PATIENCE WILL PAY OFF
Modest salary, thrifty lifestyle make plan doable
A woman we’ll call Martha, 56, makes her home in B.C.’s Lower Mainland. Employed by a large business in a clerical position, she brings home an average of $2,069 a month. Her challenge is to make ends meet when she retires in 2021.
Martha has ordered her affairs quite well. She lives in a modest but fully paid condo with a $300,000 estimated market value, pays taxes and condo-related expenses of $290 per month and is thrifty in all things. She has no car, no cellphone, uses public transit for $80 per month and saves $30 a month for treats for her annual staycation.
She worries how she will get by in retirement with just her job pension of something between $1,077 and $1,483 per month, depending on when she quits, plus OAS at 65 of $579 a month and Canada Pension Plan Benefit appreciably less than the age 65 maximum of $1,107 per month. She will be able to add distributions from her RRSPs that currently total $68,000, cash of $11,000 and a TFSA with about $25,500. It is not a great deal of money on which to retire, but, given her income, it is remarkable that she has saved so much. With care, it can be the base for a secure retirement.
THE DILEMMA AND THE PLAN
“I would like to live in my urban cabin forever,” Martha explains. “I hope I have saved enough money to pay for my home and the special charges that go with condo ownership. I do a lot of volunteer work, travel a little if I can afford it, but my worry is if and when I can afford to retire. I am trying to keep my job in spite of budget cuts.”
Martha’s goal is to change very little except to retire at 60, keep the condo, and do a lot of travel starting at $7,000 a year with estimated increases of two per cent a year for inflation. Her question is whether her work pension, government benefits and savings will be sufficient.
Family Finance asked Guil Perreault, head of G. Perreault Financial Inc. in Winnipeg, to work with Martha.
“The sum of government benefits, the pension plan and savings will be sufficient to maintain her way of life,” he explains. “But there are opportunities to do better and gain discretionary income.”
Most of her financial assets are in GICs that earn approximately zero or less than zero after inflation. They are insured against loss. However the money invested in assets that can outpace inflation is in two mutual funds with good recent performance but management expense ratios as high as 2.25 per cent. Fees gobble up much potential growth.
Martha’s TFSA, with a present value of $25,000 growing at $5,500 per year from contributions but no investment gains would have a balance at retirement at age 60 of $47,000. That money is a reserve for unexpected dental or other expenses and for anticipated travel expenses. The money is allocated to two high fee mutual funds and a $10,000 GIC.
Nevertheless, her retirement plan will work. She would need to provide for present spending of $2,093 a month less $458 she puts into her Tax-Free Savings Account. That’s $1,635 a month.
At age 60, she would have her $1,077 lifetime pension plus a bridge of $588 per month and Canada Pension Plan benefits of $494, for a monthly income of $2,159. She should not take CPP so soon, however, for she would have to give up its full value at 65, $672 a month.
At 65, she would have her basic $1,077 job pension but lose the bridge. Her full CPP benefit, $672, would begin and she could add Old Age Security of $579 a month and Registered Retirement Income Fund payments of $375 a month based on $68,000 of present RRSPs with three per cent estimated growth for nine years to $88,725 and annuitized for 30 years to age 95. That would make total income from age 65 forward $2,703 a month.
Martha’s income tax rate would be negligible and she could make use of the B.C. property tax deferral program for 0.7 per cent of tax deferred as of March 1, 2017 to save $50 per month real estate tax. That move would drop her present allocations of $2,093 a month to $2,043 per month. When retirement begins, she would be able to eliminate TFSA and other savings by $1,000 per month, making her income more than sufficient to support her way of life and to allow travel within her estimate, Perreault notes.
RAISING RETIREMENT INCOME
Martha could retire with a higher income by working to age 71. She would have earned a pension of $1,483 a month and her RRSP and other savings would have been preserved though perhaps not gained purchasing power given their low rate of growth. She would also get a 42 per cent bonus from the Canada Pension Plan and a 36 per cent boost in her OAS benefits. However, her job is subject to staff cutbacks. Her work is not secure and so staying on the job to 70 or beyond is not part of this plan. She cannot afford to retire without drawing CPP and OAS.
Martha should learn how stock and bond based investments work before plunging into them. They offer higher returns with more capital risk than her GICs, but the low volatility ETFs can both provide liquidity and outpace inflation. They could be cashed for emergency funds for medical care or other urgent needs. She could ease into ETFs, rolling money in maturing GICs into laddered five- or 10-year government or investment grade corporate bond funds that are likely to pay about three per cent per year. Eventually she might consider low volatility stock ETFs that stabilize their prices with dependable and rising dividends. These suggestions will add to her long-run financial security and liquidity. “With patience and study, she can raise her returns, increase her assets and gain peace of mind,” Perreault concludes.