In a small city not far from Toronto, a couple we’ll call Beth and Harvey have retired. Beth, 53, used to work for a bank. Harvey, 55, worked for a public utility. Together they have annual income before tax of about $64,400 a year. They cannot yet qualify for Canada Pension Plan or Old Age Security and are therefore financing their expenses from company pensions and savings. Their goal is to avoid going further into debt. Currently, they have debts equal to 93 per cent of their annual disposable income. “We know where we want to go,” Beth explains. “We’re just not sure if we can get there without going into debt. We want to keep our month each year in Florida and we are planning a trip to Europe for our 40th wedding anniversary in several years.”


Facelift asked certified financial planner Michael Cherney in Toronto to speak with Beth and Harvey in order to work out their options. The issue, as he sees it, is whether Harvey will have to do part-time work in order to provide cash flow sufficient for the realization of their plans.

“They can, in fact, realize their dreams provided that they can pay off their debts within the next two to three years,” the planner says.

Beth and Harvey retired in their fifties. Their financial assets consist mostly of registered retirement savings plans with a present value of $109,740. That is not much for two people, each of whom is assumed to live to age 95.

That age exceeds average mortality but allows for a plan that will retain assets into very old age. During the decades ahead, inflation is assumed to run at an average annual rate of 3 per cent, Mr. Cherney notes.

Both Harvey and Beth will take their CPP benefits at age 60, giving up 0.5 per cent of the maximum amount payable for each month prior to age 65 that benefits begin. The benefits payable will therefore be 70 per cent of the full CPP payout of $864.75 a month in 2007 dollars or $605 a month for each. The couple should apply to CPP at age 60 to have benefits split in order to save income tax.

Harvey and Beth will each qualify for full Old Age Security benefits, currently $497.83 a month. The payments are indexed to inflation. The clawback begins at $63,511 but this threshold will not affect the couple, Mr. Cherney says.

Harvey will continue to receive his fully indexed defined benefit pension in the amount of $55,680 a year. When Beth reaches age 65, she will receive a pension of $6,240 a year – or $2,496 a year should she elect to take her pension at age 55. Early application bears a high cost, Mr. Cherney notes. She should wait to age 65 to take her pension, he adds.

Harvey will earn an additional $51,900 for contract work in 2007. That income will enable him to pay off his outstanding line of credit debt of $38,700, which is his largest debt. When Harvey reaches age 65, his company pension will be cut by 16 per cent according to his plan’s agreement. When he dies, it will fall by a further 33.3 per cent, Mr. Cherney notes.

Beth should begin to take funds from her RRSP next year in order to average out income. If she waits until age 60 or 65 to begin RRSP withdrawals, she risks being pushed into a higher tax bracket by CPP and OAS payments, Mr. Cherney notes.

There is a risk that in taking money out of her RRSP, Beth could run afoul of attribution rules. RRSP withdrawals are taxed back into the hands of the contributor if money is taken out within two years of contribution, the planner adds. To avoid that, in 2008, Harvey should open a personal, non-spousal RRSP.

If Harvey and Beth can achieve a 5-per-cent after-tax return in their taxable investments and a similar return on a pretax basis in their registered accounts, then the couple should be able to achieve a pretax, inflation-adjusted income of $70,000 a year for the rest of their lives. That would produce an estimated $54,000 a year after tax. Since Beth and Harvey currently spend only $41,000 a year, they will have a margin for error and ample funds for travel.

In 10 years, when Harvey is 65 and Beth is 63, the couple’s income will consist of $62,767 from Harvey’s pension, $8,629 from Harvey’s CPP, $4,271 from Beth’s CPP, and $8,029 from Harvey’s OAS. That will produce total income of $83,696. They can add $8,680 from their RRSPs to bring total income up to $92,376, close to their inflation-adjusted required income of $94,000, the planner says.

Two years later, when Beth is 65, the couple will add her OAS payments of $8,517. They will have achieved stable income sufficient to pay their estimated expenses.

Their RRSP balances will have been reduced to zero in prior years in order to supply income in the years before Harvey and Beth have qualified for CPP and OAS payments. Depletion of their RRSPs is the necessary consequence of early retirement, Mr. Cherney notes.

Harvey and Beth can use pension splitting and division of their CPP pensions to avoid the clawback of OAS, Mr. Cherney says.

Even though their RRSPs will be depleted by 2017, there is a good deal the couple can do to raise returns in the next 10 years.

The couple are almost entirely invested in stocks. They have provided growth and inflation compensation, the planner says, but insufficient security for a portfolio that will provide vital income before other pensions begin to be paid. Harvey’s company pension will be a base for the couple’s retirement income, but it would still be helpful to reduce equity weight and to add fixed income to the portfolio.

Harvey has two financial services stocks that have had substantial gains in the last five years and should be considered for sale, Mr. Cherney says. Higher returns could also be achieved by eliminating high-fee mutual funds in favour of low-fee funds or perhaps some exchange-traded funds that have management fees a fourth or even a tenth of those of mutual funds.

Harvey has worked for a large organization with a fine pension plan. “Defined benefit, indexed pensions of the kind he has are getting to be rare,” Mr. Cherney notes. “Harvey is in a shrinking group of Canadians who can capitalize on this good fortune.”

“We are very happy with this analysis,” Harvey says. “We decided to retire early and Mr. Cherney has shown us how we can maintain our income until each of us is 95 or gone.” Adds Beth, “we see how to use income splitting to add to our disposable income. It was a good exercise.”