a

j

‘Business

TheReview Wednesday, August 22,1990 — B7

Experts respond fo retirement question

Jack and Jill Bush want to retire
in about 15 years (he’s 29, she’s
32) with gross income of $100,000
a yeat.

“How can we achieve our
goal?’ Jack asked when he
responded to this column’s recent
“free financial plan” offer. The
answer, from members of the Can-
adian Association of Financial

Planners who reviewed the

<-

Bushes’ situation, was clear:

“You can’t.”

The Bushes (not their real
name) live and work in a remote
part of the province. They eam
around $150,000 — about
$50,000 in bonuses — with three
months’ paid holidays a year.

“So far, we've got some flow-
through shares, $35,000 of our
employer’s shares in our RRSPs, a
$50,000 term deposit and three
rental properties in three small
towns worth, after deducting the
mortgages, about $110,000,” said
Jill, who is now expecting the

ageouple’s first child. “I'll quit work

once we start having children.”
Relatives live in the places and
pay below-market rents. Jack, who

_ ™ Says he’s conservative while his

Cia Yass aS

wife is a gambler, feels their
retirement income would be pro-
vided by his company pension,
their RRSPs and the rentals.

The financial planners were
skeptical:

“To reach your goal, you’d have
to save about $45,000 a year —
and even if you could collect your
pension at 45 (which is highly
unlikely), such early retirement
would cut the pension dramati-
cally.”

| «gy ‘The planners’ recommendations

were made at the second annual
CAFP Pacific Planning School.
The Bushes were among the five
winners chosen to receive free

*® financial plans. Their report was

prepared by Peter Baigent, confer-
ence chairman, and his education
committee.

_-@he Bushes pay nothing for food
and housing. They spend about
$2,000 a month on personal
expenses, including $4,000 a year
for travel (their company pays for
four return flights a year out of
their worksite) and $5,000 for
miscellaneous. Said one of the
planners. “You should find out
where most of that money does

go.”

The Bushes have been saving -

and investing around $17,000 a
year as well as making mortgage
payments of about $20,000 a year
on the rental properties.

When they move south to raise
their family, they plan to buy a
home — their first principal resi-
dence — for between $100,000

Photo Reprints

656-1151

and $200,000 and spend about
$60,000 on two cars. “We have
furniture in storage,” said Jack.
The Bushes hope to have several
children. “I don’t know what it
will cost to send them to university
in 20 years, but that money will
come from our savings,” Jill said.

In their recommendations, the
financial planners repeated that
the Bushes were unrealistic to
expect to retire in their mid-40s.
“You are unlikely to have the
$100,000 a year of income you
want and you will also have a
family entering the expensive
teenage years — with even greater
education expenses ahead.”

Some of the financial planners’
key suggestions:

— Save as much of Jill’s income

- as possible. She will probably

always be in the lower tax bracket
and so will pay less tax on the
investment income than Jack
would.

— The rental losses are restrict-
ing the tax-free capital gains other-
wise available on the flow-through
shares. Review the CNIL (cumula-
tive net investment loss) rules
which are causing this problem.

— Most of money is in revenue
property; think about more diver-
sification. These rentals are in
low-growth towns. Expenses
exceed income — especially with

current high mortgage rates and
the low rent being charged to the
relatives; cash flow should carry
the monthly payments. Perhaps
sell the least promising property.

— Also consider diversifying
the RRSP investments. “It’s
unwise to have most of the money
in one company, even though it is
the employer’s stock,” said the
financial planners.

— Make sure that there is a
minimum of $2 million liability
insurance on each rental property.

— Jack should have enough life
insurance to cover all the mort-
gages on the rental properties and
the future principal residence.

— Through the wills, carefully

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— Buy a private disability
insurance policy for Jack for long-
term benefits. His coverage at work
says that after two years he will not
be covered if he can do any work
he is considered educated, trained
or qualified to carry out — typical
wording on many group disability
policies. (He could be a night clerk
in a second-rate hotel and so
would no longer receive disability
payments.)

Jack’s own policy should pay
benefits as long as he is unable to
work in his principal job specialty.

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Mike Grenby is a Vancouver-
based columnist and independent
personal financial adviser; he
will answer your questions as
space allows in his column —
write to him c/o The Review, Box
2070, Sidney, B.C. V8L 3CS5.

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