Situation:Couple that came to Canada in 1990 has built up significant assets, wants to retire early
Solution:Tally up future income streams and don’t shutter the business, just in case
In Ontario, a couple we’ll call Sam and Alicia, both 54, have financially secure lives. They generate $68,000 per year through a private management consulting company and have generated $1,119,000 in personal savings and another $536,000 in capital and cash in their business. They have a $525,000 house with no mortgage. There are no debts at all. They have sons, both employed, in their mid-20s who live at home but pay their own bills and contribute to food costs. They are on a long holiday that they want to stretch into retirement, but with the option of resuming work.
Family Finance asked Eliott Einarson, a Winnipeg-based financial planner with Ottawa’s Exponent Investment Management Inc., to work with them. “They came to Canada to work and make their fortunes,” he explains. “They are a model for what new Canadians can achieve.”
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Sam and Alicia arrived in Canada in 1990 from a developing country with stiff political controls and a rather modest voluntary economy. They had technical skills, limited English, no French, and a driving ambition to build their lives. Now 29 years into life in Canada, they have built up an impressive asset base.
In addition to their full-owned house and the capital in their business, they have $949,000 in RRSPs and $170,000 in TFSAs.
Each year, they have taken $60,000 of dividends out of their company for Sam and $28,000 for Alicia. They estimate that they can retire on something close to their present spending of $4,000 per month, but we think that’s low. Sam and Alicia might travel more. We’ll budget for $5,000 per month or $60,000 per year — that’s $70,000 before 15 per cent average income tax. All capital will stay in the business so that the couple can continue work if they wish.
Getting to 65
Sam has $493,000 in his RRSP. If that sum grows at 4 per cent per year after inflation, it would generate $23,700 over 41 years to his age 95 when all capital and income would be expended. Alicia has $456,000 in her RRSP and that sum would provide annual income of $21,930 with the same assumptions.
Sam has a TFSA balance of $99,000. That would provide $4,761 per year for 40 years. Alicia has $71,000 in her TFSA which, with the same assumptions, would provide $3,414 per year.
Because the business has been put on hold, they have ceased all further contributions to their RRSPs and TFSAs.
They also have company investments of $536,000 that could provide $25,778 per year if they grow at four per cent after inflation with no further investment.
Adding up their potential retirement income, they would have $71,400 of taxable income and $8,175 of income from TFSAs. After income splits and income taxes averaging 13 per cent, they could expect about $5,850 after tax each month. That’s more than their $5,000 monthly target.
With assets only paying out gradually from their company, they would be ready for a restart or sale if they wish. At their relatively young ages, hedging their retirement bet is merely reasonable, Einarson says.
At 65, Sam would expect CPP benefits of $8,544 per year and Alicia CPP benefits of $4,092. Each would be eligible at 65 for full OAS benefits of $7,220 per year. With those numbers added, they would have total age 65 income of about $106,650. With no tax on TFSA cash flow, they would pay 15 per cent average tax and have $7,650 monthly income. The couple could postpone CPP and OAS benefits with boosts at age 70 of 36 per cent and 42 per cent, respectively. Both plans are life annuities with the operative word being “life.” If they start benefits at 65 and invest what they do not spend, they can narrow the gap to the age 70 benefit level at least a little.
It is clear that Sam and Alicia can afford to retire very soon and meet their retirement income target of $5,000 monthly income, and a good deal more. Moreover, they can keep their company viable and return to it if they wish. Their decision on when to take OAS and CPP depends on how they want to live their lives and perhaps what to do with money not spent.
Postponing income that they do not plan to use would provide a larger later-life income stream that they could use to build an estate for their children, or even to donate to worthy causes.
We can estimate incomes at 55, 65, and 70, but the essential issue for the couple is what they will do with several decades in which they are not working. We think that Sam and Alicia are much too enterprising to do nothing. Thus we are leaving their successful company capitalized, alive and healthy.
Even if their fortunes were expended by age 95, they would still have CPP, OAS and their $525,000 house which, if sold with no capital gain on a primary residence but generating 3 per cent per year after inflation, could generate $15,750 in 2019 dollars.
“Sam and Alicia’s problems are managing the bounty of their careers,” Einarson concludes. Their problem is to choose how much retirement or part time work they want.”
Retirement stars: Five ***** out of five