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