Summary: The last two columns looked at the finances
of Dr and Mrs Durst of North Vancouver. The 64-year-old cardiologist hopes to
cut his practice back to two days a week and spend much of his time at their country
place on Vancouver Island sailing his boat. His wife, Lin, age 53, recently launched
her own interior design business and has no immediate plans to retire. With a
net worth of $1.6 million including $735,000 in RRSP savings, they thought they
were sitting pretty. A closer look at their expenses suggested they'll need pre-tax
earnings of almost $180,000 a year. With Lin's new business just at the break-even
point, they fear they'll have to go back to the drawing board. Once
the Dursts had all the figures together, the couple sat down in the glassed-in
deck of their North Vancouver home with a pot of coffee to determine exactly where
they stood financially. Both were relieved to have gone through the exercise.
For years, the doctor confessed, they'd been flying by the seat of their pants. They
began by looking at their sources of income to find the $180,000 a year they need
to finance the dream of him working two days a week, (see table).
| SOURCES
OF INCOME | |
His estimated income |
$80,000 | |
RRIF proceeds |
$28,269 | |
Her estimated income* |
$50,000 | |
TOTAL |
$158,269 | |
After taxes |
$79,135 | |
Estimated expenses |
$88,000 | |
Shortfall |
($9,665) | | | | *
Estimated profit on the sale of furniture she bought in Hong Kong for resale.
Once the figures were in place, the quick fix was obvious: he could work an extra
day a week and that would pretty much take care of it. It would also put a big-time
dent in his plans. The next income source to consider was the RRSP. |
RRSP TO RRIF
You must wind down your RRSP by age 70. You have two choices in doing so. You
can either purchase an annuity or establish a Registered Retirement Income Fund
(RRIF). Your insurance agent will be delighted to tell you about all the joys
of annuities but, for most doctors, RRIFs are the way to go. The ins and outs
are more complicated than they should be, so know the big picture: a RRIF is like
an RRSP but in reverse. It allows you to gradually take money out of your RRSP
while continuing to accrue tax-free income on the balance. There's no age limit,
so Dr Durst can set one up at any time. There is, however, a minimum amount you
must withdraw each year. The formula for that minimum withdrawal is this: 1/(90-your
age) X the total in your fund. In Dr Durst's case the figures are: 1/(90-64) X
$735,000 = $28,269. Couples (married and common law) have another option. They
can use the age of the younger spouse in making the calculation. This will reduce
the minimum amount you must withdraw, and keeps more inside the plan gathering
income tax-free. Most couple elect to take a plan using the youngest spouse's
age. In the Dursts' case, the formula looks like this: 1/(90-53) X $735,000 =
$19,865. That would leave the couple about $20,000 short every year but would
provide Mrs Durst with more of a nest egg for her old age should she outlive Dr
Durst. That's what they reluctantly decide to do. Should they need extra money
in the short term they can always elect to take out more. STRETCHING
IT
Time to look at the expenses. As readers of the last column will
recall, the Dursts are paying almost $700 a month ($8,400 a year) in interest
on credit card debt. They suck in their guts and decide to pay off the debt by
selling some of the $87,000 in stock they hold outside their RRSP. Equally important,
they decide to exchange their credit cards for debit cards. From now on it's strictly
pay as you go. They then turn to their leased cars — his Ford Expedition,
her Lexus. They estimate that by terminating the leases early, and purchasing
two "pre-owned" vehicles that get good gas mileage, they can close the gap. They
go through the want ads, just for fun, and find a Jetta Diesel for him and a six-year-old
Mercedes diesel for her. That, for the time being, closes the gap. He can slow
down any time he likes.
|
