Bruce and Bonnie are “middle-aged and still enjoying their professional careers in the non-profit sector,” Bonnie writes in an e-mail, but they’re looking ahead to what they hope will be a comfortable retirement. “Because we don’t have large defined benefit pension plans, and because we’ve been busy raising a child and paying off a mortgage, we feel we have some catching up to do on our savings,” Bonnie writes. Bruce is 52 and earns $104,000 a year, Bonnie is 58 and earns $74,600.
Their most valuable asset by far is their Vancouver house, which makes up the bulk of their assets. They have a mortgage of about $47,500, “which we expect to pay off completely in five years,” Bonnie writes. As well, they plan to spend about $20,000 renovating their home. In future, they’d like to be able to help their son – who has moved out to attend university – with a down payment on a condo.
They’re hoping to retire on $75,000 a year after tax without having to sell their house, Bonnie at age 65, Bruce at 62. “We are both healthy and physically active and hope to live into our 90s,” Bonnie adds. When they retire, they plan to travel and be active in their communities.
They wonder whether they should defer taking Canada Pension Plan and Old Age Security benefits to age 70.
We asked Ngoc Day, a financial planner at Macdonald, Shymko & Co. Ltd. in Vancouver, a fee-only financial planning firm, to look at Bruce and Bonnie’s situation.
What the expert says
The strength of Bruce and Bonnie’s situation is that they have little debt, they will get nearly full CPP and OAS benefits, and they have a modest retirement income goal requirement, Ms. Day says.
Bonnie and Bruce’s lifestyle spending is about $84,360 a year, including their mortgage payments, the planner says. They contribute $2,200 a month to their registered retirement savings plans, while Bonnie’s employer contributes about $535 a month to one for her. As well, Bonnie contributes $100 a month to her tax-free savings account and Bruce contributes $455 a month to his defined contribution pension plan.
In addition to these savings, they have the capacity to save another $1,500 a month or so. “They should consider directing this surplus to pay off the mortgage as soon as possible,” the planner says. “Once the mortgage is paid off, their monthly expenses will drop down to about $5,800, and cash that used to go to the mortgage ($1,255) can be invested for their nest egg.” Ms. Day’s forecast assumes a 2 per cent inflation rate and a 5 per cent average annual return on investment.
In full retirement, Bruce expects to receive maximum CPP benefits and Bonnie near maximum, plus they will be eligible for full OAS benefits. Bonnie expects to get about $3,430 in pension income a year from a defined benefit plan of a previous employer.
After the age of 65, they could convert their RRSPs to registered retirement income funds (RRIFs), and Bruce could convert his DC plan to a life income fund (LIF), to draw additional retirement income. This way, they could make use of the pension income splitting rule to split RRIF and LIF income on their tax returns and thus minimize income tax payable.
With pension income splitting, they could drop to the lowest tax bracket in retirement and achieve their stated goal of $75,000 in after-tax income.
Without income splitting, they may run out of funds around Bruce’s age 93 and Bonnie’s age 99, the planner says. They would still have the house. Mind you, in their late 90s, they may find it challenging to live independently and so may already have downsized, she notes.
Deferring CPP benefits to the age of 70 also would help them achieve their goal, the planner says. By doing so, they may not exhaust their nest egg until Bruce is 98 and Bonnie is 104.
“However, deferring CPP to age 70 means they’d need to withdraw from their RRSPs/RRIFs sooner to fund retirement expenses,” Ms. Day says. “If their investments have not achieved the assumed 5 per cent annual return, they may deplete their resources sooner.”
In addition, assuming that both spouses are already receiving maximum CPP benefits, and one spouse were to die, the surviving spouse may face a reduction of cash flow because their benefit, combined with the survivor benefit, cannot exceed the maximum CPP payment, the planner says.
The deceased spouse’s OAS would also be forfeited. “In that unhappy scenario, the surviving spouse may need to reduce expenses,” the planner says. The surviving spouse would also have the option of deferring property taxes, she says. (Tax deferment is a low interest loan program that helps qualified B.C. homeowners pay their annual property taxes on their principal residence.)
“Assuming that both spouses have longevity genes, CPP deferral is an effective strategy to boost guaranteed retirement benefits,” she adds. “I’d also strongly encourage them to pay off the mortgage as soon as possible and pro-actively invest their savings for retirement to safeguard against income shortfall if one spouse were to pass away.”
Based on their current spending pattern, their expenses will be around $69,300 once the mortgage is paid off, the planner says. Their $75,000 target allows for another $5,000 or so of travel or other extras. It’s plausible that they will want to spend more in the early retirement phase, while they’re healthy and can travel, and that expenses could be reduced in their 80s, the planner says. “In their advanced years, they may need to downsize and move into assisted living.”
“Any reduction in expenses would be beneficial to the sustainability of their retirement income,” the planner says. “That said, they should be able to enjoy the fruits of their labour during the golden years; it’s a balancing act.”
Bruce and Bonnie should be vigilant in tracking their expenses for a few years before they retire to ensure that their actual expenses are accurate, Ms. Day says. They can make adjustments as needed.
Bonnie and Bruce wish to help their son with a down payment, although the amount and timeline is unclear, Ms. Day says. “They should reassess this wish with a more concrete financial amount before making a decision,” she adds. “Helping their son could mean reducing their own retirement resources and may negatively impact their retirement income.”
The people: Bruce, 52, Bonnie, 58, and their son, 21
The problem: Can they afford to retire in a few years with a spending goal of $75,000 a year after tax without having to sell their Vancouver house? Can they help their son with a down payment? When should they take OAS and CPP?
The plan: Pay off the mortgage as soon as possible and redirect money to saving. Convert RRSPs and DC pension to RRIFs and a LIF, and begin drawing funds. Split pension income, consider postponing CPP and carefully examine helping son financially when the time comes.
The payoff: A clear view of the risks to their retirement spending goal and how they might manage them.
Monthly net income: $11,300
Assets: Cash $15,000; house $1,093,000; his RRSPs $117,510; her RRSPs $156,960; her TFSA $2,600; his DC pension $109,500; estimated present value of her DB pension $85,500; RESP $80,000. Total: $1.66-million
Monthly outlays: Mortgage $1,255; property tax $430; home insurance $205; utilities $90; maintenance $500; garden $50; transportation (car share) $700; groceries $1,000; clothing $200; gifts, charity $425; vacation, travel $500; dining, drinks, entertainment $575; personal care $15; club memberships $300; sports, hobbies $350; subscriptions $40; doctors, dentists $150; life insurance $85; phones, TV, internet $160; RRSP contributions $2,200; TFSA $100; his pension plan contribution $455. Total: $9,785. Surplus $1,515
Liabilities: Mortgage $47,500
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