Louise works long hours in the food service industry with no employee benefits, so it’s no wonder that at 57 and single again, she is beginning to think about retiring. She earns $12 an hour working anywhere from 30 to 45 hours a week.
“Some months I find it hard to balance my budget,” Louise writes in an e-mail. When she retires, she wants to take a trip or two a year “without going to the poor house,” she writes. She has about $205,000 in savings and investments.
“Quite frankly, I am scared,” she adds. “I don’t want to have to depend on my kids or my siblings in my old age.”
Louise occasionally has to dip into her savings just to make ends meet. A few months ago, when she was in between jobs, she borrowed about $8,000 on a line of credit to cover her living expenses, including car insurance and rent on her Kitchener-Waterloo-area apartment.
“I would love to retire or semi-retire at 60, but I have no benefits and a poor-paying job,” Louise says. Her short-term goal: “To hang on to what I’ve got.”
We asked Ross McShane, director of financial planning at McLarty & Co. Wealth Management Corp. in Ottawa, to look at Louise’s situation.
What the expert says
Louise has reason to be concerned, Mr. McShane says. As it stands, her after-tax income of $17,820 a year does not cover her expenses.
In 2012, Louise will run a deficit of $8,981, including $4,000 for a planned trip to Italy, $500 for car tires, $300 for the dentist and $500 for the optometrist. Every five years or so, she will need $2,500 for hearing aids.
The way she’s going, Louise will have used up her non-registered portfolio of $40,213 and her registered retirement savings plan of $16,497 by the time she is 65. From age 66 to 71, she will have to draw on her locked-in retirement account to cover a cumulative deficit of more than $35,000. Income from her LIRA would erode and perhaps eliminate any guaranteed income supplement (GIS) she might otherwise receive. Worse, she’d run out of savings by the time she is 88. Mind you, GIS would kick in at that point, helping to cushion the income drop, and her lifestyle expenses may well be lower, so she may be able to stretch her savings out a few more years.
Fortunately, Louise has a number of planning opportunities: She can earn a little more, spend a little less and lower her goal for retirement income from $24,000 after tax to say, $22,000, Mr. Shane says. The key from age 65 on is to generate as much cash flow with as little taxable income as possible in retirement – and to take full advantage of the GIS.
First, he recommends Louise dip into her non-registered investment portfolio immediately to repay her line of credit. She is paying 5.75 per cent on the loan, “which is difficult to achieve after-tax on an investment portfolio,” he notes. This will also free up cash flow.
Next, he suggests she transfer $15,000 from her non-registered portfolio to a tax-free savings account before year end and another $5,000 in 2012. “This will turn taxable income into tax-free income.”
From age 60 to 63, she should withdraw about $5,000 a year from her RRSP, with any surplus funds going to her TFSA. She should delay converting her LIRA to a Life Income Fund for as long as possible to take advantage of the GIS. Since LIF withdrawals must begin at age 72, she will no longer be entitled to GIS benefits.
