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(Kevin Van Paassen For The Globe and Mail)
(Kevin Van Paassen For The Globe and Mail)

FINANCIAL FACELIFT

Exhausted parents eye early retirement Add to ...

Theo and Sheryl are striving to help their sons, age 21 and 24, finance professional degrees without jeopardizing a longed-for early retirement. One son is studying medicine, the other law.

A year ago, Theo moved to Alberta to take a new job. Sheryl still lives and works in the Toronto area. He is 53, she is 47. They have three condos, two rentals in Toronto and Theo’s in Calgary, as well as the family home.

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Now that Theo is commuting back to Ontario every three weeks, their expenses have risen.

“You can best describe me as a worrywart,” Theo writes in an e-mail. Their short-term goal is to cover the interest expense on their children’s credit lines.

Longer term, they want to work for another five or six years and then quit while they are still young enough to enjoy some time together.

“Since marriage, we’ve been on the go, so to speak, and have been busy working and raising children,” Theo writes. “We feel this has taken a toll on our lives and health, particularly mine, so being able to enjoy time together before any debilitating illness is crucial for us,” he adds.

Their retirement spending goal is $85,000 a year after tax, which they hope to achieve without selling their Toronto home.

We asked Matthew Ardrey and Warren Baldwin of T.E. Wealth in Toronto to look at Sheryl and Theo’s situation. Mr. Baldwin is T.E. Wealth senior vice-president; Mr. Ardrey is manager, financial planning.

What the experts say

Theo and Sheryl will be able to cover their children’s interest expenses from current cash flow, the planners say.

By the time they retire in January, 2019, one of the mortgages on the rentals will be completely paid off, Mr. Ardrey and Mr. Baldwin note.

Real estate comprises the bulk of the couple’s $3.3-million in assets.

In preparing their forecast, the planners assume an average annual return on assets of 5 per cent and an inflation rate of 2 per cent a year.

Theo will sell the Alberta condo when he retires for a net gain of about $124,600 after mortgage payout and other expenses.

Both Theo and Sheryl contribute the maximum to their company pension plans (defined contribution), registered retirement savings plans and tax-free savings accounts.

They also want to travel, so Mr. Ardrey and Mr. Baldwin have included a travel budget of $10,000 a year, rising with inflation, to Theo’s age 80. By the time they retire in 2019, their spending goal of $85,000 a year will have risen to $93,847 with inflation.

At the age of 65, Theo will get $1,008 a month in Canada Pension Plan benefits while Sheryl will get $838 a month. Old Age Security benefits will be clawed back. In addition, they will get $2,000 a month net from their rental properties. “We assume that both live to age 90,” the planners write.

Based on these assumptions, Sheryl and Theo would have just enough to meet their goal. “It is right on the line,” the planners caution. A slight shift to the negative would cause their retirement plan to fail, they add.

Alternatively, the couple could sell their two Toronto rental condos for a net $298,477 (after inflation, mortgage payout, selling expenses and capital gains tax) and downsize their family home for a net $300,000. This way, they could increase their spending to $101,200 a year, rising with inflation.

Theo and Sheryl also had questions about their investments.

The planners suggest they establish a disciplined strategy, with an asset mix of 60 per cent equities and 40 per cent fixed income.

The equity investments should be divided equally among Canada, the United States and international markets. They could start by putting the cash not needed for short-term or emergency purposes to work for them, the planners say.

While they own some stocks directly, Sheryl and Theo also hold mutual funds, the planners note. They could likely save management fees by hiring an investment counselling firm instead.

“If they were to save only 0.5 per cent on their current investments, it would amount to $6,500 a year,” the planners say. By the time they retire, if they sell the real estate and invest the proceeds, “this saving would more than double.”

***

Client Situation

The people: Theo, 53, Sheryl, 47, and their two children, 21 and 24.

The problem: Helping to pay for their children’s professional training without jeopardizing their early retirement plans.

The plan: Consider selling the rental condos and moving to a smaller home at some point.

The payoff: No more financial worries.

Monthly net income: $14,750

Assets: Cash $150,000; stocks $128,000; TFSAs $68,000; his RRSP $110,000 (including $25,000 DC pension); her RRSP $360,000 (including $90,000 DC pension); his locked-in retirement account $500,000; residence $1-million; investment properties $1-million. Total: $3.3-million.

Monthly disbursements: Mortgage $1,225; property taxes $300; utilities $400; security $35; maintenance, garden $140; transportation $1,100; groceries $900; clothing $370; gifts, charity $300; vacation, travel $600; other $250; dining out, entertainment $450; grooming $100; other personal $220; dentists, drugstore $225; life insurance $300; telecom, TV, Internet $340; RRSPs $2,500; TFSAs $950; DC pension plans $1,200; group benefits $40. Total: $11,945.

Liabilities: Mortgages $473,000; line of credit $7,000. Total: $480,000

 

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