In British Columbia, a man we'll call Larry, 37, has built a career in management.
He has a gross income of $80,000 a year plus annual bonuses that range from $10,000 to $20,000, financial assets of $193,000 and a $40,000 interest in his company's pension plan. With no liabilities, he has net worth of $233,000.
Larry's life is clear of commitments. He rents, therefore there is no mortgage.
His bills are paid when issued and he shares expenses with his girlfriend. He is prudent - even a new car he bought recently is a good, used two-year-old compact model. "It's the newest I have ever had," he explains.
"Am I oversaving and sacrificing the present?" he asks. "Should I buy into a real estate market that could drop considerably, and should I plan to retire at age 55 and then choose another career?"
WHAT OUR EXPERT SAYS
Facelift asked financial planner and portfolio manager Adrian Mastracci, head of KCM Wealth Management Inc. in Vancouver, to work with Larry.
"Larry has the capacity to save as much as $25,000 to $30,000 per year," the planner notes. He is enrolled in a company pension plan that will pay him about $56,000 a year at retirement. He can also contribute to his RRSP each year, but is limited to $8,100 for 2009 by the pension adjustment that caps total individual registered savings, Mr. Mastracci says.
Those are the limits of what Larry can save, but what he should save is another issue. He has not focused on his retirement goals very well, the planner adds. Larry would like to have $90,000 of pretax annual income beginning at age 55.
Assuming that Larry lives to 84, that inflation runs at 2 per cent a year, and that his assets generate a pretax return of 6 per cent a year, he will require $840,000 of capital to meet his goal, the planner estimates.
The $840,000 goal is attainable if Larry puts $20,000 a year into his registered and non-registered accounts to his age 55, the planner says.
At retirement at age 55, Larry will therefore have estimated pension income of $56,000 a year and income from invested capital of $34,000 a year. That total of $90,000 a year will carry him to age 65.
At that time, he will be entitled to reduced Canada Pension Plan payments of $8,724 a year based upon the planner's estimate of benefits curtailed by ending work at 55. He will receive Old Age Security of $6,204 a year subject to the clawback that currently begins at $66,335 a year. These benefits, combined with his annual company pension of $56,000, will give him a total of $70,928. To meet his $90,000 goal, he will need to draw only $19,072 from savings. In terms of his expressed needs, Larry is oversaving.
There is more that Larry can do with his money than squirrel it away in banks and stocks. He can get inflation protection for housing by buying a home. Once the home is paid for, Larry will only have to pay for maintenance and repairs. As a renter, he will pay ever more as prices rise. This is already in Larry's mind as he plans to use $100,000 of his cash for a down payment on a home.
His high saving rate would allow him to pay off the mortgage within 10 years, Mr. Mastracci says. Late in life, he could sell the home to raise cash for other needs.
It's clear that Larry will be able to meet his goals as a single man. Were he to have a family, his goals would have to change. His anticipated retirement at age 55 could then be in jeopardy. But if nothing else changes, if he continues to share expenses with his girlfriend, a government employee with a solid pension of her own, and if he continues to get promotions and bonuses, he will end life financially prosperous but perhaps poor in the sense of having missed out on things in life he cherishes.
"What seems to be a simple case of a man with a good career and a good income turns into the problem of knowing what work is really all about," Mr. Mastracci says.
"I fully expect that he will attain his present goals. Indeed, he will have a large financial surplus if he just carries on with no changes in his life. For Larry, the issues thus become non-financial - what the work is for, why he would want to stop doing it, and what sort of second career would be fulfilling."
"In my current job, I do work that I don't mind," Larry explains. "But neither do I love it. I feel trapped in my pension plan with 17 years of service and the ability to retire in 18 years. Then I would chase what I love, though I haven't yet found out what that is. For now, I am a prisoner of a generous pension plan."
Man in B.C., 37, with good career, six-figure income
More money than purpose for it
Decide what the money is for, then allocate between present and future
More satisfaction from the work he does and the income he earns
Net monthly income:
Savings $111,000; Stocks $15,400; RRSP $66,600; Pension $40,000; Total: $233,000
Rent (Larry's half) $340; Utilities $115; Food $190; Dining out $280; Entertainment $180; Clothing $35; Car fuel, repairs $120; Travel $425; Car, home insurance $67; Charity, gifts $115; Misc. $233; Savings $ 2,500; Total: $4,600
Special to The Globe and Mail
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