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Financial Facelift

Dentist's dream to move West possible but risky Add to ...

Life is good for Lou and Dan. They have a successful dental business in a small southwestern Ontario town where housing costs are low.

He’s 37, she’s 32. Their assets total $1.4-million, only $254,000 of which is their house – not bad for a couple with two young children.

Yet success has sparked other dreams. Dan and Lou look to the day they can leave it all behind, pack up their children, now age 2 and 5, and move out West. Dan would sell his practice – say in nine years – and go to work part-time for someone else until he retired at about 55. Life would be simpler, and there’d be the mountains.

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Their dental corporation grosses about $500,000 a year, from which they each take $35,000 in dividends plus a small salary. They have no company pensions. If they move, their family income will drop substantially and their housing costs will be higher. Is it a plan worth pursuing or is it a gamble?

We asked Keith Copping, a financial planner at Macdonald, Shymko & Co. Ltd. in Vancouver, to look at Dan and Lou’s situation.

What the expert says

For most Canadians, gradual retirement starting in their mid-40s “would not be at all realistic,” Mr. Copping says. For Dan and Lou, though, it just might be possible given their high income, low spending habits and disciplined savings – they are saving $159,000 a year, including registered education savings plans for their children. As well, the fact the dental practice is incorporated offers tax-planning opportunities.

“Their goal of switching to part-time work at [Dan’s]age 46 and giving up his strong dental practice earnings is an aggressive plan, given their life expectancy of 40 to 50 years or more,” Mr. Copping says. It is not without risks.

They’d have to tuck away at least $144,000 a year for the next nine years. After that, Dan would work part-time until he is 55, earning enough to cover their expenses. This would enable them to meet their after-tax retirement income goal of $90,000 a year if – and it’s a big if – they can earn an average three percentage points more than inflation on their investments long term. The planner doesn’t include potential proceeds from the sale of the business in his plan, since that amount is difficult to determine.

The greatest risks include the long time frame and inflation, which could put a squeeze on their real or inflation-adjusted rate of return. The planner’s analysis assumes Dan lives to age 93 and Lou to 97, an inflation rate of 3 per cent a year and an average annual return on investments of 6 per cent.

“With such a long time horizon, a one percentage point reduction in the spread [between nominal returns and the inflation rate]has a huge impact on retirement income potential,” the planner cautions. If returns fall short of projections, the couple would have to trim their spending at a time when their ability to earn might well be limited.

Mr. Copping also questions the wisdom of drastically reducing family income by working part time when the children are still so young. They’ll be 11 and 14 when Dan sells his practice in nine years. “Kids are expensive.”

Because their wealth is growing within their corporation, Lou and Dan are able to minimize taxes, Mr. Copping notes. For example, they are taking their income in the form of dividends rather than salary. The tradeoff is they have very little registered retirement savings plan room and cannot expect any Canada Pension Plan benefits.

Their investments will play a critical role in their plan so a well-structured, balanced portfolio is essential, the planner says. He suggests a diversified portfolio that is monitored regularly and has set targets for asset mix. Currently, their investments are 90 to 95 per cent in equities.

“I would suggest a more balanced approach with a larger fixed income component – at least 20 to 30 per cent.”

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CLIENT SITUATION



The people



Dan, 37, Lou, 32, and their two children, age 2 and 5.



The problem



Can Dan afford to give up his profitable dental practice in Ontario in nine years, move out West and work part-time until he retires at age 55 or would the family suffer financially?



The plan



Save as much as possible for the next nine years and invest the money in a well-balanced portfolio designed to earn three percentage points more than inflation over time. Continue with modest lifestyle and be aware of the risks of giving up high earning power.



The payoff



If all goes according to plan, they may well realize their dream without taking too much risk.



Monthly net business income (variable)



$20,666



Assets



Bank accounts, personal and corporate $163,000; investment accounts, personal and corporate (mutual funds) $831,000; TFSAs $20,000; RESPs $27,700; Dan's RRSP $53,000; Lou's RRSPs $53,300; residence $254,000.



Total: $1.4-million.



Monthly expenditures



Groceries, eating out $650; clothing $40; medical $15; child care, cleaning $135; miscellaneous $500; property tax $485; home insurance $40; utilities $180; telecom, cable, Internet $270; auto $190; vacations $750; entertainment $50; education/hobbies $160; gifts $55; critical illness, life, disability insurance $745; personal and corporate universal life policies (savings) $5,800; RESP $415; TFSA $850; personal investments $1,165; corporation investments $5,000.



Total $17,495



Liabilities



None







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