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NATIONAL POST NEWS OPINION MARKETS INVESTING PERSONAL FINANCE MORTGAGES & REAL ESTATE TECH EXECUTIVE ENTREPRENEUR JOBS SUBSCRIBE PERSONAL FINANCE FAMILY FINANCE FAMILY FINANCE Greece | Eternal Truth | Bonds | Alberta | Debt | Housing Market | Oil | Apple | Bank of Canada | China Family making $200,000 a year is feeling the pinch in pricey NWT ANDREW ALLENTUCK | June 26, 2015 11:15 AM ET More from Andrew Allentuck Situation: Couple raising three children in Northwest Territories has high cost of living, risky investments Solution: Reduce investment risk by cutting carrying costs, allow for lower costs after move south In the Northwest Territories, a couple we’ll call Tom, who is 53, and Mary, who is 45, make a living that, with income from a rental suite in their home, is $196,600 a year before tax. After tax, they have $12,111 a month to spend. That would be considered handsome in southern Canada, but it is not lavish where food prices are at levels of luxury goods in the south and even gasoline is a third more than it is in Alberta. With three children ages 13, 10 and 8, their grocery budget is $1,500 a month, their two cars cost $600 a month to run and their utilities – heat, light and water – add up to $1,070 a month. However, their plan to move south after retirement will lower their expenses and help stretch their retirement savings. Related TRENDING Republish Reprint

Family making $200,000 a year is feeling the pinch in pricey NWT _ Financial Post

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Family making $200,000 a year is feeling the pinch in pricey NWT _ Financial Post

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  • 7/3/2015 Family making $200,000 a year is feeling the pinch in pricey NWT | Financial Post

    http://business.financialpost.com/personal-finance/family-finance/family-making-200000-a-year-are-feeling-the-pinch-in-pricey-nwt 1/3

    NATIONAL POST NEWS OPINION MARKETS INVESTING PERSONAL FINANCE MORTGAGES & REAL ESTATE TECH EXECUTIVE ENTREPRENEUR JOBS SUBSCRIBE

    PERSONAL FINANCE FAMILY FINANCE

    FAMILY FINANCEGreece | Eternal Truth | Bonds | Alberta | Debt | Housing Market | Oil | Apple | Bank of Canada | China

    Family making $200,000 a year is feeling the pinch inpricey NWT

    ANDREW ALLENTUCK | June 26, 2015 11:15 AM ETMore from Andrew Allentuck

    Situation: Couple raising three children in Northwest Territories has high cost of living, risky investments

    Solution: Reduce investment risk by cutting carrying costs, allow for lower costs after move south

    In the Northwest Territories, a couple well call Tom, who is 53, and Mary, who is 45, make a living that, with income from a rental

    suite in their home, is $196,600 a year before tax. After tax, they have $12,111 a month to spend. That would be considered

    handsome in southern Canada, but it is not lavish where food prices are at levels of luxury goods in the south and even gasoline is a

    third more than it is in Alberta. With three children ages 13, 10 and 8, their grocery budget is $1,500 a month, their two cars cost

    $600 a month to run and their utilities heat, light and water add up to $1,070 a month. However, their plan to move south after

    retirement will lower their expenses and help stretch their retirement savings.

    Related

    TRENDING

    RepublishReprint

  • 7/3/2015 Family making $200,000 a year is feeling the pinch in pricey NWT | Financial Post

    http://business.financialpost.com/personal-finance/family-finance/family-making-200000-a-year-are-feeling-the-pinch-in-pricey-nwt 2/3

    Pension peril looms for Vancouver man if his partner dies

    This couple really wants to retire now, but they risk messing up their entire plan if they do

    How this B.C. couple can buy a $940,000 home and still retire at 65

    Tom, who is a geologist, and Mary, a civil servant in the Territorial government, have built up

    the childrens Registered Education Savings Plans to a $101,000 balance. Thats a large sum,

    but only $33,300 per child; if one wants to go to medical school, then, as Tom says, they may

    have to remortgage their house. They have recently suspended RESP contributions to free up

    cash to pay down debts. Their home mortgage, a line of credit that finances a speculative real

    estate play and a car loan add up to $404,826, about twice their annual gross income.

    Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C.,

    to work with Tom and Mary. They have two solid paycheques and disciplined saving habits,

    Moran says. But they have problems in the high cost of living in the N.W.T and the cyclical

    nature of Toms work.

