Chris Bolin/The Globe and Mail
After raising two children, paying off their Edmonton home and building their separate businesses, Serge and Sally would like to quit in four years when their younger daughter finishes high school.
Serge is 56, Sally is 59. Neither has a company pension.
They have set money aside for the girls' education, so their retirement goal is to maintain their current lifestyle. Sally's corporation will have no sale value, but Serge's might fetch up to $500,000, mainly for intellectual property, half of which would go to him and Sally, who each own 25 per cent.
Both have been drawing salaries and contributing to their registered retirement savings plans, which are worth about $1.6-million.
They ask in an e-mail: Can they afford to retire in four years? Are there better options than contributing to their RRSPs? Can they arrange their affairs in a more tax-effective manner?
We asked Brinsley Saleken, a financial planner and portfolio manager at Macdonald Shymko & Co. Ltd., in Vancouver, to look at Serge and Sally's situation. Macdonald Shymko offers fee-only financial planning and portfolio management services. It does not sell financial products.
What the expert says
To maintain their current lifestyle, Serge and Sally will need about $120,000 a year after tax, Mr. Saleken estimates. Money that in the past went to home renovations or saving for the children's education is now available to beef up their nest egg. While their RRSPs are substantial, they have a combined $51,000 in unused tax-free savings account room.
Their corporations, and their TFSAs, could help them achieve their goal if integrated into a comprehensive financial plan, Mr. Saleken says. Whether they can generate the needed income in four short years "may present some difficulties," depending on how much their investments earn.
He assumes an inflation rate of 2 per cent a year, life expectancy of 92 years for Serge and 96 years for Sally, annual savings capacity of $131,000 and full Canada Pension Plan benefits starting at age 65.
The amount of savings they would need to generate $120,000 after tax a year would be $3,115,000 with a 5 per cent rate of return. (At 4 per cent, they would need $3,541,000, and at 6 per cent, $2,766,000.)
Given their current working assets of $1,724,002 and savings capacity of $131,000 a year, they would need a growth rate, net of tax, of 9.27 per cent over the next four years – and an average of 5 per cent a year thereafter – to meet their goal, the planner says. The 9.27 per cent estimate would fall to 6.14 per cent if they sold their share of Serge's company for $250,000 and invested the money.
So they're close, "although the margin of comfort is not necessarily in place," Mr. Saleken says. They may have to delay their retirement date or save more.
Arranging their finances differently would help, the planner notes. Rather than drawing salary, they could take their income in dividends. Sally could take enough money in dividends from her company to meet the family's cash flow needs, leaving the rest in the company as a "new bucket" of retirement assets. She should also take full advantage of her TFSA. The small-business tax rate in Alberta is 14 per cent – lower than the personal tax rate – so she would have more money to save.
This would diversify the source of retirement cash flow; as it stands, income from RRSPs or registered retirement income funds, CPP and Old Age Security is fully taxed. As well, leaving more money in the corporation will allow it to grow over time.
"We would make the case that no further RRSP contributions should be made."
Serge's corporation might offer similar opportunities, but because it could be sold and the proceeds would likely qualify for the federal small business capital gains tax exemption, they must be careful that 90 per cent or more of its assets are used in the active business at the time of sale and at least 50 per cent in the 24 months preceding the sale.
If Serge's corporation could pay dividends both to him and to Sally, then a higher proportion of revenue could be saved in Sally's corporation (where it is not subject to the same capital gains tax concerns as Serge's corporation), "which benefits both of them in future," Mr. Saleken says.
Finally, TFSAs should form part of their plan because they provide "fully-tax-paid and tax-free capital in retirement," giving the couple significant flexibility.
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Client Situation
The people
Serge, 56, Sally, 59, and their children, ages 14 and 18.
The problem
Can they hang up their hats in four years without having to lower their standard of living?
The plan
Arrange their financial affairs in a more tax-effective way, taking advantage of their corporations and TFSAs, and consider either saving more or working a bit longer.
The payoff
Financial independence.
Monthly net income
$22,500
Assets
Bank deposits $35,000; stocks $53,000; education fund $50,000; home $735,000; her RRSP $890,000; his RRSP $746,000; RESPs $137,000. Total: $2,646,000
Monthly disbursements
Housing (utilities, insurance, maintenance) $2,125; transportation $1,600; groceries, clothing, dry cleaning $1,795; gifts, charitable, vacations $1,760; personal discretionary $1,025; sports, hobbies $1,225; private school fees $3,030; dentists, drugstore $625; life, disability, CI insurance $635; telecom, TV $115; savings $3,935; group benefits, professional association $165. Total: $18,035
Liabilities
None
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