Carlos Osorio/Globe and Mail
Frank, 61, was fired from his $100,000-a-year government job. His wife, Diane, works in retail and earns about $39,000 a year. She is also 61 years old. She owns a house in a small town in Ontario and has no debt.
“I have little hope of finding a new job in my field,” Frank wrote in an email. “If you don’t move, you don’t have many opportunities locally, and even then, it seems like your age is already a disadvantage.”
When Frank turns 61, he becomes eligible for a reduced defined benefit pension. “If he receives the money this year, his penalty will be reduced by 20 cents,” Frank added.
Frank and Diane have more than $1 million in savings. “If he has $65,000 in after-tax income, will he be able to retire safely?” Frank asks. “How can I adjust my investments to get the most out of my tax dollars?”
We asked Warren McKenzie, a fee-only Certified Financial Planner (CFP) and CPA in Toronto, to look into Frank and Diane’s situation.
What the experts say
“Simple math and conservative assumptions show that Frank and Diane, now retired, could spend $65,000 a year after taxes and never run out of money,” McKenzie said. says. Planners say the key to financial independence is modest spending goals.
Starting in January 2024, Frank’s reduced pension will be indexed to inflation and pay him about $44,200 a year. In addition, Diane should convert her spouse’s Registered Retirement Savings Plan (RRSP of $506,000) into a Registered Retirement Income Fund (RRIF) and withdraw $45,000 annually, the planner says. This would result in an after-tax cash flow of more than $70,000 per year.
When he turns 70, he will receive about $73,000 a year in nominal amounts from the Canada Pension Plan, Old Age Security and Frank’s working pension, McKenzie said, exceeding his spending goal by about $8,000 a year.
Diane’s RRIF withdrawal and Frank’s work pension should be split for income tax purposes. “He can avoid having his OAS repossessed by receiving his RRIF payments before starting CPP and OAS,” says the planner. It also avoids paying taxes at the higher rate that would apply if he received RRIF payments while collecting CPP and OAS.
Additional cash flow requirements must be met first using non-registered funds and then using tax-free savings account funds.
“They will be able to get by without CPP and OAS income for the next nine years until age 70,” McKenzie said. Because Frank and Diane are in good health and genetically long-lived, they will need to delay starting CPP and OAS until he is 70 years old. This would increase CPP payments by 42 percent and OAS payments by 36 percent.
As long as you have unregistered funds, you should continue to move those funds into your TFSA, planners say.
Frank and Diane aren’t worried about future medical or nursing home costs. When the time comes that I can no longer manage my home, I plan to sell it and use the proceeds to fund an assisted living facility. “Most of their income is indexed pension income, so expenses aren’t a concern.” McKenzie said in his projections that assisted living costs of $6,000 a month per person in today’s dollars and $144,000 a year. Assuming costs. This includes most basic living expenses, he points out.
For example, if you are 85 years old and need assisted living, your pension and government benefit income will total approximately $135,000 per year. This assumes an inflation rate of 2%. After selling the house, he would have about $3 million in investment assets, enough to live until he is 100 years old.
Frank and Diane manage their own savings and investments. Approximately 96% of their investable assets of $1,050,000 are held in guaranteed investment securities and other fixed income securities.
Mr MacKenzie says he will benefit from a disciplined, goal-based investment process, resulting in better balance and greater diversification. “You’ll probably get better results if you work with a fiduciary investment specialist.”
What if Frank or Diane die early?
“Mr Frank has an indexed state pension and a larger CPP entitlement,” McKenzie points out. “If he died before Diane, she would also be entitled to 66 percent of Frank’s work pension and a portion of his CPP.” Although her income will be lower, the reduction in basic expenses and income taxes means Diane will still have enough money to reach all of her financial goals.”
In summary, Frank and Diane will discuss whether to retire now and significantly reduce their pension income, how to invest their savings, how to prepare for potential future medical costs, and how to receive government benefits. You have to make some important decisions, including when to start and how. And when should you withdraw your RRSP, planners say? You will also need to update your will and appoint a power of attorney for your health and finances.
“They have worked hard to become financially independent and don’t need more money. Now is the time to use the capital they have saved wisely and enjoy their retirement,” McKenzie says. “With no family expecting an inheritance, you should feel safe spending your savings and perhaps even donating a little to your favorite charity or community group,” he says.
Assuming a 5% return on investment and a 2% inflation rate, planners say if the couple lived to be 100, they would have about $2 million in assets with their current purchasing power.
Client situation
people: Frank and Diane, both 61 years old.
problem: Even if Frank’s pension is reduced, will they be able to afford to retire soon? How should they withdraw their savings?
plan: Now, please retire. Frank’s pension can be supplemented with withdrawals from Diane’s spouse’s RRSP/RRIF. Defer CPP and her OAS until age 70.
In return: The perception that you are achieving financial security.
Monthly net profit: Diane’s salary and cash savings as needed.
assets: Joint bank account $28,000. His GIC is his $25,670. Her GIC is $140,620. His TFSA is $125,000. Her TFSA is $98,825. His RRSP is $113,695. Her spouse’s RRSP is $506,000. Housing costs $450,000. Total: $1.5 million.
Estimated present value of Frank’s defined benefit pension: 1,000,000. This is the amount someone without a pension would have to save to generate the same cash flow.
Monthly expenses: Property taxes $320. Water, sewer and garbage $65; home insurance $125. Electric bill: $95. Heating is $100. Maintenance, garden $120. Car insurance $90. Fuel cost $240. Oil change and maintenance $80. Groceries cost $750. Clothes are $20. Charity $150. Vacation, travel $1,000. Food, drinks and entertainment $170. Personal Care $20. Subscription fee is $10. Doctors and dentists pay $120. Drugstore $150. Phone, TV, and Internet $230. Additional credit card fees are $1,500. TFSA he contributed $1,165. Total: $6,520.
liabilities: none.
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