Emily is 66, lives in a leafy suburban neighbourhood and has been working in the same administrative job for the past 30 years. She’s on her own again with two adult children.
“I have no financial dependants, only a dog, and have begun my retirement planning process,” Emily writes in an e-mail. She plans to continue working at her $91,000 a year job full-time until spring and then work part-time until mid-2021. She has a $196,000 mortgage and both a registered retirement savings plan and a tax-free savings account.
She wants to know when to begin collecting Canada Pension Plan and Old Age Security benefits; when to begin drawing on her RRSP; whether to work part-time a little longer; whether to withdraw money from her RRSP to pay off her mortgage; and how long she can afford to stay in her home before she has to sell it.
The family home has increased in value over the years, and at $1.2-million is now Emily’s main asset. She also has about $470,000 in an RRSP and a small pension from a previous job that will pay about $2,735 a year, not indexed to inflation, when she retires fully in 2021. Her retirement spending goal is $45,000 a year after tax.
We asked Rona Birenbaum, a certified financial planner and founder of Caring for Clients Inc. in Toronto, a fee-only financial planning firm, to look at Emily’s situation.
What the expert says
Ms. Birenbaum ran numbers for three different retirement scenarios.
In the first, Emily quits full-time work in June, 2020, and continues working two days a week until mid-2021. She begins collecting CPP and OAS when she retires fully.
In the second, the only change is that Emily draws on her RRSP to pay off her mortgage. And in the third, the only change from the first is that Emily defers CPP and OAS to the age of 70.
Among other things, Ms. Birenbaum assumes Emily lives to the age of 95, inflation averages 3 per cent a year, and Emily earns an average annual rate of return on her investments of 4.34 per cent. This is based on an asset mix of 15 per cent Canadian, 20 per cent U.S. and 15 per cent international stocks or stock funds, 20 per cent global bonds, 25 per cent Canadian bonds and 5 per cent cash and cash equivalents.
After she retires, Emily lowers her TFSA contributions to $500 a month. Half of the TFSA savings goes to an emergency fund and/or car replacement, with the remaining half going to retirement saving.
First, the government benefits. “We tested out taking the benefits earlier and later than age 67 and determined that Emily’s optimal trigger point is at full retirement in 2021,” Ms. Birenbaum says.
Next, the planner looks at whether it makes sense for Emily to withdraw RRSP funds to pay off her mortgage. “Absolutely not,” Ms. Birenbaum says. “She would be triggering an outrageous tax bill up front that would undermine her wealth accumulation,” she adds. “It would accelerate the date when her investment assets are fully depleted from age 85 to age 77,” the planner says. Emily’s budget after she sold the house, paid off the mortgage and invested the balance would be $24,000 a year less than in the first scenario.
As to the RRSP/RRIF, the planner recommends Emily convert the RRSP to an RRIF in 2020 and begin making minimum withdrawals starting in 2021. The RRIF withdrawals, along with the government benefits and small work pension, will meet Emily’s lifestyle needs. Her average tax rate will be in the 20-per-cent range.
When she begins drawing on her RRSP/RRIF, Emily should ensure that she has sufficient cash and fixed-income holdings so that she can withdraw from the fixed-income portion exclusively for up to five years. “This will allow her to not be forced to sell any equity holdings during a bear market and subsequent equity market recovery.”
Should Emily work longer? She can if she enjoys working, but not because she needs to for financial reasons, Ms. Birenbaum says.
In scenario one, Emily can remain in her own home until she is 85, at which point she sells the house and invests the proceeds. This will give her about $5,000 a month to offset housing costs. In scenario two, she will have to sell at 77 and will have $3,000 a month to offset rental costs. In the third scenario, in which she defers government benefits, she would have to sell at 83 and would have only $1,200 a month to offset rental costs.
Finally, Ms. Birenbaum looks at Emily’s investment portfolio. Her investor profile indicates she has a low to moderate risk tolerance, yet her return expectations are 5 per cent to 8 per cent a year, pointing to a mismatch. The planner suggests Emily sit down with her investment adviser to ensure that her portfolio is structured to achieve a minimum of 4.34 per cent a year on average and that she understands and is prepared for some volatility.
The person: Emily, 66
The problem: Should she draw on her RRSP to pay off her mortgage? Should she postpone government benefits to the age of 70? How long can she stay in her own home?
The plan: Leave the mortgage as is, retire as planned, begin drawing CPP and OAS when she retires fully and plan to sell the house to fund her old age in her mid-80s.
The payoff: Financial security
Monthly net income: $5,470
Assets: Cash $1,500; TFSA $35,300; RRSP $468,000; house $1.2-million. Total: $1.7-million
Monthly outlays: Mortgage $1,000; property tax $415; utilities $255; maintenance $335; garden $85; house insurance $95; car insurance $160; maintenance, fuel $75; groceries $445; gifts, charity $150; vacation, travel $350; personal care $100; dining out, entertainment $250; pet expenses $175; phones, TV, internet $220; TFSA (includes catch-up) $1,335. Total: $5,445
Liabilities: Mortgage $196,000
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