In Saskatchewan, a couple we’ll call Marie, 52, and Stephen, 53, would like to retire at age 60. Their target retirement date is 2028, but the timing is fluid and depends on how and when they can achieve a permanent after-tax income of $70,000. They have a current combined annual gross income of $235,800 from their jobs with the federal government and a large corporation, respectively, and they’re accumulating retirement savings while paying off $198,000 in debt. They must do their calculations correctly for a financially secure future.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, British Columbia, to work with Marie and Stephen.
[email protected]m for a free analysis of family finances.
The core of their retirement strategy will hinge on their work pensions, Moran notes. At age 65, Marie can expect a fully indexed government pension of $42,660 per year, while Stephen will receive $37,000 per year without indexation. They have bridges of $12,168 and $7,000, respectively, until age 65 when the bridges disappear and are replaced by CPP and OAS. They have RRSPs: Stephen $220,000 and Mary $45,630. Mary also has $12,000 in her TFSA. Finally, they have $20,000 in cryptocurrency.
Pay off the debt
They have debts that need to be paid, preferably before retirement. There’s a $185,000 mortgage on their home with a current interest rate of 3.2% that’s expected to rise before it’s paid off in 13 years and a $13,000 car loan with an interest rate of interest of 4.7%. Right now, the house mortgage payment is $1,452 per month, the car loan $800 per month.
They currently allocate $8,495 a month, but their retirement costs are expected to drop when their car loan and mortgage payments as well as their RRSP contributions of $1,100 and a term life insurance payment of $161 end. . This will reduce a total of $3,513 in expenses, leaving $4,982 per month or $59,784 per year in estimated retirement expenses.
To generate the approximately $60,000 of after-tax retirement income, they will need approximately $70,000 before income splitting, various credits and taxes. The mortgage, due in 13 years, should be adjusted so that the debt will be paid when they retire. The acceleration will increase the current monthly payment from $1,452 to $2,537.
One solution is to convert some assets into cash. If they sell their $20,000 bitcoin treasure and pay off the $13,000 car loan, they will have $7,000 left. They can then cash out the $12,000 TFSA and apply the total $19,000 to the mortgage, reducing the balance from $185,000 to $166,000. This will reduce the higher monthly amount owed from approximately $340 per month to $2,197. They can cover the higher net payments of $745 by making a monthly reduction of $300 on current food and restaurant expenses of $1,150 and a reduction of $445 on gym, entertainment, and travel expenses of $825. It is important, but it would be temporary.
The two will receive $13,539 in Canada Pension Plan benefits at age 65, near the maximum of $15,043. They will also both receive Old Age Security at age 65, which is currently $8,000 per year. That’s a total of $43,078 per year.
Next come defined benefit pensions. Marie’s is 100% indexed to inflation. Stephen’s is not indexed. Stephen could commute his pension base, around $900,000, but he would have to pay an estimated 44% tax on the $300,000 rise in income exposed to full taxation. This equates to a bill of $132,000. His unused RRSP contribution room of $145,000 could help defer tax. The process only works as intended if Stephen can get a higher return on what’s left after tax.
Their RRSP savings, $45,630 for Mary and $220,000 for Stephen, are more than enough for their needs given their solid employment, CPP and OAS pensions. If they stop contributing, their combined balance of $265,630, which increases by 3% after inflation for the six years before retirement, will become $317,180 when Stephen is ready to retire. If this amount continues to increase by 3% of inflation and is spent over the next 32 years until Mary turns 90, it will provide $15,103 per year until exhausted.
From Stephen’s retirement until Mary’s age 65, when the pension bridges end and CPP and OAS begin, their income, assuming Stephen does not cash out the value of his discounted pension , would consist of $42,660 and $37,000 in basic pensions, matching bridges of $12,168 and $7,000, and $15,103 in RRSP income for a total of $113,931.
With a qualifying income split and an average tax of 20%, they would have $91,145 per year or $7,595 per month to spend, well above their $70,000 goal and the $60,000 they would need to cover small expenses.
When the two turn 65, they will have basic pensions of $42,660 and $37,000, CPP benefits of $13,539 each, two OAS benefits of $8,000 each and combined RRSP benefits of 15 $103. That’s a total of $137,841 before taxes. After qualifying income splitting and average tax of 21%, they would have $9,075 a month to spend.
The question of mortality must be asked. When either partner predeceases the other, even with pension splitting and 50% survivor benefits for their work pensions, there will be a loss of an OAS and almost all of a CPP benefit. That’s a total loss of $21,539, plus the fractional loss of the deceased’s pension — about $20,000, depending on who goes first. Without income splitting, the survivor will pay more tax.
They could cover that cost and risk by buying out Stephen’s annuity, paying the hefty up-front tax, then investing the rest in a combination of RRSPs and LIRAs. Commutation and a good return on investment would offset the inevitable decline in the purchasing power of Stephen’s non-indexed pension, but at a high upfront cost, as noted. However, the transfer and subsequent RRSP investments could fund additional annual payments of up to $35,475 until Marie turns 90 assuming a 3% return after inflation. Switching comes at a high cost and adds investment risk, but offers potential inflation protection in the future. Stephen should review the commutation with an accountant or actuary.
Retirement Stars: Four **** out of five
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