In Toronto, a couple we’ll call Charles, 56, and Susan, 60, are thinking about their lives after retirement. An educational administrator and a school department head, they have each taught for less than 20 years, and in that number is a problem, for neither has qualified for the maximum pension available to employees who have appreciably longer terms of service. The basis for their retirement will therefore be pensions based on their salaries, a total of $193,500, and their assets, a total of $977,200. Their largest asset is a townhouse with an estimated value of $800,000. Their financial assets are $107,200. “We are hoping to travel after retirement,” Charles says. “Will we be able to afford two or three months a year in Europe or in North America? We might stay in one place and rent a house or an apartment. Without the pressures of work, we may be able to learn more about the world than we have before. But what should we be doing now to set that up?
What our expert says
Facelift asked Michael Cherney, a certified financial planner in Toronto, to work with Charles and Susan in order to plan their retirement and to budget for their postretirement travels.
“This is a couple with many opportunities and, as well, many responsibilities,” Mr. Cherney observes. “They have a blended family but have not made a financial plan and, while they do not face any great difficulties, they do need to assess their retirement resources.”
The couple has relatively modest financial assets, Mr. Cherney notes. However, assuming that Susan retires in 2010 at the age of 63 and Charles in 2015 at the age of 64, there is still time to build up their investments, he says.
Assuming that Charles lives to age 91 and Susan to age 95, that inflation runs at an average annual rate of 3 per cent and that each partner begins to receive benefits from the Canada Pension Plan on retirement, Susan can expect an initial CPP payment of $7,974 a year and Charles $9,244 a year. The benefits are indexed to inflation.
Each partner will receive full Old Age Security benefits at age 65. Currently, OAS pays $491.93 a month and is indexed to inflation. Recent federal tax law changes allow pension splitting, so Charles’ OAS payments will probably not be subject to the OAS clawback that currently starts at $63,511.
Charles can expect an annual employment pension of $57,699 in pretax, 2007 dollars. Susan can expect $37,056 a year. The pensions are paid by the Ontario Teachers Pension Plan and are indexed to inflation, Mr. Cherney notes.
Registered retirement savings plans will not contribute a great deal to the couple’s pensions, but each partner should convert RRSP balances to registered retirement income funds at retirement and then begin to withdraw the minimum permissible amount, he recommends. Any RRIF withdrawals in excess of spending should be saved in a non-registered account. Early withdrawal accomplishes income averaging, though it sacrifices maximum accrual of gains within tax-deferred plans, the planner notes.
Even with their modest RRSP/RRIF balances, the couple should be able to attain a retirement income of $115,000 in pretax 2007 dollars, Mr. Cherney estimates. That will work out to after-tax income of $7,500 a month made up mostly of their school pensions, CPP and OAS. In 2015, Charles’ retirement year, total RRIF income would be only $4,000.
There is a good deal that Charles and Susan can do to adjust to the costs of retirement. They could sell one of their two cars, for example. They can also use what may be a cash surplus generated by expense reduction to give $1,000 a year to each of their seven children and $400 a year to each grandchild. They may want to contribute to wedding costs for several children who are not married at present.
Charles and Susan need to do some work on their current finances, Mr. Cherney notes. They have $62,900 outstanding on lines of credit used to pay for their children’s weddings. They can use their substantial savings of nearly $4,000 a month to pay down those balances and reduce them to zero within two years. Thereafter, they can direct those savings to investments. They have little RRSP room, the result of having generous pension contributions through their work.
The couple can also use their cash surplus to build up a taxable investment account. To date, the couple have used blue-chip stocks for their RRSPs and put relatively small amounts of money into speculative stocks in their taxable investment accounts. Later in their retirement, they could also sell their townhouse and move to a smaller apartment, potentially freeing up what is already an $800,000 asset, the planner says.
Given the limited room Charles and Susan have in their RRSPs, they will have to make most of investments in their taxable account. With their foundation of indexed pensions, they can afford to put most of their new, discretionary investments into stocks or mutual funds. They can reduce portfolio risk by diversifying by style – value and growth, capitalization and domicile (Canadian and global). It is possible to reduce fees by using exchange-traded funds that have management expense ratios a small fraction of those charged by managed mutual funds.
Charles and Susan made wills 15 years ago but have not revised them since. They need to review the wills to ensure that their designated executors and trustees are still available. They have numerous potential heirs in their several children and in the relationships that come with blended families. They may wish to use trusts to divide income. They may want to consider the disposition of their house, provide investment suggestions to trustees or look after the interests of their growing brood of grandchildren, Mr. Cherney says.
The transition to retirement should not be difficult, the planner explains. The couple’s retirement income will not be appreciably less after tax than their present income. Most of their retirement income will be from their employer, CPP and OAS. In that respect, they can have a more secure retirement than many people, Mr. Cherney adds.
They may want to use their substantial savings to start a business that would occupy their time and provide income during their retirement. Charles, who was in business before he became a teacher, could be a consultant and employ Susan in the business. Were he to do that, their business income could be shared between them as employees of the company, Mr. Cherney says.
“Charles and Susan are in the fortunate position of being able to rely on secure incomes in retirement,” he notes. “They can use their substantial savings to travel to see their children and grandchildren, to visit foreign countries or to create a small business. As long as they are in good health, they can expect that their retirement will be fulfilling.”
“I find it reassuring to have this analysis,” Charles says. “I figured we’d be okay in retirement, but I have never gone through this sort of planning exercise to test retirement income and expense. The process provides peace of mind and a map of how we can use our resources. In a sense, this is a baseline for our future.”
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