    Retirement the outline

    If Tom and Mary retire in 10 years, at Marys age 55, as they contemplate, they will have two

    defined benefit pensions. Marys will be from government as much as $51,024 a year plus a

    $10,440 bridge to age 65 depending on when she quits. Tom will have a $3,617 annual

    pension from a former job in a merchandising business. That would provide a base

    retirement income of $65,080 before tax. They have present financial assets of RRSPs and

    TFSAs that add up to $668,000, capital that would generate about $20,000 at three per cent

    indefinitely. That would produce total pre-tax income of $85,080 a year before tax. If they

    pay tax at an average 25 per cent rate, they will have $63,800 a year, or $5,320 a month to

    spend. At current levels of consumption, that would not be enough. But they expect to leave

    the north when Mary has retired and the kids are gone. They will have a much lower cost of

    living in southern Canada.

    Tom has 12 years to go to age 65, Mary 20 years to her 65th birthday. Then, it would be

    possible to add unreduced CPP benefits of an estimated 80 per cent of the maximum $12,780

    a year, or $10,224 per person. At 67, each would get full Old Age Security of $6,765. Marys

    $10,440 bridge would be gone, but their income would total $108,618 before tax. After an

    average tax of 25 per cent, they would have $6,788 to spend each month.

    Carrying less risk

    This projection has a blend of what is certain, such as CPP, OAS and their own job pensions,

    and what is uncertain the amount and means of obtaining investment income. That income

    is difficult to estimate. They have $250,000 in raw land in British Columbia that they may be

    able to sell as seven lots at $100,000 per lot, less $25,000 for preliminary work, net

    $525,000. The land has a $198,128 mortgage, so the eventual gain could be $327,000.

    Tom and Mary have two property loans, a mortgage on their home and a line of credit loan for

    their raw land. At present, their focus is to pay off the mortgage, which theyre doing at an

    accelerated rate of $2,600 a month, and just pay the interest on loan. While understandable, this approach is actually backwards. The

    interest they pay on their home mortgage is tax deductible, thanks to their income-generating rental suite. The land, however,

    generates no income, so it makes sense to pay off that loan first, Moran says.

    At their present payment rate, Tom and Mary will pay off the land in 20 years. To accelerate that, Moran suggests reducing their

    monthly mortgage payment to $1,500 a month and putting the rest of the money toward the land loan, along with any extra cash

    generated by their rental suite. That would allow them to pay off the land in 10 years. The house would be paid off in 12 years

    longer than their current schedule, but the tax advantages more than make up for the extra time. As a bonus, Moran estimates

  • 7/3/2015 Family making $200,000 a year is feeling the pinch in pricey NWT | Financial Post

    http://business.financialpost.com/personal-finance/family-finance/family-making-200000-a-year-are-feeling-the-pinch-in-pricey-nwt 3/3

    that this plan could produce savings of about $2,500 a year in after-tax interest costs.

    Enhancing returns

    The couple could get much more money out of their investments $3,400 in TFSAs, $664,600 in RRSPs, $ 7,000 of bullion and

    $53,874 of equity in undeveloped land, or about $729,000 by continuing to add $20,400 a year to their RRSPs. That is possible by

    using available space and income from Mary continuing to work for another 10 years, invested to return three per cent a year over

    the rate of inflation. That would raise their investments to $1,220,600 in 2025 when she is 55 and ready to retire, Moran estimates.

    If that capital were to continue growing at three per cent a year and is paid out completely in 35 years to Marys age 90, it would

    generate $56,500 a year from Marys age 55. Along with Toms $3,617 pension, Marys $51,024 pension plus the $10,440 bridge to

    65, they would have a total of $121,580 before tax from 55 to 65.

    When each is 65, they could add CPP benefits of 80 per cent of the maximum $12,780 per person or a total of $20,448, making total

    annual income $131,600 without Marys bridge. When each is 67, OAS would add $6,765, making their total and permanent annual

    income $145,120 before tax or, after an average 30 per cent tax (though none on TFSA payouts), leaving them about $8,465 a month

    to spend.

    With the children gone and their jobs ended, their expenses would drop by $400 a month for piano and sports lessons, $1,700 a

    month for RRSPs, perhaps $700 a month for food and $1,000 a month for extensive travel to the kids sports competitions, for total

    savings of $3,800 a month. Additionally, $3,400 of mortgage and debt payments would be gone. Their present budget of $12,100 a

    month would fall to $4,900 a month. Their budget would allow for additional spending, perhaps the travel they anticipate in

    retirement, and a surplus that could be invested in their TFSAs.

    With investment and home loans paid off, savings and job pensions should provide a secure retirement, Moran says.

    Illustration by Andrew Barr/National Post

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    Topics: Family Finance, Personal Finance, Retirement Planning

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