JUSTIN TANG/THE GLOBE AND MAIL/Simpson and Judy/How to cover lifestyle expenses.
Original story is by Dianne Maley, in a special to The Globe and Mail.
We all need to plan ahead for retirement. No matter how you visualize how it will be later, it will always be difficult to get the lenses right. At best, you can use the personal experiences of your parents, your friends parents or that of known relatives.
It will be totally inappropriate not to get an idea of what that period of life will look like. Quite well, different countries and jurisdictions have rules and programs that are different from one another.
But the basic rule is still the same, plan ahead. For there is coming a time when, as a result of age and for health consideration, you will not be able to work like you are doing today. By virtue of an early start, or outstanding pre-retirement investment, you may be able to earn a passive income that will be close to today’s income.
How to cover lifestyle expenses – Simpson and Judy (not real name) example
Simpson and Judy have retired from the work force – Simpson from the government and Judy from financial services – and are planning to spend more time travelling.
While they are not prosperous, Simpson and Judy are comfortable. They bring in more than $80,000 a year before tax between the two of them in government benefits and pension income. Simpson’s defined benefit pension is $37,290 a year, rising with inflation. Judy’s work pension is about $12,200 a year, not indexed to inflation. As well, they both get Old Age Security and Canada Pension Plan benefits.
“No matter how well off people are, they can’t enjoy their retirement to the fullest if they don’t have confidence that they have enough.”
CLIENT DESCRIPTION AND SITUATION
People involved: Simpson, 71, Judy, 65, and their three children.
The problem: Determining how far their savings and investments will go. How to invest the proceeds of a cottage sale. And how to keep income taxes to a minimum.
Aspiration and plan: Set aside some money for health care later in life. Take full advantage of their tax-free savings accounts. Consider hiring an investment counsellor to build a more diversified portfolio.
The payoff: Confidence they can achieve their goals with no more worrying about financial security.
Interesting readers comments on Globe and Mail investing and personal finance column
From over seventy comments on the article in globe and mail, the four below provides insights into how some are thinking about retirement and classification of the wealthy. Personally, it got me thinking, which side do I belong, poor, average, prosperous or wealthy?
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“On average, people live in a nursing home for less than three years, some five years, before they die.”
“We currently rent an apartment which is well-equipped with many amenities,” Judy writes in an e-mail. They own a lakefront four-season cottage. This is a former second home that they have decided to sell because they don’t use it much any more.
They plan to spend $15,000 a year travelling for the next decade. They are concerned they may have to tap into their savings or spend some of the proceeds of the cottage sale to cover their lifestyle spending.
As well, they wonder how best to invest the net proceeds of the cottage sale, estimated at $450,000. “How much should we put aside for long-term care support if needed?” Judy asks. “Would I be able to keep up our standard of living if Simpson should die and I lose half his pension?”
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Globe and mail asked an expert to look at Simpson and Judy’s situation.
WHAT THE EXPERT SAYS
- Simpson and Judy have worked all their lives and managed their affairs wisely.
- They are financially independent, that is, they have enough to retire and maintain their lifestyle.
- As strange as it sounds, they lack financial security, or the confidence that they have enough to achieve all their goals.
- Based on an assumed 4-per-cent average rate of return and inflation of 2 per cent, they will have sufficient financial resources to maintain their desired lifestyle and achieve all their financial goals.
- Their financial independence is largely based on their work pensions and government benefits
- With $80,000 in pensions and government benefits, it looks like they have enough to cover lifestyle expenses and pay their income tax.
- Their travel money will come from investment income.
Benefits of giving children an “inheritance advance”
At some point before they pass away, the couples are thinking if they could afford to give each of their children an “inheritance advance.” The following may apply if they do so.
- It will allow the parents to enjoy seeing the good they can do.
- Siblings war tends to be strange. Distributing early would reduce the possibility that their heirs will quarrel over what might be a larger estate.
- Giving the children some money would reduce the parents’ investment income. It would lower their income tax liability and the possibility of having their Old Age Security benefits clawed back.
- It would help the children when they most need the help.
Experts recommends they hire an investment counsellor, and draw up an investment policy statement among others.
Nothing in this write up is an investment advise or a guide on how to manage your own personal affairs.