Federal employee's uncertain job future clouds retirement picture

Enlarge Image

An adviser says Lenny and Nora must cut their monthly spending to meet their retirement goals. (RUTH BONNEVILLE / WINNIPEG FREE PRESS) Photo Store

Lenny and Nora's finances

INCOME:

Lenny: $69,000 ($3,358 net a month)

Nora: $36,000 ($2,058 net a month)

Rental property income: $5,000 a year (estimated)

MONTHLY EXPENSES: $5,798 (includes minimum payments on credit cards)

DEBTS:

Home mortgage: $306,000 owing at 3.89 per cent fixed, two years remaining

Line of credit: $47,148 at 3.5 per cent

Credit card one: $11,397 at 19.99 per cent

Credit card two: $10,812 at 19.99 per cent

Rental property mortgage: $336,863 owing at 3.5 per cent

ASSETS:

Home: $525,000

Rental property: $620,000

Canada Savings Bonds: $4,912

Lenny RRSP: $50,945

Spousal RRSP: $15,000

NET WORTH: $503,367

Lenny fears the axe.

It's not the actual tool that makes the middle-aged federal government worker uneasy. It's his job he's concerned about -- that it will fall under the axe amid the government belt-tightening to rein in the deficit.

"I'd say right now it's 50-50 that my job will be cut," says the married father of three late teenage and adult children.

"There are a couple of other jobs that I can go to, but I'd be in for a $20,000-a-year pay cut."

Lenny earns about $69,000 a year before deductions and taxes. His wife, Nora, also in her mid-40s, works for the province. She earns $36,000.

The couple plans to retire at 60 and while their work pensions will certainly be a large part of their retirement income, they also own a rental multi-unit rental property worth $620,000.

Lenny says the income property is the foundation of their retirement plan.

They still owe about $337,000 on the property but they expect, by age 60, they will have enough equity in the investment to realize a tidy profit. Any current annual profits -- generally about $5,000 -- from the property are invested in RRSPs.

The couple also has a $306,000 mortgage on a home worth $525,000, which won't be paid off at retirement, and they also owe $47,000 on a line of credit and $22,000 on their credit cards.

"We've had some unexpected expenses pop up."

Lenny says they're also worried about monthly overspending. Income from their rental property has helped them absorb many unexpected costs, as well as save for retirement.

But he says he is concerned a job loss in the near future may completely upend their retirement plan.

"We'd have to readjust everything," he says. "That's my biggest worry. If I take a $20,000 pay cut, how will that affect my calculations?"

Financial planner Trenton Mochnacz says the biggest problem facing Nora and Lenny isn't a potential job loss. It's spending more than they earn.

"Sometimes individual 'needs' and 'wants' become mixed up, and Lenny and Nora have been able to accomplish what they 'want' through the utilization of open-ended credit," says the certified financial planner with RBC Financial Planning in Winnipeg.

As they have noted themselves, life often comes with unexpected, costly turns and previous decisions that may have seemed inconsequential have profoundly negative effects today.

"We sometimes unintentionally create our own personal fiscal cliff," he says.

The most pressing problem to be remedied is their cash flow -- or lack thereof -- that will only get worse if Lenny is laid off.

Lenny and Nora have a fairly substantial net worth -- about $500,000 -- but they're eroding their wealth.

"Lenny and Nora are currently running a monthly deficit," he says.

"As a result, the open-ended credit -- credit lines secured by mortgages or credit cards with large limits -- have been utilized to accommodate their cash-flow deficits to fund the monthly expenses and lifestyle."

Obviously, this can't go on even if Lenny remains at his current job. By age 60, they would have accumulated more than $90,000 in additional debt, which would certainly put their retirement plan at risk.

Lenny and Nora need to get back to the basics. They must start budgeting and watching their spending very closely.

"It is critical for Lenny and Nora to start tracking their cash outflows, always asking themselves if the money they are spending is on a need or a want, so they can reduce their current expenses by at least $500 a month," he says.

While they may think all their income is accounted for in their current household budget, they need to become sticklers for detail. It's unlikely they'll be able to find lump-sum savings to make up for the entire shortfall. Instead, they will have to find a few dollars here and there to reach their goal.

And they need to address the problem immediately instead of waiting a few weeks when cost-cutting may be forced upon them if Lenny loses his job. If that happens, "strong consideration will need to be made to sell the revenue property," Mochnacz says.

Restructuring their debt, however, may offer them relatively quick and substantial savings. At present, their debt payments of almost $2,200 a month are unmanageable after accounting for all their household expenses.

"There is no additional cash flow at the end of the month to make an additional payment beyond the minimum payment on the credit cards," Mochnacz says.

But Nora and Lenny should be able to consolidate their line of credit and credit card balances into their mortgage, he says.

"With a new mortgage of $376,000 and a new mortgage payment of roughly $1,800 a month, they eliminate a majority of the cash-flow deficit and simplify their debt portfolio," he says. "And there should be no breakage costs to refinance as long as they are not switching institutions."

Many lenders will allow homeowners to blend the current balance at the pre-existing rate with the additional debt based on available rates.

"It is possible that in order to re-register a new mortgage, legal fees to run around $485 and a processing fee of $250."

If they can cut costs and Lenny keeps working at his current job, the couple should be able to retire as planned at age 60 and meet their expected income needs of $3,000 to $4,000 net a month. Income from CPP, OAS and their work pensions should be enough to fund most of their retirement income goals.

"And the expected net gain -- after taxes -- on the sale of the revenue properties at retirement should be adequate to ensure that all debts are paid in full," he says.

Their RRSPs can largely be used to fund trips and other extras in retirement. Any future contributions, however, should be invested in the spousal plan.

"This will maximize income-splitting opportunities early in retirement since they won't be able to split his work pension until age 65."

Yet, their retirement plan hinges as much on their ability to cut their monthly spending as it does on Lenny keeping his job.

In fact, if Nora and Lenny can eliminate their monthly deficit, they should still be able to attain the lower end of their retirement income goal -- $3,000 after taxes a month -- even if Lenny's job is cut and he has to take a job with lower pay, Mochnacz says

"The good news is retirement is still achievable."

giganticsmile@gmail.com

Republished from the Winnipeg Free Press print edition January 12, 2013 B7