Money Makeover: No kids, no debt... no problem?

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John and Mary, both in their mid-50s, have few worries as they look forward to their golden years.

"We don't have kids so we're not too concerned about leaving a legacy," says Mary, adding they also have no debt.

John, a provincial government employee, plans to retire at the end of this year with a full pension, receiving a gross pension income of about $3,000 a month. Mary, a federal government employee, cannot retire with a full pension until 2015, but she wants to retire at the end of 2011 or 2012 with a reduced pension.

On top of their pension incomes, Mary has $99,000 in a locked-in retirement account (LIRA), and they have about $115,000 in RRSPs.

John also will receive $46,000 in severance, including vacation pay, while Mary will receive $15,000.

So what is their problem?

The couple appears set for retirement, and Mary says she thinks they will even have enough money to travel at least three months of the year, on a vacation budget between $5,000 and $10,000.

In addition, they plan to trade in their car for a truck and fifth-wheel for road trips. They have more than $49,000 in non-registered money as well as $20,000 in tax-free savings accounts (TFSAs) to cover the cost.

"We'd like to travel as much as we can during the reward years, from 55 to 70, but after that, we're not sure how much we'll be able to do," she says. "I don't think I'll be skiing as hard. Let's put it that way."

Still, Mary says she finds herself questioning their plan.

"I think our retirement plan is ready, but we'd like someone to go through it and validate it," she says. "Are there any red flags that we might have missed?"

Winnipeg-based financial planner Daryl Diamond says "no kids, no debts, no worries" is a pretty accurate assessment of their situation and ability to retire.

"Since they do not have any legacy objectives at this time, they can feel free to use what they have accumulated to fund their lifestyle objectives," says the certified financial planner with Diamond Retirement Planning.

Diamond did some number-crunching, basing their retirement income as of Jan. 1, 2012, and says Mary is likely better off retiring sooner rather than later -- even with the penalty to her pension.

"Don't think of it as a penalty; think of it rather as getting a year's worth of payments in advance," he says.

"If there were no other personal assets to create income, then maybe it would be better to wait, but that is not the case here."

He says Mary needs to ask herself if it's worth working an extra year while her husband is retired to earn the $140 in additional after-tax income every month from her pension.

Even with the reduction, their pension payments alone, when split to maximize tax savings, will provide them with a combined net annual income of about $42,000 starting in 2012. Their projected annual expenses, including discretionary, would be about $37,500, leaving them with a chunk of money for their vacation fund.

The rest of the money for vacations, at least until they begin collecting CCP and old age security (OAS), can come from their savings. Diamond says they should tap into Mary's LIRA first.

"The reason for this is that money 'locked in' under pension legislation has restrictions on how income may be withdrawn, so it is better to use the less flexible sources of income first," he says. "This would be done for the start of 2012 when Mary will be age 56 and as such, she will be permitted to withdraw about 6.5 per cent of the capital or about $6,500 for the year."

By age 60, they should start collecting CPP, adding another $7,847 each in income before taxes, and at 65, OAS will add another $6,192 each per year before taxes.

Their RRSPs will not be needed for cash flow for regular expenses and can be used for discretionary spending. Still, they should look at strategies to reduce their taxable income when they have to convert their RRSPs to a retirement income fund and start declaring portions of it as income.

"There are ways to meaningfully defer and systematically convert these to non-registered accounts to minimize future tax issues," he says.

For example, if their income -- in particular, before age 65 -- is well below the first federal tax bracket, they could make an additional withdrawal from their RRSPs, pay the tax and invest the after-tax amount in non-registered investments or contribute to a TFSA.

"Yes, they pay the tax earlier on this withdrawal, but at the lowest rate," he says. "This strategy, executed over a number of years, could help preserve government tax credits after age 65 by keeping their taxable income low."

But they also have other RRSP considerations. In particular, they should look at sheltering their expected severance packages by transferring as much as possible to registered savings.

The retiring allowance rule permits them to transfer to an RRSP, regardless of contribution room, $,2000 "for each year or partial year of service prior to and including 1995 plus some additional amounts for years when they were not members of the pension plan," he says.

Combined with the fact they each have about $16,000 in RRSP contribution room available, they should be able to shelter most of their severance, if not all of it.

"Vacation pay does not qualify for the retiring allowance transfer, but it could be moved to an RRSP through regular contribution room," Diamond says.

With their TFSAs and non-registered accounts, John and Mary might want to consider an alternative to using those funds to pay up front for the truck and fifth-wheel.

"There are lots of dealerships offering attractive financing packages so why not use their money instead of giving up yours?" he says. "Pay it monthly, over time from the non-registered investment account, and let the balance of your investment capital work for you at the same time."

To do this, however, they need to restructure their non-registered portfolio to provide the payments while maintaining a balance between preserving their savings in low-volatility investments and growing them at a rate that outpaces inflation. In fact, they need to ensure all their investment portfolio focuses more on capital preservation so they can draw on those savings as required without having to worry about stock market gyrations.

"I am referring here to a balance of dividend-paying stocks and bonds, not entirely in fixed income such as only GICs and bonds," he says, adding bonds and GICs alone will not yield enough in the current environment of low interest rates.

Overall, however, Diamond says John and Mary can look forward to a comfortable, early retirement -- though he did have one more suggestion they'll be happy to hear.

"Candidly, Mary could even retire at the end of 2010 with John," he says, adding this bears further investigation.

"They will have more than enough cash flow to do what they want to do, so why not start at the end of this year?"

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John and Mary's finances

RETIREMENT SAVINGS

Joint non-registered: $40,000

Mary non-registered: $8,900

John RRSP: $58,000

Mary LIRA: $22,000

Mary LIRA: $77,000

Mary RRSP: $57,000

Canada Savings Bond: $5,000 (work deduction plan; used for travel)

TFSAs: $10,000 each

Home (owned): $350,000 assessed value

MONTHLY EXPENSES

Fixed and necessities (includes groceries, gas, insurance, utilities): $1,875

Discretionary (includes hobbies, entertainment, dining out): $1,250

Total: $3,125

Additional retirement expenses: $5,000 to $10,000 for vacations; $40,000 for truck and fifth-wheel

PROJECTED MONTHLY RETIREMENT INCOME:

John's gross pension income: $3,000

Mary's gross pension income: $1,100 (2012 retirement start); $1,300 (2013 retirement start)

Estimated net, combined monthly income from pensions: $3,500

Additional pension payouts from severance (includes holiday pay):

John: $46,000

Mary: $15,000

Republished from the Winnipeg Free Press print edition March 20, 2010 B11