A Point Fortin couple was killed execution-style this morning while they slept in their bed at their Cochrane Village home.
Mary, age 55, has opted for early retirement from her job of 25 years. She is expecting a full monthly pension of $4,000 or a reduced pension of $3,000 plus a tax-free lump sum of $144,000.
For the past 15 years she contributed $1,000 per month to a personal annuity and her insurance company recently wrote her advising that she is now eligible to receive a full monthly pension of $1,280 or a reduced pension of $960 plus a 25 per cent ($64,000) tax-free lump sum. She currently rents a two-bedroom apartment connected to her home, which earns $2,500 every month. When she turns age 60, she will start collecting a National Insurance pension of $3,000.
Mary estimates that she needs about $5,000 monthly to live comfortably today. She would like to take the lump sums from both pension plans to do some much needed repairs to her roof costing $150,000. Mary wants to know if she will be able to meet her monthly expenses when the cost of living increases. She also wants to know what strategies she can employ to deal with her needs in the future if it is unfavorable.
Nick’s assessment and advice
Mary is very right in considering the increase in the cost of living during her years of retirement. The biggest challenge she and many retired people face is the destructive effect of inflation whilst living on fixed income sources. Three of Mary’s cash flows are fixed in nature; unless, of course, if NIS increases.
The rental component in her income is the only one that has the potential to move in tandem with inflation. Her decision to take the lump sums now to repair the roof is probably a good one since she may not be in a position to raise much capital from borrowing, in light of her age and current level of income. Overall it is definitely a good idea to secure and improve her property investment.
Mary’s total starting income will be $6,460 until she begins to collect her NIS at age 60. Thankfully her needs are less than her means at this time and, as such, she has a small surplus.
For illustration we can give an idea of what she can expect down the road by making assumptions about the rate of inflation (7.0 per cent annually) and the potential increase in rental income (5.0 per cent annually). A higher rate of inflation was chosen as this includes all goods and services whereas rent is only one item in the basket of goods used in inflation calculations and may not be as high as other items.
Table 1 and the graph shows that between the ages of 65 and 70 Mary may be faced with a deficit as her cost of living surpasses her income. To cope with this many retirees find ways to cut back on daily living or increase total income. It is not likely that after 15 years in retirement Mary will consider looking for employment to bridge this gap.
Adjusting living arrangements
Mary can consider trading living spaces between the apartment and the main house. In so doing she might fetch more rent and be able to scale down the maintenance costs and stress of a larger place. She could even consider extending the house to accommodate another apartment however this option would require some capital.
Saving in retirement
Mary’s monthly savings will vary from period to period because of increases in the cost of living on the one hand and changes in her Rental and NIS incomes on the other hand.
After she uses her pension lump sums totaling $208,000 (Pension: $144,000+ Annuity: $64,000) to finance the roof repairs of $150,000 she will be left with $58,000. This sum added to her total savings for the first five years of $87,600 (Surplus of $1,460 x 12 months x 5 years), plus her savings for the second 5 years of $188,820 (New Surplus of $3,147 x 12 months x 5 years) she would have $334,420.
This figure does not include any interest, distributions or gains that she could achieve if she chose to invest in instruments such as a money market account (safer) or some kind of stock based (riskier) mutual fund.
If she chooses to direct the bulk of her surpluses towards the construction of a second apartment she can do this on a phased basis when her savings build up adequately.
If Mary is unable or not inclined to squeeze more rent money out of her property she can consider investing in an unregistered annuity (no tax benefit – as she pays no taxes) that has an indexation feature, which provides pension increases periodically. Of course these funds should free of charges and skewed towards safer instruments as at this stage of her life she will find it more difficult to recover from an investment loss.