The choices: Be a GOOD grandma and POOR or WORK and retire happy
In British Columbia, a woman we’ll call Doris is on the verge of making a very bad decision. The 63-year-old is single, earns $41,600 a year and receives $6,000 a year rent from a roommate with whom she shares an apartment. She wants to quit her job in order to help out her daughter by babysitting her one-year-old granddaughter. She would be paid $500 a month but since Doris is just barely making ends meet now — in fact has a net worth of minus $7,000 — it’s a move that could make her retirement threadbare. “It is hard living now on what I earn,” she says. “I am prepared to take this step, even though it will be very costly for me. Frankly, I do worry what will happen when my job ends.”
If she quits, she will get a pension 40% of what she is earning today. She has no retirement savings and no other financial assets. Her job pension, Canada Pension Plan, Old Age Security and roommate rent will be her only resources.
Her dilemma — be a terrific grandma and be poor or let her daughter arrange babysitting on her own. Conventional daycare is expensive for her daughter, who earns a similar salary to Doris’s.
It’s a serious dilemma but Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C. has a solution.
“What we have to do is to make the most of her income. With that, she can subsidize her daughter’s child care costs. It is the best choice she’s got.”
COSTS AND BENEFITS OF RETIRING BEFORE 65
Doris could retire immediately, but it is not a good idea, Mr. Moran says. She would lose her salary and any chance of boosting her pension. Moreover, she has no savings or other financial resources to cushion the drop in income.
Babysitting payments would be claimable as a child care expense by the daughter and taxable to Doris. Her compensation for babysitting would work out to about $3 per hour for a 40hour week.
There may be emotional satisfaction in babysitting a grandchild, but the pay does not compare with her present wage.
Were she to retire this year at 63, Doris would lose 0.6% a month for starting CPP benefits 24 months before she turns 65, though she would gain a $665 monthly bridge to 65 to supplement her $1,400 monthly job pension.
The CPP cut would be a permanent 14.4% drop of $1,750 a year at 2013 rates. Doris cannot afford that.
Moreover, babysitting is a temporary position. When the child is ready for school, the job would end.
The trade-off will have a few years of low income for perhaps 25 years of what could have been appreciably higher pension income.
RETIREMENT: DEBT MANAGEMENT, INCOME
On the other hand, if Doris continues to work for another two years, her pension will be boosted by $60 a month and her CPP credits will grow by almost 15%.
Her total CPP benefit at 65 would then hit the maximum $12,150 a year in 2013 dollars. She would get $6,600 annual OAS in any case at 65.
In retirement at age 65, Doris will replace her present $41,600 salary with a $16,800 pension, OAS of $6,600 per year, and CPP of about $12,150 and add $6,000 in babysitting income for total income of $41,550. Rent from the roommate will push total, pre-tax income to $47,550 or $3,570 a month after 10% average tax.
That would cover present expenses and leave $470 per month savings for car replacement, travel or other uses. She could give some or all of this money to help with babysitting costs, thus reducing the financial burden on her daughter.
Doris should consider working to 70. She would defer and thus add to her CPP benefits by as much as 42% over the age 65 benefit, to $17,250 a year, enhance her employment pension by perhaps 10% to $18,480 based on 2% annual wage increases, and defer OAS for a 36% boost to $8,976 a year.
At age 70, her retirement income would be at least $44,706. The child would be beyond babysitting years, but she would have rent from the present roommate or another of $6,000 a year for total annual income of at least $50,706.
After 10% average income tax, she would have $3,800 a month to spend. With that increased after-tax income, she could afford a newer car, some travel, even some long-term care insurance.
“This analysis shows that even individuals with modest incomes and no financial assets can improve their situations by making the best choices available,” Mr. Moran says.
“In this case, the financial assets — to bend the term a little — are work pensions consisting of her employment pension and Canada Pension Plan benefits. The rational course is to work at least another two years and to extend her working life to age 70 if possible. That way, Doris can help her daughter and herself. The financial benefits are too large to ignore.”