Pre­car­i­ous job sit­u­a­tion puts B.C. woman’s full pen­sion at risk

Windsor Star - - FINANCIAL POST - an­drew allentuck Fam­ily Fi­nance

In Bri­tish Columbia, a woman we’ll call Doris is 53 and con­sid­er­ing re­tire­ment. Her fi­nan­cial as­sets are at the low end of six fig­ures. Doris lives mod­estly spend­ing no more than her take home pay of $2,590 per month. Sin­gle, she has no car, does not own her home — she pays rent, and if there is any luxury in her spend­ing, it would be travel to visit her el­derly mother every month in a nearby com­mu­nity and care for her cat at $85 per month for food, lit­ter and vet.

Doris’ main in­come in re­tire­ment will be a com­pany pen­sion that starts at $26,616 per year at 55 but drops to half that, $13,008 when her bridge to the start of CPP ends at 65. Worse, she is not sure that she will qual­ify for that pen­sion. If her job in com­mu­ni­ca­tions ends, as she fears it may, she will have to wait to age 60 to start her pen­sion and suf­fer a five per cent per year loss of ben­e­fits from 60 to 65.

“My work sit­u­a­tion is pre­car­i­ous and I am not sure I am go­ing to be em­ployed long enough to have a full pen­sion with 25 years of ser­vice,” she ex­plains. If she is forced to re­tire be­fore 2020, she will have to find work for per­haps 7 or even 12 years.

Fam­ily Fi­nance asked Derek Mo­ran, head of Smarter Fi­nan­cial Plan­ning Ltd. in Kelowna, B.C., to work with Doris. “There is not much slack in her in­come or spend­ing. If the job does not last two more years, she will have to find part time work to fill the gap and avoid run­ning down sav­ings.”

RE­TIRE­MENT TAC­TICS

Doris’ sit­u­a­tion is se­ri­ous but fix­able, Mo­ran says. The job pays her $31,080 per year af­ter taxes and med­i­cal and re­tire­ment ben­e­fits are de­ducted. She has only mod­est credit card debt. She has room to add $7,543 to her RRSP for 2018. She has enough cash in her sav­ings ac­count to cover that. The re­fund at her marginal rate would be 23 per cent or $1,725. That sav­ing would help at present, es­pe­cially if she needs to bridge a short pe­riod with­out work. Doris’ has a choice of pay­out op­tions for her com­pany pen­sion. She can choose the high­est re­turn, which will pay her $2,216 per month or $26,592 per year from 55 to 65, be­fore CPP or OAS will start, and then $1,084 per month from 65 on­ward when she can have those ben­e­fits. She would be able to en­hance her re­tire­ment in­come from 55 to 65 with $8,186 per year or $682 per month from her six fig­ure RRSP for to­tal pre-tax in­come of $2,898 per month. That will cover her ex­penses. Her to­tal in­come from 55 to 65 would be $34,778 per year. Af­ter 12 per cent av­er­age tax, she would have about $2,550 to spend each month. That is about what she spends now.

From 65 on­ward the pic­ture changes. Doris’ will see her pen­sion drop to $13,008 per year but gain an es­ti­mated $8,166 per year from the Canada Pen­sion Plan and $7,075 from Old Age Se­cu­rity. She could add $8,186 from her RRIF. The sum, $36,435 taxed at 12 per cent, would leave her with $2,670 to spend each month.

RAISING RE­TIRE­MENT IN­COME

Doris could raise her in­come in re­tire­ment and per­haps have more se­cu­rity by shift­ing in­vest­ments in her var­i­ous RRSP ac­counts from broad Cana­dian eq­ui­ties to div­i­dend growth stocks which, though sub­ject to ris­ing in­ter­est rates that make bond in­ter­est more at­trac­tive and div­i­dends less at­trac­tive, pro­vide in­come and growth. Her ac­count ad­vi­sor could help her to make the switch. If she uses a div­i­dend or div­i­dend growth ex­change traded fund through her ad­vi­sory ser­vice or reads up on how ETFs work, she might also save man­age­ment fees, Mo­ran points out. This is not to be done in a hurry, for Doris is not fa­mil­iar with in­vest­ments. Even so, learn­ing how stocks and bonds work and study­ing the mar­ket would al­low her to judge the per­for­mance she gets from her man­aged port­fo­lio, Mo­ran notes.

ADDING CHOICES

Rent is an in­ex­pen­sive way to pay for shel­ter in the short run and a costly way to do it in the long run. Doris won­ders if she could buy a small house with her fi­nan­cial re­sources. While Van­cou­ver and Vic­to­ria are not op­tions, it is pos­si­ble to find smaller houses or con­dos for rel­a­tively mod­est sums out­side of B.C.’s ur­ban ar­eas.

It would be tight, how­ever. Doris could use the Home Buy­ers Plan to bor­row up to $25,000 money for a down pay­ment from her RRSP. The cost, of course, would be re­duced in­come from the RRSP. Nev­er­the­less, her rent, now $890 per month and ris­ing every year, could be redi­rected to a $200,000, 3 per cent mort­gage with a 25-year amor­ti­za­tion. Pay­ments would be $1,186 per month. She might need a part-time job for a few years to add to her sav­ings and thus need to bor­row less from her RRSP. B.C. al­lows per­sons 55 or older to de­fer pay­ing prop­erty taxes at a nom­i­nal cost. Sums de­ferred have to be re­paid when the prop­erty is sold. Find­ing a home in Doris’ price range could be chal­leng­ing even far from the hottest mar­kets in the Lower Main­land, but it is pos­si­ble, Mo­ran says.

Fi­nally, Doris asks, is it pos­si­ble to travel to visit her brother in the Far East once every two years with­out crip­pling her fi­nances? Yes, the plan­ner insists, with a cou­ple of more years on the job and some part-time work for a few years be­fore age 65 and per­haps even af­ter, a plane ticket for a few thou­sand dol­lars and re­lated ex­penses for mod­est ac­com­mo­da­tion would fit within her bud­get.

If Doris does not work two more years to get the full 25 years ser­vice re­quired for full pen­sion pay­ments, she would be pe­nal­ized with a 5 per cent loss for each year. It would be slightly less af­ter tax, but the cost would be bear­able. Her in­come would drop by per­haps $200 per month. Part-time work would com­pen­sate, Mo­ran says.

ROOM DORIS HAS TO ADD TO RRSP FOR 2018 $7,543

MIKE FAILLE IL­LUS­TRA­TION

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