WORKING TO 70 IDEAL FOR RETIREMENT PLAN
In Alberta, Helen, as we’ll call her, is 65 and still active as a self-employed retail market consultant. Divorced for a decade and a half, she has two children, both grown and financially independent. Her question: Can she maintain her way of life in retirement by working to age 70 and adding to savings?
“Timing retirement will depend on having enough money to support myself in a comfortable but modest lifestyle,” she says. “I want to travel a few times a year and stay in my home as long as possible. And all that depends on my investments — are they right?” Family Finance asked Graeme Egan, head of CastleBay Wealth Management in Vancouver, to work with Helen.
“There are no liabilities such as a mortgage or other debt, so that works in her favour,” Egan says. “But she has just $327,000 in financial assets. That is not a lot to support a few decades of retirement. There is no company pension.”
A SAVING DILEMMA
Helen takes home $6,250 a month. Her spending net of savings works out to $3,529 a month. She is eligible for Old Age Security this year, at an annual rate of $6,846, and would be able to collect $9,012 a year in Canada Pension Plan benefits were she to start now. Her gross employment income is about $100,000 before tax. With government benefits, her income would be $115,858. She would lose nearly all of her OAS to the clawback, which currently starts at $73,756 a year.
Best bet, Egan says, is for Helen to defer her government benefits to age 70, boosting her OAS by 36 per cent, to $9,311 a year, and increasing CPP by 42 per cent to $12,797 a year. The two benefits would then add up to $22,108. Without her work income, the clawback would no longer be a problem, he notes.
Helen’s RRSPs are in two accounts, one of which is an insurance product called a segregated fund, which guarantees her minimum lifetime payments of $14,180 a year. The amount may be higher if the mutual funds, on which the payments are based, perform well.
ENHANCING SAVINGS
Helen can get more out of her savings by ending TFSA contributions and shifting her present TFSA balance to her RRSP to make use of her approximately $100,000 contribution space. The shift will pay handsomely in tax reductions. She can use about a fourth of the TFSA balance, $7,500 for each of the next four years, to generate tax reductions. She will retire in the middle of the fifth year.
Assuming that her gross income is $105,000, that she adds $12,000 annually to the RRSP account as she does now and adds $7,500 from the TFSA each year, then with an average tax rate of 18 per cent, she would get a tax refund of $6,860, which can also be put into her RRSP each year together, for annual contributions of $26,360. Assuming growth of three per cent, by the end of the fourth year, her present non-insurancebased RRSP, which has a present balance of $42,000, would rise to $160,860. In her fifth year, with just $6,000 in contributions and a $3,900 tax refund put back into the RRSP, her balance would rise to $179,900.
Thus by the end of her 70th year, Helen will have about $255,000 in the insurance annuity and $179,900 in the conventional RRSP, for a total of $434,900. For simplicity, we’ll assume a three per cent rate of return on her $179,000 of investable RRSP funds. On that basis, beginning not later than her 72nd year and assuming payments and income exhaust all capital by her age 97, she would have RRSP income of $10,331.
CLOSING THE INCOME GAP
When she retires and begins drawing on her RRSPs, Helen’s total income, including CPP and OAS would be $46,619. If that income is taxed at an average 15 per cent rate after age and pension income deductions, she would have $3,302 a month to spend in 2016 dollars. That’s a gap of $227 a month, or nearly $2,724 per year, that she needs to close.
Helen is paying a lot of fees to have her investments managed. All are in mutual funds with average management fees of 2.58 per cent. Add a 0.2 per cent to 0.3 per cent for the trading expense ratio and her total annual bill for management approaches three per cent a year. She could switch out of much of this costly mix of mutual funds, buy similar exchange-traded funds and save perhaps 1.5 per cent to two per cent a year.
If Helen can reduce management fees by just one per cent, her income would rise by $2,550 a year using present asset values and by a good deal more if her asset base grows before she retires at age 70. She can cut expenses by not renewing her car lease. It costs her $477 a month and generates tax savings by converting what would otherwise be a fairly low capital depreciation loss into an income deduction. When she retires, her tax bracket will fall and the lease will no longer be advantageous. She can travel more and perhaps buy an inexpensive car that does not have built in financing costs — as all leases do, Egan says.