|
By: Andrew Allentuck
The Globe and Mail
Globe Investor Section,
Saturday, December 14, 2002
Nicole Wright, a 30-year-old lawyer in Calgary, and
engineer Matt Wood, 37, will marry in a few days. They
have substantial incomes -- $90,000 for Nicole and $80,000
for Matt. They also have two houses worth a total of
$438,000, two mortgages for a total of $342,000 and
a flair for budgeting right down to monthly allocations
for muffins.
The issue for the couple, whose names we've changed
to protect their privacy, is not whether their incomes
will support a lifestyle so modest that they have only
one car -- a 16-year-old Honda. Rather it's about whether,
if Nicole were to stay home to raise children or if
Matt were to return to university, they could retire
in just 10 years.
"We are used to living on little," Matt says.
"We don't need fancy cars or expensive clothes.
But we see the problem in balancing our preference for
living simply with our future children's need for a
good but not indulgent life."
Facelift asked Adrian Mastracci,
a fee-only financial planner with KCM
Wealth Management Inc. in Vancouver, to speak
with the couple and to examine their plans.
"Nicole and Matt are planning a retirement that
they would like to begin in 10 years, but 15 years is
more realistic," he says. "As long as they
both continue to work and earn at least their present
incomes, they can do it. But if Nicole leaves her job
for a period of years to raise children or if Matt goes
back to school, that would delay their retirement."
Adrian Mastracci, financial
advisor at Vancouver’s ‘fee-only’
KCM Wealth Management, says, “They can adjust
their registered retirement savings plans to make full
use of spousal plans. This will ensure that when the
couple begin to take money out after they retire, they
will have split their incomes to minimize taxes.”
Mr. Mastracci says the couple can achieve their 10-year
retirement goal, but only if their can save $50,000
annually out of their $170,000 current gross income.
Having children could reduce their savings capacity,
he says, but they can still manage a retirement on a
$40,000 a year if they can accumulate $1.4-million in
assets.
Retiring and living reasonably well on $40,000 a year
is going to be hard, Mr. Mastracci says. But Nicole
and Matt say that they would be willing to work a bit
in retirement to add to that income.
If the couple do save $50,000 a year, then, if they
can generate 9 per cent a year on their investments,
they will meet their goal.
If they save only $40,000 a year, they would need to
attain 10.5-per-cent annual growth. These high rates
of growth of assets are possible, but not probable,
Mr. Mastracci says.
"A more realistic goal would be to move the retirement
date closer to 15 years from now. This would reduce
the implied rate of return to 6.5 per cent based on
$40,000 a year of saving capacity."
The couple's finances have to be restructured if they
are to be able to achieve even the 15-year retirement
goal, Mr. Mastracci says. They can adjust their registered
retirement savings plans to make full use of spousal
plans, he adds. This will ensure that when the couple
begin to take money out after they retire, they will
have split their incomes to minimize taxes. Matt has
$55,000 of unused space in his RRSP. Their tax-deferred
accounts should be their primary savings and investment
vehicles, Mr. Mastracci says.
Nicole and Matt should aim for 60 per cent to 65 per
cent stocks and 35 per cent to 40 per cent fixed-income
assets in their RRSPs and, as well, establish threshold
losses at 20 per cent, 30 per cent or some other level
of decline from purchase price. That will ensure that
Nicole's 86-per-cent loss on her dot-com era investments
will not be repeated, the planner says.
The couple have an unusual problem in that, rather
than lacking shelter, they have too much of it. Matt
lived in his house until October, 2002, then rented
it out.
The rent he receives, $1,100 a month, is taxable, but
he can deduct interest payments on the mortgage from
rental income. After expenses, there will likely be
no net income, Mr. Mastracci says.
Nicole's interest payments are not tax deductible and
her $205,000 mortgage should therefore be paid off as
soon as possible. She can double up her monthly payments
of $1,465 a month and prepay an additional 15 per cent
a year, he adds. Once Nicole's house is paid off, the
couple can begin to pay down the $137,000 mortgage outstanding
on Matt's rental house.
Each year, the couple should pay off RRSP Home Buyers
Loans. Matt has $18,000 remaining due on his RRSP loan
and he must pay it back at $1,333 a year. Nicole owes
$7,000 on her plan and must pay back $450 a year.
Then Matt can begin to top up the $55,000 unused space
in his RRSP. Nicole has used up all her RRSP space,
the planner says.
"Nicole and Matt can reach their goals if they
are very careful to achieve their $50,000-a-year savings
target. Nicole, who invested directly in Nortel Networks
and Laidlaw, watched $46,000 worth of stocks fall to
$6,000. She has learned that diversification is insurance
against misfortune," Mr. Mastracci says.
"Our initial reaction was disappointment,"
Matt says, to the planner's report. "We will have
to compromise, so maybe we can retire in 12 years. Nicole
will be able to teach a little to supplement our income
and I might be able to do some nursing after I return
to school to get the necessary qualifications,"
the engineer says.
"But it remains our plan to retire early."
Adds Nicole: "We can raise children in our retirement
on what will be an average income after tax. "I'll
use the time to read and maybe write a novel. And raise
bees. We don't have to live to the full extent of our
present means."
Client situation
Calgary lawyer Nicole Wright, 30, and her fiancee,
computer engineer Matt Wood, 37, will marry this month.
They have a combined income of $170,000 a year and would
like to raise a family and retire within 10 years.
Income
Nicole's gross and bonus $90,000 a year; $60,000 take-home
pay;
Matt's gross and bonus $80,000 a year; $53,000 take-home
pay.
Matt's annual rental income, $13,200 before expenses
beginning in October, 2002.
Assets
1986 Honda, $250; Matt's house, $210,000; Nicole's house,
$228,000; RRSPs, $25,000; cash, $5,000; furniture, $2,000.
Monthly household expenses
Food, $300; Nicole's mortgage, $1,465; taxes and insurance,
$190; Matt's mortgage, $990; taxes and insurance, $154;
Nicole's utilities, $160; Matt's utilities, $140; phone,
$47; entertainment, $250; clothing, $250; travel and
gifts, $275; coffee and muffins, $60; haircuts, $40;
car expenses, $140; dry cleaning, $20; races and running
shoes $70; art supplies, $60.
Liabilities
Nicole's mortgage, $205,000; Matt's mortgage, $137,000.
|
