Golden years bring fears for woman bridging gap
Betty worries travel, renovations may drain her retirement savings
The Person
Betty recently turned 65. After decades of working, she wants to spend the next few years travelling before settling into a retired life at home. She resides in a small home in the Greater Toronto Area and has been a social worker earning $74,000 a year for the last six years. Before that, she worked part-time for a number of years. Betty has a paid-off home worth $300,000 and is able to meet all of her expenses. She has a grown daughter who is self-supporting and lives out of province.
The Problem
Betty will receive retirement income from many sources, but isn’t sure she has enough to last her through her golden years and also provide for travel and a $25,000 home renovation. She knows she’s also entitled to monthly amounts from Canada Pension Plan and Old Age Security. And she knows she will receive a small pension from her employer. She also has $324,000 in a Registered Retirement Savings Plan and $38,600 in her Tax Free Savings Account.
The Particulars
Assets Cash: $30,000 Tax Free Savings Account: $38,600 Registered Retirement Savings Plan: $324,000 Liabilities None
The Plan
All of Betty’s current expenses total $31,800 a year; with travel, those expenses will increase to $35,500 a year, says Janet Gray, a financial planner and money coach with Money Coaches Canada in Ottawa.
If Betty retires this year, she would receive $500 a month from her pension, which is indexed to inflation.
In addition, she would receive $900 a month from CPP, and $563 a month from OAS. Both benefits would slightly higher if she waits to retire until age 70.
Her expected income from all of these sources, plus her own savings, would give her a cash flow of $27,500 a year, assuming a four per cent rate of return. That’s a shortfall of $8,000 from her anticipated lifestyle and travel costs. It also does not leave room for any home renovation expenses. There’s also no emergency fund buffer in this retirement amount, or any contingencies for possible increased health care costs. Betty has no health care plan benefits with her pension.
The good news is that Betty has a
“At that point, (Betty) may have to sell her home and use that equity to help pay expenses.” JANET GRAY A FINANCIAL PLANNER SPECULATING ON WHETHER BETTY’S INCOME WILL KEEP UP WITH EXPENSES IF SHE LIVES MUCH LONGER THAN AGE 83
few options to manage this gap. “She could work longer, which allows her to save more for retirement, she could try to achieve a higher rate of return on her savings, or she could work part time in order to fill the travel fund,” Gray suggests.
Gray recommends that Betty continue to work to complete her renos and save more for her “wants” (i.e. travel). But at the same time, Betty should also be confident that her “needs” (food, shelter, etc.) will be taken care of should she decide to retire sooner.
If Betty continues to work after age 65, Gray says it’s up to her whether she wants to bother contributing to CPP at that point. “It is optional if she wants to contribute. The contributions will add to her existing benefit. This option is available to age 70.” Gray also says that any additional savings Betty earns from working should go into a TFSA to allow for tax-free growth.
She’ll have sufficient income (less travel costs) to last her until she reaches age 87, but longevity risk is a big challenge for seniors, Gray notes. If Betty lives much longer than the average life expectancy of age 83, her income may not keep up with her expenses. “At that point, she may have to sell her home and use that equity to help pay expenses,” Gray explains.
When she retires, Betty also needs to account for the fact that her income sources will be taxable. “If the appropriate amount is not withheld at source, there can be taxes owing at tax return time, which she would need to pay likely from her savings,” Gray says.
Finally, Gray recommends that Betty set up a will and powers of attorney. “It’s a huge hardship on an adult child if their parent dies intestate or is incapacitated without powers of attorney in place,” she says.