Tired nurse ready to call it quits

SITUATION Woman, 60, fears she does not have enough savings and pensions to retire

STRATEGY Do the math: There is more than enough pension income and assets for comfort

In British Columbia, Julia, as we’ll call her, is a registered nurse who brings home $4,500 a month. At 60, she is looking at the end of a 35-year career, feeling worn out physically and burned out mentally.

After years of shift work and increasing work loads brought on by cuts in provincial health budgets, she feels dragged down by the work in her clinic and by incessant home visits. Her patients are palliative in the process of dying, people with post-operative infections and others with diabetic wounds. She says it is profoundly draining. Her home in a mature neighbourhood with cottonwoods and hazelnut trees is a refuge, but only for a few hours at a time. At the end of her working day, she takes care of her 90-year-old mother who lives nearby in a nursing home. She is understandably exhausted.

“I enjoy the job in that I can help people, but the toll of sicker patients and the amount of paperwork has gotten to me,” she says. “I am thinking I could retire at 60 and still work part time,” Julia explains. “The trouble is that there is no guarantee that I may get enough work. My problem is that I didn’t contribute as much to my pension plan as I now wish I had.”

Yet she is not quite ready to quit. Her problem is that her means for retirement, which are her financial assets, a little over $264,000, plus a work pension of $3,057 a month at age 60 — which reduces to $2,328 at 65, CPP and OAS, will only provide about $3,900 to $4,000 a month before tax whether she ends full-time work at 60, which she would like, or 65, which she would accept if necessary.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Julia. “She seems solid and sensible and just needs help with compiling her figures and a boost to her confidence,” he explains. “It is true that her work pension is less than it might have been had she maxed out her contributions, but we can work with that problem.”

BUILDING RETIREMENT INCOME

With planning, Julia can retire at age 60. She should top up her RRSPs. She has $17,840 of space. She can take the money from her cash balance of $30,109. She would get a refund of approximately 35% or $6,244 which she can add to her TFSA over two subsequent years, pushing its present balance, $29,130, to $35,374. Her RRSP would rise to $120,307, Mr. Moran estimates.

In retirement, Julia can have the full Canada Pension Plan benefit of $ 12,150. CPP will be her largest fully indexed pension. She could take it at age 60 with a 36% reduction, but that would mean giving up a lot of her CPP indexation.

To match the age 65 CPP at age 60, she could withdraw $12,150 a year from her RRSP. She will be able to draw Old Age Security benefits at age 65 at the full present rate of $6,612 a year.

The plan is simple: She would add $400 a month, as she does now, to her RRSP to age 60 then take $12,150 a year from her RRSP from 60 to 65. The balance left would be $69,157. She will have preserved her CPP in full and get full indexation and spread the income from her RRSP so that she is not hit with high taxes when, under RRIF rules, she has to take about 7.5% at 72 rising to 20% in her 90s.

Her monthly income from age 60 to 65 would therefore be $2,328 from her work pension, $729 from the five-year bridge to 65, nothing from CPP or OAS, and $1,013 from her RRSP for total income of $4,070 a month before tax. At a 14% average tax rate, she would have $3,500 a month to spend, which would exceed her present $2,820 monthly allocations net of RRSP, TFSA and cash savings.

Monthly income from age 65 forward would be $2,328 from her work pension, $1,013 CPP benefits, $550 from Old Age Security and nothing from investments, which could grow at 3% after inflation plus a return from her financial assets.

Her total income would be $ 3,891 a month, enough to support present net spending.

Julia’s RRSP funds will have been boosted by a tax refund to $ 120,307 but reduced by five years of contributions and eroded by payouts to $69,157. That sum plus the enhanced balance of her TFSA, $35,374 and $6,244 cash would leave her total financial assets at $110,775.

These funds invested to return 3% a year after inflation would generate income of $3,325 a year or $ 277 a month. That would make her total income $4,168 a month. The process of delaying CPP benefits will have both allowed retirement at 60 and created a rising income in retirement.

BUDGET CHOICES

Julia can get more out of her financial assets by deferring property taxes of $350 a month until sale of her house. This privilege, available to B.C. residents 55 and older, would save her $4,200 per year. She can add to income by renting out a basement suite which one of her children has used, for perhaps $650 a month or $7,800 a year. That is more than enough for payments on a new car or good used model. Given her high level of present car maintenance costs, as much as $500 a month, it could be a wise expenditure.

“Julia is right to see that her financial assets are not very large. But that is compensated by her work pension. She will have a substantial and growing surplus for her retirement, for her adult children or their children perhaps or for donation to good causes.”