A financial cushion for life after work
Alice wants to take early retirement from her nursing job next year to spend more time with her ailing husband, Andy.
She is 54, he is 60 and on disability insurance for a condition that is expected to worsen with time. The disability insurance payments of $48,000 a year will stop abruptly when Andy turns 65 and he'll be left with only Canada Pension Plan and Old Age Security benefits totalling about $1,085 a month.
Leaving work early will eat into Alice's pension, but she figures she can work part time to make up some of the difference.
When Alice quits, they plan to sell their suburban Vancouver condo and move to their recreational property, which is also in British Columbia and needs a little work. They wonder whether Alice's pension, the proceeds from the condo sale and government benefits will be enough to tide them through with after-tax spending of $60,000 a year.
Their biggest concern, Andy writes in an e-mail, is how to invest to get the best possible returns with the least possible risk. They also worry that Alice's medical coverage, which continues after she retires, might be cut at some point in future. They worry, too, about the cost of home care for Andy if he needs it in future.
We asked Ron Graham, a chartered accountant and financial planner with Ron Graham & Associates Ltd. in Edmonton, to look at Andy and Alice's situation.
What the expert says
With Alice's salary of $85,000 before tax, the couple is able to tuck away $2,800 a month in savings, Mr. Graham notes. They wonder whether they should sell their condo now because the market is softening and rent an apartment, which would enable them to save even more. Their condo has a $175,000 mortgage, which costs them $1,650 a month plus condo fees and taxes of $375 a month.
Selling now would seem to make sense, the planner says. They hope to net $280,000 from the condo.
Together, they have $40,000 of unused room in their tax-free savings accounts. They should take advantage of this first. After that, Alice could contribute to her registered retirement savings plan to take advantage of the tax deduction while her marginal tax rate is still 32.5 per cent, Mr. Graham says. Andy should not contribute to his RRSP because he is not paying any tax If she retires at age 55, Alice will get a pension of $2,629 a month. This amount will be supplemented with a bridge benefit of $757 a month until she turns 65. At age 60, she could begin collecting CPP benefits of $631 a month. At age 65, her bridge benefit would stop, but she would get OAS of $545 a month.
If Andy and Alice save $30,000 a year from their surplus cash flow and the proceeds of the condo sale and earn 4-per-cent interest (with 3-per-cent inflation), their capital would throw off another $1,000 a month of income. When Andy's disability income stops at age 65, their combined income will be $5,471, Mr. Graham calculates. "With pension sharing and Andy's disability tax credit, their taxes will be about 8 per cent of their income, so they will be able to meet their retirement goal of spending $60,000 a year indexed for inflation starting at Alice's age 55 even with her reduced pension," he says.
When Alice's bridge benefit ends, her OAS will kick in. Their income will still be down about $100 a month but by then Andy will have begun withdrawing the required minimum amount from his registered retirement income fund, which will make up the difference, the planner says. Best of all, they can accomplish their goals without taking any risk in their investments, Mr. Graham says. They could buy guaranteed investment certificates or bonds. But for a potentially better return and preferred tax treatment, they might want to keep their fixed income holdings in their registered plans and invest their non-registered savings in a portfolio of dividend-paying stocks.
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Andy, 60, and Alice, 54
Figuring out if Alice can retire in a year and whether they can get by on her pension, government benefits and the proceeds from the condo sale.
Sell the condo, rent an apartment, invest the money. Alice retires next year as planned. With a modest annual return of 4 per cent nominal or 1 per cent after inflation, they will have enough to meet their retirement spending goals.
More time to spend together now and financial security in future.
Monthly net income
Bank accounts $19,000; RRSPs, $60,000; residence $500,000; recreational home $150,000; Alice's pension plan $600,000. Total: $1,329,000
Mortgage $1,650; other housing $505; transportation $240; groceries $700; clothing $120; gifts, charitable $100; vacation $120; other $50; entertainment, grooming $720; memberships, subscriptions $290; pets $20; life insurance $255; drugs $30; telecom $290; RRSPs $400; Total: $5,490