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If Rena and Ray waited nine years to retire, they’d be sitting pretty. (GEOFF ROBINS for The Globe and Mail)
If Rena and Ray waited nine years to retire, they’d be sitting pretty. (GEOFF ROBINS for The Globe and Mail)

FINANCIAL FACELIFT

Debt could reset retirement clock Add to ...

As employees and entrepreneurs, Rena and Ray are eagerly working toward what they hope will be early retirement.

He is 51 and works in sales, she is 53 and works part-time in health care. They hope to throw off their shackles in four years.

They have two children, 18 and 20, both of whom are pursuing expensive studies. They have a home and vacation property in Alberta, a substantial investment in (mortgaged) income-producing industrial real estate and a separate but related small business.

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When they quit, Ray and Rena want to travel, perhaps spending a couple of months each year in a warmer climate. Ray may spend more time operating his business or even start up another one. They want to renovate their home and vacation property.

“I have been working full time since age 21,” Ray writes in an e-mail – “about two days after my last exam at university.” So it’s time for a change.

If they retire from their jobs in four years or so, most of their income will come from their businesses. As well, they both have modest work pensions. Their goal is to generate enough retirement income to have $130,000 a year after tax to spend.

Can they do it with nearly $1.4-million in debt? Ray asks.

We asked Michael Cherney, an independent Toronto-based financial planner, to look at Ray and Rena’s situation.

What the expert says

Rena and Ray are “a breed apart,” Mr. Cherney says. On one hand, they hold down conventional jobs with all the attendant benefits; on the other, they have taken on a tremendous amount of debt as entrepreneurs. Now they’re eager to enjoy the fruits of their investments.

Can they achieve their dreams in four years?

“If they scrimp and save and push the envelope a bit – and their businesses stay as successful as they have been – they may be able to pull it off,” Mr. Cherney says. If they waited eight or nine years, though, “it would be a piece of cake.”

Here is what the planner calculates they would have if they retire in 2017: $70,000 a year from their two businesses, $15,550 from Ray’s defined-benefit pension plan (not indexed), $3,466 from Rena’s defined-benefit pension plan (mostly indexed) and $36,300 from their combined investments, including Ray’s defined-contribution pension plan (he has both kinds of pensions). The planner’s calculations assume an “aggressive” 5-per-cent temporary withdrawal rate from their savings, for a total after tax of $125,316.

This falls short of their $130,000 target. To help close the gap, they could ensure that the income from the small business owned by Rena and the two children is paid out by way of dividends. This would save “a significant amount of taxes” and help pay for the children’s tuition, Mr. Cherney says. Education costs will be offset by the $52,700 they already have in a registered education savings plan.

Ray could take over management of the other business, saving himself some money, but this wouldn’t really make sense, the planner says. Ray would be quitting one full-time job for another, lower-paying one. As well, they would still have debts.

Nine years from now, when Ray is 60, “things look much different,” Mr. Cherney says. The loan against the small business would be paid off, so dividends to Rena and the children would be much higher. Both of their pensions would be worth more. As well, they could begin collecting reduced Canada Pension Plan benefits, although they may not need the income and so might be better off deferring CPP.

A good portion of the family’s retirement income is based on the continuing success of the couple’s two businesses, the planner notes. “If either starts failing, they could be in trouble.” Strong management and realistic forecasting are critical, he adds. Fortunately, the underlying real estate is well located.

In drawing up his forecast, Mr. Cherney assumes that Ray lives to age 93 and Rena to 95, inflation averages 2.5 per cent a year, their investment returns average 4.5 per cent in their registered accounts and 3.5 per cent in their taxable accounts, and Old Age Security benefits are clawed back.

CLIENT SITUATION

The people

Ray, 51, and Rena, 53, and their two children.

The problem

Determining whether they can quit their jobs in four years and still have $130,000 a year after tax to live on.

The plan

Consider working a few years longer, in which case they can achieve their goals with ease.

The payoff

Financial independence and the peace of mind it brings.

Monthly net income

$12,235

Assets

Cash in bank $4,200; his company stock $134,000; estimated value of businesses net of mortgage $2-million; TFSA $400; his RRSP $262,000; her RRSP $66,000; his employer pension plan $92,800; her work pension plan $27,000; RESP $52,700; home $650,000; vacation property $350,000; commercial property interest $95,000. Total: $3.73-million

Monthly disbursements

Property taxes $720; property insurance $300; electricity, water $350; heating $280; security $30; maintenance $750; gardening $200; transportation $730; groceries $1,000; clothing $415; line of credit $700; car loans $880; gifts, charitable $140; vacation, travel $1,000; other discretionary $300; vacation property expenses $700; dining out, entertainment $775; grooming $300; clubs, sports $400; pets $150; subscriptions $15; doctors, dentists, drugstore $275; telecom, TV, Internet $145; RRSPs $475; RESP $400; TFSA $400; his stock purchase plan $325; DB pension plans $330. Total: $12,485

Liabilities

Business loans (mortgages) $1.25-million; line of credit $101,000; car loans $45,000. Total: $1.4-million

Special to The Globe and Mail


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