RAYMOND plans to retire soon, Caribbean-style.
The self-employed, 63-year-old has two years left of working full time.
Once he calls it a day -- or more precisely, a career -- he wants to spend winters on a beach in the Caribbean.
"I'd like to go until I can no longer travel, and then I can either die in Canada or I can die there," says Raymond, who is separated and has adult children.
Still, he says he knows he faces some financial challenges in the coming years. For one, he has no work pension so his retirement income will be comprised of CPP, OAS, a tax-free savings account (TFSA) worth about $15,000 and an RRSP of about $219,000. Raymond also has a 35-year-amortization mortgage with about $188,000 owing on his house worth about $300,000.
He's considering selling the home and looking into renting or other options.
"If I can walk away from the sale with $100,000, I would be OK."
Besides the mortgage, Raymond also owes about $3,650 on his MasterCard, even though he has a line of credit at a lower interest rate with no balance.
He's paying $500 a month on the debt, and that has thrown his income out of whack with his expenses.
He presently earns about $56,000 a year before deductions and takes home about $3,083 a month.
But his monthly expenses are about $3,245 a month.
With retirement almost at hand, Raymond says he wants to know what it will take to make his retirement dream come true.
"I have a hard time calculating my retirement income with my RRSPs," he says, adding he is willing to work part time and cut costs. "I'd like to see how much money I need to achieve this lifestyle."
Certified financial planner Doreen Sigurdson says Raymond's first order of business is dealing with his monthly deficit because if he can't balance his budget while working, it's going to be an even bigger stunt to pull off on a lesser income in retirement.
"His MasterCard payment of $500 per month would pay the outstanding balance in about nine months, and then he should be in a positive income position," says Sigurdson, a registered financial planner with Edmond Financial Group in Winnipeg.
Raymond should consider transfering the credit card balance -- at 12.9 per cent interest -- to the line of credit (two per cent) so more dollars pay down the principal. Instead of paying off the debt in nine months, it'd take about eight months, saving about $150 in interest payments. That may not be substantial, but he needs every extra dollar because he is facing a 20 per cent plus decrease in income when he retires, even with the $500 debt payment removed from the estimates.
When he retires in two years, his retirement income before taxes will be about $2,545 a month. Sigurdson says about half his retirement income will come from RRSPs. Based on a six per cent annual return, Raymond's RRSP will be about $247,000 at age 65 if he makes no more contributions. At present, he's not saving anything.
"If we assume an annual average rate of return of five per cent on his RRIF throughout retirement, projecting it to last until age 85, while indexing to inflation at a rate of three per cent, he could draw a monthly income of about $1,250 per month," says Sigurdson. That includes CPP and OAS, but not his TFSA funds.
(Sigurdson says he should use the TFSA as rainy-day money, adding it can provide him enough to cover five months of living expenses in a pinch.)
After taxes, Raymond's monthly income will be about $2,300 in retirement.
"It's obvious either Raymond's expenses will need to be cut in retirement or he will need to get part-time work to improve his income because his retirement income falls short of expenses of about $2,800, assuming his MasterCard is paid off," says Sigurdson.
"In fact, he should try to earn even more so he can reduce reliance on his RRIF and maintain more capital for when he stops working altogether."
Raymond also will likely have to downsize his home because he will probably have trouble keeping up with mortgage payments and other home-related costs once he retires. "With a fairly tight budget, he would be at a real risk of finding his mortgage payments unmanageable when interest rates increase." Furthermore, he may find it difficult to holiday four months of the year and take care of a home.
If he can sell his house, pocketing $100,000, he should weigh his options -- like buying a condo, renting or purchasing a life lease.
His current monthly housing costs are about $1,268, so he should seek housing alternatives in the $1,200-a-month range or less.
"The $100,000 capital that he would get from the sale of his house could be used to supplement his income," she says. "At four per cent rate of return, he would use up the capital at a rate of about $600 per month, and it would last for about 20 years."
This would bring his income in line with his expenses, solving the shortfall problem without part-time earnings, but he also likely faces increased travel costs.
Raymond already sets aside $4,500 per year for vacations.
"If the cost becomes substantially more, he would need to reconsider his budget," says Sigurdson, adding he should also buy travel health insurance to cover costs not insured by Manitoba Health. The premium would likely be expensive given his age, about $1,300 per year.
And Raymond must be sure to stay abroad less than six months a year or he risks losing provincial coverage, says Sigurdson.
Fortunately, Raymond has a little time to rethink his plan. His revamped strategy will inevitably involve finding ways to increase income while cutting costs. He might even want to work full-time two more years.
"He could then continue to live on his salary and build up his RRSP by investing the income he'll receive at age 65 from his CPP and OAS benefits," says Sigurdson, adding that's about $15,500 a year in additional savings.
The extra money would abide him more financial security. Money aside, however, he may not want to give up two years of retirement when he's healthy and able to travel, she says.
"But at the very least, he should plan to maintain a fairly substantial part-time job well past 65 -- preferably one that would still allow him to enjoy his island time."