After 25 years, Ramona was laid off from her government job in small-town Ontario with few prospects for well-paying employment. She’d been earning more than $100,000 a year.
She’s 60 years old and lives on her own but has grown children and grandchildren.
“I have started a job search and am volunteering to make new connections and keep busy,” Ramona writes in an e-mail. But she’s worried about her “changed circumstances.”
She owns her house outright and has some savings. Best of all, she has two defined benefit pension plans, the larger from her most recent employer. But the amount of money she stands to get will be reduced if she takes it before age 65.
At age 65, her pensions and Canada Pension Plan benefits will be about $68,400 a year, Ramona writes. When she was let go, she got a settlement, which she is living on now. She is also eligible for 42 weeks worth of employment insurance after her settlement funds run out early next year.
If she doesn’t find work, Ramona wonders when to start drawing from her savings and pensions, including CPP. If she gets a relatively low-paying job, should she take one of her pensions so she can buy low-cost health and dental benefits through the plan? Can she afford to forget about job hunting and just “get on with life?” Her retirement spending goal is $50,000 a year after tax.
We asked Morgan Ulmer, owner of CentsAbility, a financial counselling firm based in Calgary, to look at Ramona’s situation.
What the expert says
“Despite being laid off, Ramona is still in an enviable position,” Ms. Ulmer says. She has paid off the mortgage on her house and saved a decent amount in her registered retirement savings plan and tax-free savings account, the planner says. “She is also exercising restraint with her severance and estimates she will have saved about half of it once it ends in June, 2017.”
Ramona’s retirement from age 65 onward is secure because her pensions and CPP benefits will cover her estimated income needs, Ms. Ulmer says. “It is over the next five years where she faces the most uncertainty.” The planner explores a number of alternatives.
Ramona could delay taking her pensions until she is 65, drawing instead on her savings after her employment insurance runs out. She could even afford two wish-list items – buying a car and doing some renovations on her house, Ms. Ulmer says. “However, she would wear her savings down to almost nothing, and would not be able to weather a financial emergency.”
Complicating the situation is that Ramona is still looking for work, so drawing a pension could potentially push her into a high tax bracket if she gets a good job, the planner notes. If she gets a low-paying job, she could supplement her income from her TFSA or RRSP.
Ramona does not need to decide now, the planner says. Next year, if her severance and EI payments don’t cover her expenses, she could draw on her RRSP to take advantage of her lower income and lower tax bracket that year.
Until Ramona is more certain of her income, she should: track her spending closely so that she will have some baseline data to make an accurate retirement budget; save as much as possible of her severance payment; delay spending on a car and home renovations; and next year, try to live on her remaining severance and employment insurance benefits. If she needs more income, she can withdraw from her RRSP to take advantage of this lower-income year. She should also set aside at least $20,000 for an emergency fund.
After 2017, if she is still not working, Ramona could begin drawing the larger of the two pensions. This would allow her to buy low-cost health insurance and insulate her savings, leaving her with more than $115,000 at age 65. But her pension would be reduced because she would be taking it early.
“A middle-of-the-road approach would be to leave her larger pension intact and tap into her smaller pension and her CPP,” Ms. Ulmer says. This would be less detrimental from a tax perspective if she started working again. But she’d have to draw on her savings, leaving her with about $70,000 at age 65, and she would have to get private health insurance.
“There are no bad choices here, and no scenarios leave Ramona high and dry,” Ms. Ulmer says. The one circumstance where she could run out of savings would be if she began drawing both her pensions and her CPP at age 61. The reduced pensions would not keep up with her income target of $50,000 in after-tax dollars and her savings would run out at age 93. She would still have her mortgage-free home to draw on, “so even this scenario would not pose a major problem,” the planner says. The plan assumes a 4-per-cent annual rate of return on investments and a 2-per-cent inflation rate.
The person: Ramona, 60.
The problem: How to navigate a wealth of choices. Does she need to find another job, or can she retire with enough funds for “fun and travel?”
The plan: Spend cautiously this year and next, drawing as little as possible from savings. She may be able to put off drawing on her pensions until 2018. She could draw the larger one first, sacrificing some income, or the smaller one plus CPP.
The payoff: A less confusing financial situation, along with greater flexibility.
Monthly net income: $6,000 (salary continuance).
Assets: Cash in bank $8,000; stocks $30,760; bullion $36,000; TFSA $25,500; RRSP $177,190; estimated present value of pension plans $770,825; residence $360,000. Total: $1.4-million
Monthly outlays: Property tax $260; home insurance $100; utilities $255; maintenance and repair $335; garden $85; telecom, TV, Internet $230; transportation $320; grocery store $835; clothing $165; vacation, travel $415; gifts $415; yoga $125; pets $65; entertainment $100; life insurance $20; home office $160. Total: $3,885
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