In Ontario, a couple we’ll call Phil, 58, and Nancy, 53, are looking at the end of their careers in nonprofit management and wondering if they will be able to sustain their way of life. Sidelined by a catastrophic illness, Phil has been on disability for several years. Nancy will work another two years, then quit. They have no children. Debts are mortgages on two rental properties and a small family loan.
They are apprehensive about the decline of their present $7,713 monthly combined income when Phil’s tax-free company disability insurance ends and then the loss of Nancy’s $5,348 monthly after-tax salary at retirement. When Phil’s private disability insurance ends, he will go on CPP disability at $1,284 per month. It’s about half what he now receives on the company unindexed disability plan. CPP benefits will be indexed and taxable.
“Can we afford to retire with my husband perhaps never able to work again?” Nancy asks. “Our goal is a $100,000 income before tax. Is that attainable?”
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Phil was incapacitated last year by a vascular issue. When Nancy retires, she will lose her own workplace drug and extended medical benefits insurance. It covers Phil who currently ne $30,000 of drugs and physical therapy each year. Phil’s employer will end his drug benefits this year. Much of the drug bill should be picked up by the Ontario Trillium Drug Program, depending on the drugs involved and income tests. If Phil qualifies, $18,000 of drugs he uses will be covered, leaving only $4,000 to be paid. Other therapies that cost $12,000 per year will remain his to pay. Tentatively, that means the drug and therapies bill in 2019 and later years will be $16,000 per annum. Almost all of that will be tax deductible, saving perhaps $4,880 of costs at their expected marginal rate of 30.5 per cent after splits of eligible income.
Phil and Nancy have $913,348 in financial assets including cash they are using to repay a $25,000 loan and, courtesy of the booming real estate market, a house recently appraised at $1,150,000 plus two rental properties with combined value of $1,789,000. Their debts totalling $395,629 are mortgages on the rental properties. The interest payments on the mortgages are tax deductible. The two properties generate $5,135 per month or $61,620 per year in net rental income after costs. That’s a 3.44 per cent return after costs. The return will rise in two stages when the mortgages for the properties are paid in full.
One property has a $13,512 annual principal and interest cost; it will be paid in full in four years. The other has a $31,200 annual charge; it will be paid in full in 11 years. On a monthly basis, when both mortgages are paid in full, the income provided by the properties will rise to $106,332 per year. Using the present appraisal, the return for rental units would then rise to six per cent a year.
Nancy has a defined contribution company pension plan. The employer matches her contributions up to five per cent of salary. Including the match, she adds $23,294 per year. On that basis, in the two years from today until her retirement in two years, her RRSP, with a present value of $538,501 and assuming a three per cent return after inflation, should have a value of $620,000. If that sum is annuitized to pay out all income and principal in the following 40 years to her age 95, it would generate $26,000 per year.
Phil can expect $1,065 per month or $12,780 per year from CPP at his age 65 in seven years and a company pension of $539 per month or $6,468 per year at 65. His RRSP, with a present value of $341,847 with no further contributions and growing at three per cent per year after inflation to $362,700 for two years could pay out $15,700 per year for the 40 years to Nancy’s age 95.
Assuming that Nancy remains at work for two more years, the couple will have her pre-tax work income of $103,000 per year after tax and Phil’s present nontaxable annual disability income of $28,380. Rental income will add $61,620 per year for total pre-tax income of $193,000. After 24 per cent average tax and with no tax on disability income, the couple should have $146,600 per year.
After Nancy quits her job, she can draw her taxable company pension, $5,748 per year. Phil will still have his non-taxed $28,380 disability income and annual net rental income of $61,620. With the same assumptions, Nancy’s RRSP withdrawals could add $26,000 and Phil’s withdrawals $15,700 per year. That’s a total of $137,448 with no tax on disability income. In four years, with one rental property mortgage discharged and its mortgage cost of $13,512 added to income, they would have total income of $150,960. If income is split and taxed at an average rate of 16 per cent after medical cost deductions, they would have $126,800 per year to spend, Stronach estimates.
When both partners are retired, they will have Nancy’s company pension, Phil’s $6,468 annual company pension, both RRSPs, two CPP benefits totalling $25,740, and two Old Age Security benefits of $14,434. Net rental income of $75,132 will rise by $31,200 in ten years when the second property is mortgage free. That raises total pre-tax income to $200,400, about double their $100,000 target income. After 24 per cent average income tax based on pension income credits and deductions for remaining medical costs, and modest Old Age Security clawback costs, they would have about $150,000 per year to spend, far ahead of their retirement income target.