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financial facelift

Todd Korol/The Globe and Mail/Todd Korol

After years of teaching overseas off and on, Tina and Tom moved back to his hometown of Calgary with their two children in 2018. In addition to some freelance work, they both secured temporary contracts with the local school board. They were bringing in a combined $210,000 a year.

In October, Alberta brought down an austerity budget that resulted in layoff warnings to hundreds of contract teachers. Tom finds himself middle-aged and jobless. Tina’s contract has been extended to the spring. He is 53, she is 49. Their children are 12 and 14.

“We don’t fit the typical bill of locking in with a school board for a career,” Tom writes in an e-mail. Their international teaching jobs enabled them to tuck away a substantial sum for their retirement. If things don’t work out in Canada, they will look for work abroad again, he adds.

This is not their first Financial Facelift. That was in 2013, during their last extended stay in Canada. Back then, they wondered whether they should buy a house or keep renting. They’re still wondering, Tom writes. They’re thinking of buying a small condo when they retire where they could spend summers in Canada and where the children could stay while attending university.

They wonder, too, whether they can afford to draw on their savings if necessary without jeopardizing their retirement goal. They want to retire in 10 years with a budget of $45,000 a year after tax, made easier, they hope, by their plan to live six months of the year in a low-cost – and warmer – part of the world.

We asked Johanne Plamondon, an investment adviser and financial planner at Raymond James Ltd. of Calgary, to look at Tom and Tina’s situation.

What the expert says

Tom and Tina live well within their means and have done an excellent job of saving for their retirement, so they are well-fixed financially to cope with job uncertainty, Ms. Plamondon says. If they are not able to meet their income requirement of $6,820 a month over the next while, “then they can indeed begin to take some of their savings out to cover their expenses,” the planner says.

To illustrate the soundness of the couple’s financial position, she offers the following calculation. “Based on their investable holdings of about $1-million, they can take out as much as $46,585 a year, net of tax and indexed annually, to maintain their purchasing power,” Ms Plamondon says. That assumes a 4.17 per cent rate of return on their investments, a 2 per cent inflation rate and life expectancy of age 95, at which point they would run out of savings.

“The retirement income goals are achievable even if savings are needed in the short term,” she says. If they need to tap their savings, she suggests they withdraw the money from their non-registered accounts for greater tax efficiency.

If they do not need to tap their savings, and if Tom continues to save $6,000 a year in his tax-free savings account, they will have money to spare when they retire, the planner says. As a U.S. citizen, Tina would not benefit from a TFSA because the income earned in the plan would be considered taxable.

By the time Tom retires at 63, he will have an estimated $205,340 in his TFSA. Their non-registered assets will have risen to $851,070. Because the estimated return will fall short of their goal, they can draw from their liquid assets until Tom turns 65 to make up the difference.

At 65, Tom will be eligible for the pension credit, giving him a tax credit on his first $2,000 of pension income. He will also be eligible to split pension income with Tina. The planner suggests Tom convert his registered retirement savings plan to a registered retirement income fund (RRIF) and withdraw the minimum of 4 per cent a year, giving them total income of $60,820 before tax, or $47,955 after tax. RRIF withdrawals are considered pension income. (By then Tom is assumed to have rolled his teacher’s pension and half of his locked-in retirement account into his RRSP. He rolled the other half of the LIRA into a life income fund for greater flexibility in withdrawing.)

“At this point, they slightly exceed their $45,000 after-tax income goal,” the planner says. To provide maximum tax-deferred growth, Tina’s registered assets would be left intact until she turns 71, at which point she would be required to convert her RRSP to a RRIF.

Next, the planner looks at the proposed condo purchase.

Assuming they do not have to withdraw large sums to cover their spending needs in the years ahead, Tom and Tina could afford to buy a small condo in their first year of retirement, Ms. Plamondon says. They could take $450,000 in cash ($554,410 in future dollars) from their non-registered savings for the purchase. This would leave them with $296,660 in future dollars in their non-registered portfolio.

Their savings, and eventually government benefits, would give them an estimated $50,370 a year (in current dollars) after tax from his age 63 to age 95, indexed to inflation, still exceeding their $45,000 a year goal. They would have to consider the costs of keeping up the condo while they were outside of the country and factor them into their budget. “I suggest they revisit this option as they get closer to retirement, but it is an option,” Ms. Plamondon says.

She suggests they postpone taking government benefits to age 70 to take advantage of the higher payout, and consider using some of their RRIF savings to buy a joint annuity when Tom is in his mid-70s to provide an additional guaranteed income stream. Because Tina has worked outside of the United States for so long, she will not qualify for U.S. Social Security.

Client situation

The people: Tom, 53, Tina, 49, and their two children

The problem: Should they take the leap and buy a small condo when they retire in 10 years? Can they tap their savings short term to maintain their current needs if necessary?

The plan: Draw on their savings as needed until they find more permanent work. Tom continues to contribute to his TFSA. Buy a condo when they retire if they want to.

The payoff: A sound financial future

Monthly net income: Variable

Assets: Bank accounts $12,000; non-registered $557,220; his RRSP $236,425; his LIRA $19,780; his TFSA $88,180; his pension payout $21,000; her RRSP $43,000; her pension payout $27,000; children’s informal trust $33,000; RESP $88,000. Total: $1.1-million

Monthly outlays: Rent $1,800; water, garbage $80; home insurance $15; heat, electricity $240; car insurance $140; fuel, maintenance $460; grocery store $800; clothing $300; charity $100; vacation, travel $200; dining, drinks, entertainment $620; personal care $100; sports, hobbies $300; subscriptions $300; health care $20; life insurance $140; phones, cable, internet $290; RESP $415; TFSA $500. Total: $6,820

Liabilities: None

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Some details may be changed to protect the privacy of the persons profiled.