a cash reserve. We know that we have to spend less now to have more in the future. After all, you can't live on negative cash flow."
Interested in a free Financial Facelift? Then drop a line to the writer at 444 Front St. W., Toronto M5V 2S9 or
Client situation
Robert, 46, and Jack, 32, live in the Maritimes as a couple.
Net monthly income: Robert $3,400; Jack $3,200.
Total: $6,600.
Assets: East Coast condo, $280,000; B.C. house, $380,000; RRSPs, Robert $71,000, Jack $20,000; non-registered investments, $6,000; personal property, $150,000.
Monthly expenses: Mortgage & tax for East Coast condo, $1,734; for B.C. house $1,030; monthly charges for condo, $225; utilities & phone, $370; dry cleaning, grooming, $120; car repairs, $150; transportation, gas, $400; food, $650; wine, $150; restaurants, $550; clothing, $100; house cleaning, $160; movies, entertainment, $100; charity & gifts, $150; insurance for both house, $100; RRSP, $500; miscellaneous, $975.
Total: $7,464.
Liabilities: Condo mortgage, $180,000; B.C. house mortgage, $170,000. Line of credit, $4,000.
© The Globe and Mail
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