Home' Trinidad and Tobago Guardian : June 8th 2014 Contents Client Situation:
Lawrence is a 50-year-old general manager with
a pharmaceutical company and earns $15,000
per month. Based on his years of service he now
has the option for early retirement with an incen-
tive after tax of $176,250. He will continue to
receive his medical benefits and the company
has offered to give him his age 60 pension today.
He can get a full pension of $8,000 per month or a reduced
pension of $6,000 with a tax-free lump sum of $250,000. He
has a small private annuity that matured one month ago but
is too small to generate a pension so he will receive an after
tax refund of contributions of $80,000. He also has savings
in a money market account of $60,000.
His mortgage balance is $355,271 and will be paid off in 10
years at $4,125 per month. The three-bedroom house in which
he lives with his wife Juliana sits on 8,000 square feet of land
and is valued at about $1,200,000. Lawrence also owns one
lot of land a couple miles from his house valued at $350,000.
He has 36 payments of $750 remaining on a land loan (APR
8.25 per cent.)
Lawrence is not certain if he should take up the retirement
offer. If he does, his challenge will be to cover monthly expenses
of $5,000 plus his loan payments and continue to support his
wife and 12-year-old daughter Victoria.
His retirement plan was to build on the land and generate
a rental income. An estimate from his builder put his construction
cost in the vicinity of $500,000 for two apartments, which
could yield $5,000 per month; the project will take six months
Lawrence is seeking our advice on the following:
• Should he take the package, if so, should he take the
lump sum and the reduced pension or the full pension?
• Should he clear off his loans or instead use the money
to build the apartments?
• Should he sell the land and use the money for another
real estate deal?
• Does he need to go back out to work after retire-
Nick's assessment and
Lawrence s primary objective is to secure his retirement
income; preferably from sources that are predictable and increas-
ing to cope with the ravages of inflation. He has two pieces
of real estate: one is his primary residence and the other a
vacant lot that he can sell and take a profit or develop it to
provide rental income.
If he decides to accept early retirement, he will see a drastic
cut in his pay from $15,000 to $8,000 and possibly $6,000.
If he continues to work he will pay off his mortgage in 10 years,
have some money saved (Table 2) and collect a handsome
If he takes the offer to retire today with the incentive he has
to seriously consider how he will make up for the shortfall in
his earnings especially if he opts for the reduced
Lawrence will still have the option to take the
same pension lump sum when he is 60 years old
and this, added to his savings, will be a sizeable
Money today is more valuable than money in 10
years so even though he will have some cash at his
disposal in the future he may have lost 50 per cent
of his buying power using the past as a guide. Con-
versely, both his home and the vacant lot could
double in value.
Focusing on holding cash over the long haul will
invariably lead to a loss of real wealth. Converting
cash into an asset that will preserve wealth and pro-
duce income should be his objective.
Based on the numbers given (illustrated in Table
1) Lawrence will not have sufficient cash to take
care of all of his needs therefore he has to choose
the best strategy to accomplish his goals.
Regardless of which decision he makes, Lawrence
can and should completely repay the land loan from
savings to improve his monthly cash flow and save
on interest cost.
If he accepts early retirement and takes the full
pension without the pension lump sum, he can use
only his incentive money plus his annuity proceeds
and pay down his mortgage debt. He can then
approach his bank to reduce the payments; based on 10 years
and the implied interest rate of 7.0 per cent (Refer to Tables
Table 3 gives a few scenarios illustrating the transition from
current employment to life with a pension (full and reduced)
then including rental income.
If he chooses to take the incentive: $176,000, the annuity:
$80,000 and the pension lump sum: $250,000 totaling:
$506,000; he will have enough to cover the construction cost
of $500,000. In the time he takes to complete the apartments
he will need to take care of the shortfall in monthly bills of
($3,375) by using some of his money market savings after he
pays off his land loan of $23,846 ($60,000 - $23,846 = $36,154).
Over the next 10 years the mortgage will be repaid on schedule
and he will see a drastic increase in his cash flow after that.
If mortgage interest rates increase he can cover this by increments
in his rental income. His overall net worth will also increase
significantly because of his savings from monthly surpluses
and to a greater extent the appreciation of his property values.
So to answer Lawrence s questions as to what he should do,
I would say he should seriously consider taking the package
with the additional pension lump sum, clear off only the small
loan, let the rent cover the mortgage payments and not sell
the land but develop it for cash flow.
If he wishes to go to work it would be because he is too
bored at home and could make a couple dollars to take Victoria
out for ice cream.
(Details were modified to protect client s identity)
Nicholas Dean (Cer-Fa) is a financial coach and mentor
who is the managing director of the Financial Coaching
Centre. He can be contacted at:
JUNE 8 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL PLANNING | SBG9
Retire early with benefits
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