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With substantial savings and a mortgage-free house in British Columbia, Jeanine and Gerry look forward to putting their feet up. (CHAD HIPOLITO For The Globe and Mail)
With substantial savings and a mortgage-free house in British Columbia, Jeanine and Gerry look forward to putting their feet up. (CHAD HIPOLITO For The Globe and Mail)

FINANCIAL FACELIFT

Illness spurs dreams of retirement Add to ...

Recent health problems have Gerry wondering whether he can retire soon. At the moment, he is collecting disability insurance. His wife, Jeanine, is not working because she has health problems of her own. Both are 50.

“I’m self-employed and do not have an assured job to go back to,” Gerry writes in an e-mail, “so we are wondering if we have enough of a nest egg to stop trading time for money in the near future.”

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They have substantial savings and a mortgage-free British Columbia home. As well, Gerry has a government pension from a previous job that will pay him slightly more than $17,000 a year starting at age 55.

They wonder, too, whether their investments are suitable.

“A portfolio review would make my partner happy as I take bets in the market via options,” Gerry writes.

“Can we live on our assets for the rest of our lives if my disability benefits are terminated but I cannot find work?” Gerry asks. If he can’t afford to retire now, how much longer must he work?

We asked Ian Black, a financial planner and portfolio manager at Macdonald, Shymko & Co. in Vancouver, to look at Jeanine and Gerry’s situation.

What the Expert Says

In his plan, Mr. Black looks at what would happen if Gerry officially retires in three years at age 53.

“This will require them to consume much of their current savings before their pension, CPP and OAS benefits begin,” Mr. Black says.

Gerry’s pension benefit of $17,185 will not begin until age 55. They could begin collecting Canada Pension Plan benefits as early as age 60, but they won’t qualify for Old Age Security benefits until age 67.

Gerry is projected to have a nearly full CPP benefit at age 65, while Jeanine’s CPP benefit would be about 50 per cent of the maximum because she has not worked for so long. At 65, Gerry’s pension bridging benefit will cease and his pension will fall to $13,620, the planner says.

He estimates that their annual income would be about $49,000 before tax, far short of what they are aiming for.

If Gerry is able to return to work, he should consider delaying retirement to age 60, Mr. Black says. As it stands, they are spending about $60,000 a year and saving little if anything. Delaying retirement appears to be necessary to meet their income goal, the planner says.

Shortening Gerry’s retirement period would enhance the couple’s expected annual income, raising it from $49,000 to $62,000 before tax if he worked to age 60. If he could work to age 65, their annual income could rise to $76,000.

Gerry takes responsibility for making the investment decisions for the household, Mr. Black notes. Their asset mix is about 90 per cent income-oriented exchange-traded funds and 20 per cent call options on momentum stocks.

“An investor would need a high risk tolerance to have a portfolio with that asset allocation,” Mr. Black says. Gerry may be sufficiently risk tolerant, but Jeanine may not be.

“The couple might consider reviewing their risk tolerance,” the planner says. “Due to their lower savings capacity, their ability to take investment risk is quite low because they have no way to recover from investment losses by saving more.”

Mr. Black suggests their main investment objective should be capital preservation, “so the current portfolio asset allocation is likely inappropriate.”

If Gerry returns to work as a consultant (through his corporation), he should take steps to ensure the Canada Revenue Agency does not deem his company to be a personal services corporation, the planner says. The simplest way to do this is to obtain multiple contracts from different clients.

(If the business is considered a personal services company – effectively, an incorporated employee – most standard business expenses will be denied, with only salary and benefits allowed. As well, the company would not qualify for the small business deduction, which lowers income tax payable.)

Because both Gerry and Jeanine are shareholders in the corporation, they can split its income via the payment of dividends. Also, the corporation could pay a salary to Jeanine for office work, for example, to increase her CPP entitlement. Although the employer portion of the CPP contributions would be an additional cost, it would also be a form of forced savings.

Both Gerry and Jeanine should look into their eligibility for the disability tax credit, a non-refundable tax credit worth about $1,500 a year in British Columbia. This could reduce the household tax bill if Gerry returns to work. If Jeanine qualifies, it would only be beneficial if she had income to use the credit.

Gerry has $80,000 of life insurance and Jeanine has none, Mr. Black notes. They are both under-insured, but with their health problems, they may not be able to obtain additional coverage.

Client situation

The people:

Gerry and Jeanine, both 50.

The problem:

The couple would like to retire in the next several years and wonder what income to expect in retirement. They are also concerned their investments might not be appropriate for their circumstances.

The plan:

Take less risk in their investments by eliminating the use of options in the portfolio. Hold off from retiring until age 60 or 65.

The payoff:

A higher expected income in retirement.

Monthly net income:

$4,000 disability benefit.

Assets:

Investment portfolio $25,000; TFSAs $60,000; Gerry’s RRSP $121,000; Jeanine’s RRSP $212,000; consulting company $60,000; commuted value of DB pension plan $303,000; residence $600,000. Total: $1.38-million.

Monthly disbursements:

Property tax $250; insurance $60; utilities $160; maintenance and repairs $1,250; transportation $165; groceries $715; clothing $30; donations $100; vacation, travel $665; personal discretionary $445; dining out, entertainment $510; subscriptions $50; life insurance $20; health care $415; telephone, cable, Internet $130. Total: $4,965. Deficit: $965.

Liabilities:

None


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