Mike, 56, and Mary, 57
Should they quit work now, like Mike wants, or stick with another three or four years, like Mary wants?
They can afford to quit next spring, but just barely. It would be a compromise. If they do, they should take advantage of pension splitting.
An appreciation of the tradeoffs involved in whatever decision they make.
Monthly net income
Cash in bank $5,000; short-term deposits $10,000; his TFSA $38,000; her TFSA $38,000; his RRSP $100,000; her RRSP $300,000; estimated present value of her DB pension plan $594,000; estimated present value of his DB pension plan $522,000; residence $180,000; cottage $150,000. Total: $1,937,000
Condo fee $255; land lease on cottage $200; property taxes $250; heat, hydro $350; insurance for two properties $285; auto $500; telecom, Internet, TV $300; grocery, drugstore $1,200; clothing $250; gifts $300; personal discretionary (dining, drinks, entertainment, grooming, sports and hobbies, travel) $2,260; pension plan contributions, other payroll deductions $2,850. Total: $9,000. Surplus available for spending or savings: $2,500
Mike, who works in the health-care field, wants to retire now. He is 56. Mary, a teacher, thinks they should both work a few more years so they can retire without having to crimp their spending too much. She just turned 57. “I think that if we both work four more years, until age 60, we can enjoy retirement without much fiscal restraint,” Mary writes in an e-mail. “We are not used to fiscal restraint.” Adds Mary: “We have never had a budget and frankly do not spend much time worrying about money. We do live within our means as we have annual savings of about $30,000. Although we do not spend extravagantly, when we do travel or make the odd discretionary purchase, we do not want to scrimp.” They have a suburban condo and a cottage not too far away. When they retire, they plan to sell their current condo and move downtown, either buying or renting. They figure buying a downtown condo would cost about $30,000 more. They would spend half the year at the cottage and the other half at home. “I would like to be able to enjoy the downtown lifestyle (theatre, restaurants, etc.) and possibly be a snowbird for one month of the year,” Mary writes. She wonders if they should rent or buy. This year’s $30,000 surplus is earmarked for a new car for Mike. If they keep working, the next year’s surplus could go to cottage renovations, Mary adds. “I feel the following years’ savings of $30,000 to $60,000 – if we continued to work full time (until age 60) – would allow us to retire without money worries,” Mary writes. Mike wants to retire now “because you never know what might happen.” Both have defined-benefit pension plans but wonder if they should add annuities to their investment mix. We asked Michael Cherney, a Toronto-based financial planner, to look at Mary and Mike’s situation.
What the expert says
Mary and Mike are both fortunate to be part of the dwindling number of workers with defined-benefit pensions, Mr. Cherney says. They are asking whether they can retire on May 31, 2016 (Mike’s preferred retirement date), with an income of $6,000 to $7,000 a month after tax. Mike would settle for $6,000 a month, while Mary would be more comfortable with $7,000.
In his calculations, the planner assumes a life expectancy of 95 years, an inflation rate of 2.5 per cent a year, with pensions indexed at 75 per cent of inflation, and an average annual rate of return on investments of 4.5 per cent. He assumes they convert their registered retirement savings plans to registered retirement income funds when they retire.
The result? “They can, just barely, meet their retirement goals if they retire next spring,” Mr. Cherney says. They would have an indexed income of $92,000 a year before tax, or $78,500 a year after tax, “near the midpoint of their respective targets.”
Mike would get $30,336 a year in pension income in 2016, falling by 15 per cent at age 65 when the bridge benefit ceases. Mary would get $32,880, falling by 12 per cent at age 65. To supplement their income, Mike would draw $5,454 a year to start from his RRIF and Mary $18,702. They would draw the balance from their tax-free savings accounts.
At age 60, they would begin collecting Canada Pension Plan benefits of $8,179 a year each. At age 65, they would get Old Age Security (currently $6,839 a year each).
But, they might have to buy a used car and scale back on the cottage renovations if they retire in 2016. Working another year or two would give them more pension income and fewer years in retirement for which to provide.
To keep their taxes to a minimum, the planner suggests the couple take advantage of pension income splitting, dividing their retirement income in half. “Even though they are only in their late 50s, they can take advantage of this immediately because these are pension payments,” he says. They will also have the $2,000 a year pension income deduction.
Mr. Cherney has grossed-up Mike and Mary’s projected withdrawals from their TFSAs to pretax amounts to put all retirement income on an equal footing.
Looking at their investment portfolios, the planner finds that Mike’s is overly conservative “with very little foreign exposure.” Mary’s in contrast, is aggressive. “Considered together, it isn’t a bad mix,” he says. Even so, they should adjust their holdings so that they each have similar investments. “Otherwise, their withdrawal plans will become skewed and unnecessarily complicated.”
Mary and Mike asked whether they should include annuities in their retirement income plan, Mr. Cherney says. Because interest rates are so low, annuities are not paying a lot at the moment. If they do want to include annuities, he suggests they “wait for some time before buying them.”
They also wonder whether they should rent downtown or buy again after they retire. “The answer depends on many factors,” the planner says: rental rates; the purchase price of a downtown condo, including legal fees and tax; the carrying costs of a new condo; what rate of return they could get if they rented and invested the sale proceeds of their current condo; the expected rate of appreciation of the downtown condo; and “personal preference, for example, pride of ownership.”
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