Navigating toward a brighter future

Liam is a lightkeeper, Arlene an artist. Together, they live an idyllic life on an island off the B.C. coast. He's 53, she's 59. They have a 23-year-old son who is out on his own.

While the hours of a lightkeeper are long, their housing is provided by the government, casting Liam's $47,000 a year salary in a better light. Arlene's earnings are variable. Last year, she brought in $20,000 working part-time, but that number will be lower this year. She makes anywhere from $1,500 to $10,000 from her art and occasional painting workshops on the mainland. Liam has been working for the government for only 16 years, so his pension will be modest; Arlene has none.

They own a century home in a small village on a lake in the B.C. Interior. "It's a duplex, commercial down and residential up, and it's mortgage free," Liam writes in an e-mail. "Even though our annual income is low ... we have been able to save and to travel a little together for the first time in our lives because we are now debt-free and our expenses are low," he adds. They'd like to travel when they retire.

Arlene and Liam have two main questions: How much do they have to save to retire with an after-tax income of $50,000 a year? Can they afford to buy a second home on the West Coast and rent it out until they retire without having to sell the duplex? We asked Brinsley Saleken, a financial planner at Macdonald, Shymko & Co. Ltd. in Vancouver, a fee-only financial adviser and portfolio manager, to look at Arlene and Liam's situation.

What the expert says

When Liam retires at age 65, he will get an indexed public service pension of $14,400 a year in today's dollars. He will also get Canada Pension Plan benefits of $4,600 a year and Old Age Security of $6,500 for a total of $25,500. At 65, Arlene will get CPP of $5,300 and OAS of $6,500 for a total of $11,800. Their rental income adds another $6,600 net, for a total of $43,900 a year – assuming the property is fully rented.

Because most of their retirement income comes from pensions, they can take advantage of income splitting so the planner assumes they will need gross income of $56,000.

Liam and Arlene need an asset base large enough to provide gross cash flow of $12,000 a year in today's dollars to supplement their $44,000 in pension and rental income – $18,600 if the rental property is vacant. Mr. Saleken assumes 3 per cent inflation and a 25-year time horizon, which would take them to Liam's age 90 and Arlene's age 96.

How much they need depends on their rate of return. With marketable securities, nothing is guaranteed. At 3 per cent a year they would need $440,500, at 4 per cent $393,000, and at 5 per cent $353,000. That doesn't include a contingency fund in case they have a vacancy. Fortunately, amassing that much should not be too difficult, Mr. Saleken says. Their existing asset base is $110,000 ($90,000 in RRSP plus $20,000 in cash – plus a $5,000 emergency fund not included in the planner's retirement calculations). Their savings capacity is $2,000 a month or $24,000 a year over the 12 1/2 years until Liam retires. At the same 4-per-cent rate of return, they will have $540,000 by then.

As for the West Coast home, they may be better off deferring the purchase because they don't have much of a down payment, the planner says. If they wait until Liam retires, they would have a better idea of their asset base and whether they had the cash flow to run two properties if necessary.

In building her savings, Arlene's priority should be to contribute first to a tax-free savings account and then to a non-registered investment portfolio. Contributing to an RRSP would not make sense because her income is so low. Liam should contribute first to his RRSP but only so far as it brings his net income to the bottom of the second federal tax bracket, which is roughly $41,000, Mr. Saleken notes. Additional savings would go to his TFSA and then to non-registered investments.

CLIENT SITUATION

The people

Liam, 53, and Arlene, 59

The problem

Can they save enough to generate net retirement income of $50,000 a year and buy a retirement property on the West Coast?

The plan

Defer the West Coast home purchase, instead investing their $2,000 a month surplus in an RRSP for him and TFSAs for both of them, with the balance going to a non-registered investment account.

The payoff

A comfortable retirement, a home on the West Coast and an investment property, all without having to take undue investment risk.

Gross income

Liam's salary $3,917; Arlene's income $2,083; rental income $1,064. Total: $7,064

Assets

Bank accounts $25,000; RRSPs $90,000; duplex $300,000. Total: $415,000

Monthly disbursements

Income taxes $509; payroll deductions $616; living expenses (food, clothing, telecom $990; housing $598; personal expenses (restaurants, entertainment, education) $1,312; transportation $130; life insurance $178; health care $95; miscellaneous $538; RRSP contributions $1,100; savings $1,000. Total: $7,066

Liabilities

None

Special to The Globe and Mail

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