Renter shows a five-star retirement is possible without equity piled up
AB.C. man we’ll call Jonah is employed by a high-tech company. He is 52 and anticipating retirement at 60. He earns $106,000 per year and has take-home income of $4,800 per month after extensive deductions for benefits and taxes. A renter, he has neither equity in a home nor mortgage debt. His balance sheet is pristine except for $2,000 in credit card debt.
Jonah expects to die by age 85, and has been thinking about his finances in those terms. The problem — what if he lives beyond that?
Jonah’s daily spending is quite modest. He has rented all his adult life and has no plans to change. He prefers public transit to owning a car. He pays his credit card bills monthly, and has avoided other forms of debt. His indulgences are $500 per month for restaurants and travel at $450 per month.
Jonah expects to be alone in his old age.
“I may need assisted living or full-time care,” he notes. For now, he is healthy but his employer’s medical plan will not cover care after retirement. His questions follow from that concern: when he can retire, whether to buy a long-term care policy and should he buy an annuity as a hedge against declines in his $564,000 portfolio of registered and non-registered financial assets?
Family Finance asked Ian Black, a planner with Macdonald Shymko and Company in Vancouver, to work with Jonah.
“The plan is to make drawdowns of his various accounts tax-efficient and to include his company pension beginning at age 60.”
RETIREMENT FINANCE
Jonah wants to retire early, hopefully as early as age 60.
Rather than stress his registered savings — he has $325,000 in his RRSP and $110,000 in his TFSA — Black suggests that he can begin his retirement by drawing down his non-registered investment account, which currently holds assets worth $125,000.
If he takes out $50,000 per year (about $4,200 per month) for two years from the non-registered assets he can keep his other accounts intact and growing, Black suggests.
Combined with his company pension, which provides a base of $1,380 per month plus an additional bridge to 65 of $1,130 per month, he would have a pre-tax monthly income of about $6,700 for the first two years of his retirement. After 18 per cent average tax, he would have $5,500 to spend, which is a little more what he spends now with RRSP contributions removed. He could continue to save in his TFSA and cash accounts.
From 62 until 65, the picture would change slightly. He would no longer have non-registered funds (the remaining $25,000 could be used for emergencies) but he could begin to draw on his RRSP and TFSA to fill the gap.
Jonah’s RRSP has a present balance of $325,000. With growth at 3 per cent after inflation and contributions of $7,200 per year for 8 years to his age 60 plus two more years with no additions but continuing interest, the account would have a balance of $506,740 and support payouts from 62 to 85 of $29,900 per year.
Jonah’s TFSA, with a present balance of $110,000 and contributions of $6,000 per year to 62 of $218,677 would support payouts of $12,900 for the following 23 years.
The pension and bridge would continue, making total annual income $72,900 before tax. With no tax on TFSA payouts and an average 18 per cent rate, he would have $5,176 per month to spend, a little less than before but still in excess of his reduced allocations.
At 65, Jonah would lose his pension bridge, but could start receiving Canada Pension Plan benefits at an estimated 90 per cent of the $13,600 maximum value in 2019. That’s $12,240 per year. He could also add Old Age Security at $7,290 per year. Total income would be $79,070 to per year. With no tax on TFSA payouts and 18 per cent tax on the balance, he would have $5,590 per month to spend. He could cover all present expenses and have a surplus for travel or other pleasures. Or use his surplus to continue build his Tax-free Savings Account should he live beyond 85.
Should Jonah exhaust all of his savings at age 85, he would still have $12,240 from CPP, $7,290 from OAS, and $16,650 from the company pension, an annual total of $36,180 plus cash accumulated in years when his RRSP and TFSA accounts were distributing their assets but, ever frugal, Jonah was saving where he could. His cash flow might be less than present spending, but if travel at $5,400 per year were curtailed, restaurant and clothing spending reduced, and entertainment cut back, he could cover all expenses. Jonah wonders if he should buy an insurance-based annuity. Absolutely not, Black says. Today’s low interest rates cause low returns to be locked in. There is already life income from OAS and CPP and Jonah’s company pension. If Jonah wants to annuitize his income to 90 or 100 or beyond, online annuity calculators show investments and payouts with a click and no cost. With this method, Jonah would keep his capital in his hands and could stop annuity payments at any time if he wishes.
LONG-TERM CARE
Jonah wants to know if he should buy long-term care insurance. That’s ironic, given his belief he will die before age 85. Black notes that If Jonah needs care, he would neither rent his apartment nor travel, and clothing spending would plummet. There would be no more RRSP nor TFSA allocations. In care, he would not buy groceries, travel or frequent restaurants.
Only 17 per cent of the elderly will ever need to use long-term care, Black notes, so insurance might not be worth it.
“What he doesn’t spend will be a reserve after 85,” Black says. “That’s what gives this plan resilience.”
WHAT HE DOESN’T SPEND WILL BE A RESERVE AFTER 85.