Loss of dis­abil­ity cheques at 65 threat­ens cou­ple’s re­tire­ment plan

Calgary Herald - - FINANCIAL POST - ANDREW ALLENTUCK email andrew. allentuck@ gmail. com for a free Fam­ily Fi­nance anal­y­sis

In On­tario, a cou­ple we’ ll call Hilda, who is 55, and Felix, who is 60, are mi­grat­ing to­ward full re­tire­ment. But there are bumps ahead. Felix has been on dis­abil­ity for many years with res­pi­ra­tory is­sues. Hilda is an ad­min­is­tra­tor in in­for­ma­tion technology with $2,000 monthly in­come be­fore tax. Af­ter tax, they take home about $ 6,000 per month. The worry that their way of life will crum­ble when Felix’s dis­abil­ity in­sur­ance ends at age 65 and he loses half their monthly in­come.

Felix’s pre-tax dis­abil­ity in­come, now $4,454 per month, con­sists of $3,200 a month from the com­pany plan and $1,254 from CPP dis­abil­ity. The CPP por­tion will be re­placed by reg­u­lar re­tire­ment ben­e­fits of an es­ti­mated $1,037 a month in 2017 dol­lars. His Old Age Se­cu­rity at 65 at $ 584 per month will help, as will monthly rental in­come of $ 330, it will be tight. In­come has to go up and some costs, such as debt ser­vice, have to go down.

“Could we re­tire ear­lier than when I am 65?” Hilda asks. “To do that, would we have to sell our house and move into a condo?”

Fam­ily Fi­nance asked Derek Mo­ran, head of Smarter Fi­nan­cial Plan­ning Ltd. in Kelowna, B.C., to work with Hilda and Felix. “They don’t have a lot of cap­i­tal, but they do have so many sources of in­come that they can make their re­tire­ment work,” he ex­plains.

RE­TIRE­MENT PROJECTIONS

Nei­ther Felix nor Hilda has a job pen­sion. Adding to the prob­lem is that 58 per cent of their net worth is tied up in their $1 mil­lion house. A rental condo pro­duces net in­come af­ter bor­row­ing and other ex­penses of $3,960 per year. That’s a 6.6 per cent re­turn on their $60,000 eq­uity based on $ 200,000 bor­rowed on the in­vest­ment, Mo­ran notes.

If the $ 650,000 now in their RRSPs were an­nu­itized im­me­di­ately with as­sets con­tin­u­ing to gen­er­ate 3 per cent af­ter in­fla­tion, it would sus­tain an in­come of $33,160 in 2017 dol­lars be­fore tax for 30 years, that is, to Hilda’s age 85. They would still have their $1 mil­lion house that could be sold. Tim­ing re­tire­ment is the is­sue, Mo­ran ex­plains. Felix could take CPP early, but it makes no sense for him to do it. His monthly CPP dis­abil­ity pay­ments would be re­placed by CPP dis­counted by 36 per cent if he starts at 60. Hilda could take her CPP at 60 as well, but she, too would take a 36 per cent loss of the age 65 ben­e­fit.

Hilda and Felix have many choices of tim­ing their re­tire­ment and adding to as­sets by sell­ing their house or condo. The base­line in­come num­ber is what they need to re­tire. Cur­rent al­lo­ca­tions, which in­clude debt ser­vice, of $ 806 a month would be the ini­tial tar­get.

If Hilda were to re­tire im­me­di­ately, the cou­ple’s in­come would be $ 90,568 a year be­fore tax con­sist­ing of Felix’s dis­abil­ity ben­e­fits of $ 53,448 a year, $ 33,160 RRSP cash flow be­fore tax and $ 3,960 rental in­come. Af­ter 20 per cent av­er­age tax, they would have $ 6,040 a month to spend, about equal to present al­lo­ca­tions. The fu­ture is the prob­lem.

At 65, Felix will lose his com­pany dis­abil­ity pen­sion. His $12,444 CPP re­tire­ment ben­e­fit would re­place the dis­abil­ity in­come. OAS would add $ 7,004 a year and rental in­come would be $3,960 a year. RRSP in­come would add $ 33,160 a year for to­tal in­come of $56,568 a year. With splits of el­i­gi­ble pen­sion in­come and age cred­its, they could pay an av­er­age 13 per cent and have $4,100 a month to spend, far be­low present al­lo­ca­tions.

RAIS­ING RE­TIRE­MENT IN­COME

They could sell the rental condo, har­vest the dif­fer­ence be­tween its $260,000 value and the $200,000 they owe and put the money into a TFSA. Nei­ther Hilda nor Felix has a TFSA. Each has $52,000 of space. If they can get $60,000 in the cur­rently hot mar­ket and they ob­tain 6 per cent per year with no in­fla­tion ad­just­ment, it would gen­er­ate $3,600 a year, a lit­tle less than the $3,960 the condo yields but with no tax on the TFSA cash flow. How­ever, if in­ter­est on the condo loan, now 2.77 per cent, were to rise to 4.76 per cent when they re­new the mort­gage, the profit would be wiped out. In time, it could hap­pen, Mo­ran adds.

Al­ter­na­tively, if they were to sell their $1 mil­lion house im­me­di­ately and move into their condo af­ter pay­ing off its $ 200,000 mort­gage and some tax trig­gered by the end of rent­ing and the $100,000 line of credit, they would have Felix’s $53,448 to­tal dis­abil­ity in­come, RSP in­come of $33,160, and tax­able in­vest­ment in­come of $ 33,170 a year from cash from the house sale as­sum­ing they got $950,000 af­ter com­mis­sions and costs, paid their $300,000 of li­a­bil­i­ties and in­vested the bal­ance of $ 650,000 at 3 per cent af­ter in­fla­tion for 30 years. The sum would be about $119,800 a year or $7,985 a month af­ter 20 per cent av­er­age tax. They could sup­port present spend­ing quite eas­ily even when the com­pany dis­abil­ity cheques are re­placed by $12,444 to­tal CPP re­tire­ment ben­e­fits at 65, Mo­ran notes. Debts will have been paid in full so that $806 of mort­gage and line of credit bills would have ended.

At Felix’s age 65, his dis­abil­ity cheques would stop and be re­placed by $12,444 an­nual CPP re­tire­ment ben­e­fits He would have $ 7,004 an­nual OAS ben­e­fits. As­sum­ing that Hilda has also re­tired, their in­come would be about $85,778 a year be­fore tax or $6,290 a month af­ter 12 per cent av­er­age tax. How­ever, with all debts paid, $ 9,672 of an­nual debt ser­vice would stop.

At 65, Hilda could add her OAS ben­e­fit, $7,004 a year, and pro­jected CPP ben­e­fits of $8,400 a year, boost­ing in­come to $101,180 a year. Af­ter 15 per cent av­er­age tax based on age and pen­sion cred­its, they would have about $7,170 a month to spend. “The ba­sis for a se­cure re­tire­ment is in place,” Mo­ran says.

MIKE FAILLE / NA­TIONAL POST

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