Is this retirement doomed? Couple panics over layoff at 60
SOLUTION Use cash from layoff package and other sources to build RRSPs, reverse early QPP application
Acouple we’ll call Roberta, 57, and Sam, 60, live in Quebec. Recently, Sam was laid off from his job as a manager at a manufacturing company, even though he had planned to work to 67 or 70. He received a termination package of a year’s salary, which will be paid for the balance of 2015. Roberta, a health care professional, still works.
Together, they bring home $8,071 a month. That’s more than enough to cover their $6,065 monthly expenses net of savings, but it’s what happens after Sam’s paycheque stops that worries them.
Roberta can expect an indexed pension from her job in a hospital, but for the rest there will only be their retirement savings of about $355,000, $65,000 in TFSAs, and $42,000 cash. Had Sam been able to work another decade, their financial assets would have been much larger. He hopes to find another job, but the reality is that it’s a tough market.
“Our uncertainty about my husband’s future and the fact that we don’t have a lot of savings makes us understandably concerned about retirement,” Roberta says. “What we want to know is how much we need to save and how well prepared we are for the day when I quit work.”
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Roberta and Sam. “I appreciate their concerns, but the facts are not so worrisome. Their home is fully paid except for a small line of credit liability. They will be debt free soon and their three adult children no longer need financial support. But there are ways to tailor their income to raise what they take home and what they can save for the future.”
Income components
First move — understand why Roberta, who makes $7,414 a month before tax and benefit deductions, takes home only $3,200 a month. Her deductions are 57% of her paycheque. Though she only works four days a week, she contributes to her pension plan on the basis of working five days a week. She is trading current income for future income.
Roberta and Sam could save more money and income tax by taking advantage of Sam’s $80,000 of RRSP contribution room. He has a relatively high 2014 income, $88,080. He could contribute just enough to bring his taxable income down to the top of the first federal tax bracket, $43,953. The federal tax rate between $48,953 and $87,907 is 22%. Quebec tax on income between $41,495 and $82,985 is 20% for a combined marginal rate of 42%.
Assuming that he contributes $36,000, he could have a refund of about $15,000. That would be enough to pay off an $11,000 line of credit and an outstanding $4,000 personal loan. There’s also a healthy cash balance of $42,000 that they can keep in reserve if Sam does not get another job after his layoff package runs out.
Build savings
With additional contributions to the RRSPs, they will have about $391,000. Assuming that Sam can get another job, they can continue to add $2,370 a month for $28,440 for five more years to the RRSPs — or, if the RRSPs get filled to their limits, then money can go to TFSAs. If the RR SPs then grow at 3% above inflation for five years, they will have about $609,000.
If they generate 3% after inflation and draw all capital and income evenly over the next 23 years, to Roberta’s age 85, the capital would generate $36,000 a year in 2015 dollars. This is a shorter period than payouts to the customary age 90 or 95, but it is the couple’s preference. They want to spend their money while relatively young, then rely on residual savings and government pensions, Mr. Moran explains.
The couple has $64,957 in TFSAs growing with contributions of $11,000 a year. If Roberta and Sam maintain this contribution rate for five years to his age 65, the accounts will have $136,600. If those funds are dispensed so that all income and capital is gone by the time Roberta is 85, they would generate $8,065 a year.
Tailor pensions
Sam turned 60 recently and began a QPP pension with a 0.6% penalty for each month before his 65th birthday. His motive? When he lost his job, he figured he’d need the money. He has received $707 a month from QPP with a slight boost in 2015 from indexation. The QPP payments will be added to his nearly $90,000 salary. However, given the penalty and the fact it has been less than the six-month period in which one can reverse an early QPP benefit, Sam can pay back the money, then start QPP when he is 65, Mr. Moran suggests.
Roberta has a defined benefit pension from the Quebec municipal pension system. It has a base of $46,951 for life. Both were born before 1958 and have lived in Canada for 40 years since age 18, so each will be able to receive Old Age Security at 65 at a 2015 rate of $6,765 a year.
At Roberta’s age 65 they will have a retirement income of $46,951 from Roberta’s pension, $12,780 from the QPP for Sam, $36,000 from RR SPs, $8,065 from TFSAs, another $12,780 from Roberta’s QPP, and two OAS pensions of $6,765 each for total income of $130,106 a year.
Assuming that they split qualifying pension income and make use of pension income and extensive Quebec age credits, they would pay an average tax of 23% with no tax on TFSA payouts and have combined monthly income of about $8,350. Their expenses would be covered with a margin left for savings.
All of that income would be indexed: QPP and OAS are linked to increases in the Consumer Price Index; the government pension Roberta gets will be indexed; and our calculation method of estimating returns after inflation ensures that RRSP payouts will rise with the price level.
“I appreciate the couple’s concern about early retirement, but given their modest debts which they can pay quickly, Roberta’s defined benefit pension, their modest expenses and ability to cut a few of them if need be, I think there is little doubt that they can have a secure retirement with little or no change in the way they live,” Mr. Moran suggests.
Our uncertainty about my husband’s future and the fact that we don’t have a lot of savings makes us understandably concerned about retirement. What we want to know is how much we need to save and how well prepared we are for the day when I quit work. — Roberta, 57