Move to Calgary would cut this frugal Yukon couple's expenses even further in retirement

Two-defined benefit pensions, no debt and savings add to their security

It makes more sense for this couple to buy a house in Calgary instead of rent, financial planner says.

A couple we’ll call Jerry, 57, and Eleanor, 55, make their home in the Yukon with their children ages 23 and 25. Jerry has retired from a government job. Eleanor is a technical analyst for a transportation company. With Jerry’s $4,223 monthly pension and Eleanor’s $10,126 salary, they are bringing in $14,349 in pre-tax monthly income and $9,778 after tax. They have zero liabilities and they save $5,628 per month. Their plan: sell their present home and move to Alberta, giving their mid-20s children $100,000 each. The want to buy another house down south for $600,000.

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The couple plans the future carefully, adding to the security they already have with a low-seven-figure net worth and no debt. Jerry and Eleanor have added to the security of having two defined-benefit pension plans with savings and frugal spending. They have a great deal of liquidity, so they can raise cash at any time.

Pensions

Jerry and Eleanor will have fully indexed pensions totalling $9,613 per month. Their incomes after complete retirement should hold them in good stead for decades. They want to know if they should buy a new home in Alberta or rent instead and want advice on what they can do to avoid or minimize the OAS clawback when each is 65.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Jerry and Eleanor. His advice — sell the Yukon house where prices follow mining activity. Mining is doing well, so they could get a good price for their house. They can buy in Calgary where home prices are soft. When oil prices rise in Calgary, house prices should follow, Moran suggests. For now, the move means shifting from high-cost northern living to more reasonable southern Alberta.

To own or to rent?

There is much speculation in contrasting house prices in Calgary and the Yukon, but in broad terms, ownership works. After all, Moran says, if they were landlords in the Yukon, the rent they could charge would be taxable and the rent they would pay for a home in Calgary would not be deductible. They have a long time horizon, perhaps four decades or more, and ownership makes more sense over the long haul, Moran notes. Finally, if they invested what they might spend on a home and rented, the investment income would push personal incomes higher and expose them to the OAS clawback.

Predicting retirement income involves speculation about what their investments will do before and while their pensions are being paid. Jerry’s pension, $4,223 per month to age 65 and Eleanor’s pension, $5,405 per month at 56, will last until he is 65 when his $858 per month bridge ends and OAS and CPP start. His OAS will be $7,500 per year indexed and taxable. His CPP should be 80 per cent of the maximum $14,445 per year or $11,556 per year. Eleanor’s OAS and CPP will be about the same.

The couple’s private savings are $136,000 in RRSPs for Jerry and $160,000 for Eleanor. Their TFSA savings are $77,000 for Jerry and $76,000 for Eleanor. Their taxable joint savings are $264,000 plus $10,000 of company shares for Eleanor. Add in their $650,000 house and $20,000 of cars and they have $1,393,000 net worth. For their situation, in which pensions will pay their cost of living, RRSP income will be extra money they can spend on travel, gifts or good causes, Moran adds.

Retirement income

Eleanor is still working generating RRSP room. She has $7,363 of room. If she adds $7,363 to her $76,000 account in the last year of her employment and the combined $303,363 continues to grow at three per cent after inflation, they would have enough to withdraw $20,560 per year for 19 years, until Eleanor turns 75.

Up to age 65, the couple would thus have pension income of $50,676 for Jerry and $64,682 for Eleanor, Jerry’s $10,297 bridge to 65, and RRSP income of $20,560. That’s a total of $146,215. Even with splits they would be close to tripping the OAS clawback, which today starts $79,845 per person, but the approximately $6,000 of breathing room would probably protect them. After splits of eligible income and average 20 per cent tax with Alberta rates, they would have $9,750 to spend per month. That far exceeds present spending of $3,500 per month.

Once both are 65, Jerry would lose his $10,297 bridge. Their incomes would be $50,676 pension for Jerry and $64,682 for Eleanor, two CPP pensions of $11,556 each, two OAS pensions of $7,500 each and RRSP income of $20,560. That’s a total of $174,032. Split and taxed at an average rate of 20 per cent, they would have $11,600 to spend per month.

We have not included money from selling Eleanor’s $10,000 of company shares for we do not know their future price. Likewise, we have not included proceeds of $153,000 of present TFSA assets they may use along with potentially appreciated company shares to make up $100,000 wedding gifts for each child. Clearly, the couple has more than enough money for a new house and the wedding gifts.

There are risks in this plan. They might not realize $650,000 for their Yukon home and might spend more for a Calgary home. They might want to indulge their taste for travel which they currently budget at zero. Most of all, their retirement outlook from their mid-50s to 85 or 90 is long. A lot could change.

Inflation

Their largest risk is the way they have invested their retirement savings. Their employment pensions are fully indexed, but the $713,000 they hold in their RRSP, TFSA and non-registered savings is all cash. They have eliminated market risk in their planning but they have accepted guaranteed loss to inflation for their savings. As the purchasing power of their savings falls, they will be ever more dependent on their defined-benefit pensions. If they invest in diversified assets, they can maintain their way of life. It is the only long-run solution to pacing inflation.

Retirement stars: 4 **** out of 5

Financial Post
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