OUT OF WORK YEARS BEFORE SHE PLANNED, WOMAN NEEDS HELP
Financial life has been tough for a woman in Ontario we’ ll call June. Formerly a civil servant, she quit after three decades of service to go to work for a consulting company. Unfortunately, the company closed i ts doors recently and June, now 58, is living on her $ 45,400 annual work pension. She has a $ 10,492 car l oan t o pay off and a $ 20,000 line of credit f or home repairs. Her monthly spending is $ 3,076, just matching her after- tax income from the work pension.
Her worry is that any unplanned expenses would push her spending deep into the red and deplete her capital. She has a well invested RRSP but no TFSA. June feels she is at the end of her financial rope and agonizes about the future. The issue is when to call it quits and take government benefits and tap her RRSP.
“Should I take my CPP benefits at age 60, 65, or wait until I am 70?” June asks.
“I want to have $ 65,000 a year before tax when I officially retire. Also, should I pay off my credit line that costs me 3.7 per cent interest, or should I continue paying $ 1,464 a year on it?”
Family Finance asked Mathew Hall, a financial planner and chartered financial analyst with Exponent Investment Management Inc. i n Ottawa, to work with June. “She worries she will be unable to have the retirement lifestyle she envisioned with $ 65,000 a year in pre- tax retirement income,” he says.
WHEN TO START CPP AND OAS
The first question is when June should take CPP. At 60, she would get $8,390, 36 per cent less than the $ 13,110 age 65 benefit — 7.2 per cent less for year each year before age 65. If she waits to age 65, she would get maximum CPP. If she waits until after 65, she gets an additional 8.4 per cent for each year from 65 to age 70 — a maximum boost of 42 per cent, or $ 18,616 a year. Old Age Security cannot be taken before 65, but if delayed it increases 7.2 per cent per year for a maximum 36 per cent boost at age 70 of $9,311 a year.
If June does not t ake CPP early, she may have to draw down her RRSP savings to maintain or boost income. Delaying the start of the drawdown will make the initial payout higher but the total payout lower, Hall notes. If June gets her retirement income structured properly, her capital will last for her life. If it is wrong, it won’t.
At age 60, June’s income would be her work pension of $ 35,156 plus a $ 10,244 bridge to age 65, for total income of $ 45,400. To get to the target pre-tax income of $65,000 a year, she would have to take $ 19,600 each year from her RRSP balance, currently $ 263,397. The drawdown would reduce future income, since there would be less capital to support payouts.
If she chose to take CPP at age 60 to preserve RRSP capital, her income would be $ 53,790. She could take
WITH SOME ADJUSTMENTS OF PENSION STARTS, JUNE CAN HAVE THE INCOME SHE WANTS.
$ 11,210 from the RRSP to make up t he difference. Over five years, the drawdown would be $ 56,050 — 22 per cent of the RRSP. At 65, she loses her bridge but can add OAS at $ 6,846 a year. The RRSP drawdown would drop to $ 14,608 a year — too much for the portfolio remaining at 65.
If June waits to take CPP at 65, she will get the full amount as well as full OAS. Without the bridge, her income would be $ 55,112. The RRSP drawdown needed to attain her target income would be $ 9,888 a year. However, her capital, annuitized for 30 years beginning at 65, and assuming 15 per cent average tax, would only support an $ 8,485 annual draw, providing total income of $ 63,597 a year.
If June waits to 70 to start CPP and OAS, she would have $ 27,926 in government benefits. Including her basic work pension she would have income of $ 63,082.
Her RRSP drawdown for a $ 65,000 pre- tax income would be just $ 1,918 a year, which would be easily sustained by her RRSP capital. Regulations for minimum payouts of RRIFs start at 5.4 per cent at age 72. That would force June to take out more money, all of which would be taxable.
There are two i mportant variables, age and sums paid, in these calculations, Hall explains. For example, June would have to live to age 83 for CPP beginning at 70 to match the sum of CPP payments starting at 60, or until age 85 for CPP starting at 70 to exceed CPP starting at 65.
The break- evens for OAS are much the same, save that OAS benefits cannot begin before 65. Starting CPP at 60 is the least risky choice. Delaying everything to 70 and living to 95 would be the riskiest bet, with the highest potential cumulative income.
DEBT MANAGEMENT
June could accelerate her debt paydown rate. Just to eliminate the 3.7 per cent line of credit, June would have to take about $ 25,000 out of her RRSP, which would be taxed at about 17 per cent. If she adds the $ 10,492 outstanding 2.61 per cent car loan, she would need to take $ 37,000 out of her RRSP. The tax rate exceeds the interest rates. The implication: Don’t accelerate loan paydowns but, over time, put income over spending into a TFSA.
“The issues in this case are calculation, not about fundamental ability to achieve a target retirement income,” Hall says. “We’ve shown that with some adjustments of pension starts, June can have the income she wants.”