George Jordan was one of the best known voices on the east coast when he took early retirement in 2002 at 56 following nearly 24 years as a host and announcer with CBC. Now 65, Jordan is well into his post-retirement career as a businessman with a minority ownership of three New Brunswick low-power FM radio stations. One of Mr. Jordan’s adult children is still partially dependent on him, so the extra income was not gravy, but required. However, a new challenge was equally important. “I want to be engaged in something I can see grow,” after a lifetime of being an employee, he says.
Mr. Jordan is at the leading edge of “boomerang” workers who pursue new jobs post retirement, downsize with their current employers or become boomerpreneurs and venture into the realm of self-employment. With this trend come a host of unique financial considerations, from taxation and government clawbacks to early or delayed pension withdrawal.
According to the latest Statistics Canada figures, nearly 72 per cent of boomers who stay attached to the work force cite financial need as the reason. In some cases it is because the size of their nest egg has proved a disappointment. This is hardly a surprise considering the past decade, which included the dotcom bust, a market decline following the 9/11 terrorist attacks, a financial crisis, a global recession and ultra-low interest rates. Many registered retirement plans haven’t grown at all in the past ten years or are in negative territory on an average annual basis.
In other cases, the financial need comes about because of unexpected circumstances. “I retired at 58,” says 61-year-old Diana Dombrowski of Dauphin, Man. “But then my husband and I got divorced, which came right out of the blue for me. I’ve discovered that one cannot live more cheaply than two.”
Ms. Dombrowski, an employee trainer, has returned to the workforce part-time with her old employer and she’s also teaching a continuing education class. She has decided to continue working until age 65, when she’ll begin collecting CPP and OAS, then she’ll cut her hours again until age 70. She hopes she won’t have to draw anything from her RRSPs until she converts them to RRIFs.
Working beyond early retirement and into the senior years has an enormous impact on retirement savings. Ms. Dombrowski has $175,000 in Group and self-directed RRSPs. At a modest 4 per cent average annual return, her retirement nest egg will have grown to more than $259,000 by the time required RRIF withdrawals kick in. She’ll be in an even stronger position if she can continue making RRSP contributions and then deposit her tax savings into a Tax Free Savings Account.
While working past retirement is often a financial or emotional lifesaver, there can be negative aspects, such as the potential for higher income tax and clawbacks from government programs, such as the Old Age Security Pension, as income increases.
Most people, who retire early, or even at 65, from their regular jobs, but continue to work, are worried about reductions in their old-age pension cheques. But Judith Fulton, Calgary-based senior advisor with T.E. Wealth, points out that the OAS clawback doesn’t even begin until a net income of nearly $68,000. However, she says there are other reasons why post-retirement income can be less than anticipated for the boomerang worker generation. Many don’t realize that the age amount tax credit for those 65 and older, (roughly $6,500, though it varies across the provinces), is subject to reduction starting at incomes of around $33,000. “It’s a different kind of clawback,” she notes.
Also, new rules in 2012 mean that those who take CPP early, but keep working, will have to pay into the plan until they retire completely, or age 65, whichever comes first. This change will have an even bigger impact on boomerpreneurs because they will be paying both the employee and employer share. Finally, after 2012, early CPP applicants will see a greater discount for every month they receive the pension before turning 65.
Another potential clawback is the Guaranteed Income Supplement (GIS). The maximum GIS payment is just under $730 monthly for singles, $970 for couples. It is gradually reduced as net income increases, ending completely at just over $16,000 for singles and $21,500 for couples. Those who are eligible might not see an advantage in working after age 65, once income tax and reduced or eliminated GIS payments are taken into consideration.
One of the most significant decisions for early retirees who keep working in some capacity is whether or not to start drawing on their RRSPs or company pensions. Ms. Fulton recommends a thorough audit of different scenarios using a projection of income at various ages. There are many online calculators that help predict how long the nest egg will last, based on the draw and rate of return.
It’s all about being aware,” Ms. Fulton says. “Do an estimate of future years’ income and the tax on that income, so you aren’t surprised. You might face higher taxes in certain years but be able to move income between different ages by taking CPP early or even withdrawing funds from your RRSP to even things out.”
Seniors and near-seniors are increasingly filling the gap between leaving their jobs of many decades and full retirement with self-employment. More than 44 per cent of employed senior men and nearly 29 per cent of women are boomerpreneurs and early retirees are now joining entrepreneur ranks in record numbers.
Financially, self-employment, especially for early retirees who still have a long time frame, can make a lot of sense, especially from a tax perspective. “You can do income splitting with a spouse or adult children,” points out Tina Di Vito, head of the BMO Retirement Institute, “and supplies, computer equipment, as well as use of home can all be deducted.” However, Ms. Di Vito urges caution over start-up costs. “If you are putting a lot of your nest egg into a new venture, it’s pretty risky. And I consider ‘a lot’ to be 10 per cent.”
The trend for boomers to work past early or normal retirement age isn’t likely to abate. Whether the reason is need or desire, you can improve the odds of financial success with a little planning and forecasting.
Special to The Globe and Mail