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An extra four years of work will pay off in retirement for this Ontario couple


Question ultimately comes down to whether they just want to squeak by in retirement, or to thrive by adding to capital and thus to their choices

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In Ontario, a couple we’ll call Rick, 60, and Marianne, 63, have raised four kids, all of whom have left home. Rick, who brings home $5,317 per month from his job as a teacher, is approaching a retirement he would like to begin in June. Marianne is already retired.

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They wonder if their $1,500,000 of real estate, $261,000 of financial assets and Rick’s $41,460 annual work pension — plus CPP and OAS — will see them through a comfortable retirement. Can they make it work on their schedule? Or should Rick keep working until 65?

That question ultimately comes down to whether they just want to squeak by in retirement, or to thrive by adding to capital and thus to their choices.

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On the plus side, they have no debts. As well, they have modest spending goals in retirement. On the minus side, most of their money will come from sources beyond their control: Rick’s work pension, two CPP accounts that will pay a total of $1,245 per month when each is 65, and two OAS benefits that will pay $635 per month to each partner at age 65.

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Email andrew.allentuck@gmail.com for a free Family Finance analysis.

Retirement plans

Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Rick and Marianne.

Marianne retired when the COVID-19 pandemic began, unwilling to work face-to-face with customers in her job in merchandising. Rick, who wants to stop working now, is concerned that his pension does not have guaranteed indexation.

Rick has $108,000 in his RRSP while Marianne has $143,000. They have $10,000 in a chequing account. Neither has a TFSA.

The couple recently finished paying off their home. They have a car with a $28,000 present value they own free and clear. They want to keep their cottage. It’s their annual vacation spot. They are frugal and determined to save the $1,041 per month they do not spend out of Rick’s take-home income. Indeed, they spend relatively little, for they are vegetarians and grow and preserve their own vegetables.

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Rick and Marianne sense that they could wind up with a cash-flow pinch in retirement. To minimize that crunch, Marianne could go back to work for a few years or Rick could work to 65 to build up his pension and accumulate more money in RRSPs and TFSAs. We’ll crunch the numbers to show the results of these two cases.

Current finances

At present, Rick earns $96,528 per year and brings home $5,317 per month. With no mortgage be paid and no other debts to service, he and Marianne believe they should be able to live on $4,000 monthly after-tax income to cover expenses and a surplus for topping up savings. If they reached $5,000 per month, it would allow for a new car purchase and a few luxuries now and then.

If Rick does retire in the spring at age 61, his teacher’s pension would provide $41,448 per year. His $108,000 RRSP generating three per cent after inflation for 34 years to his age 95 would pay $4,900 per year.  Marianne’s RRSP, with a value of $143,000, would generate payouts of $6,600 for the same period. Adding up these cash flows, they would have $52,948 or $47,123 per year after splits of eligible income and average 11 per cent tax. That’s a little below their goal and well below the higher target.

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At age 65, with loss of the bridge benefit, Rick’s pension would drop to $35,231 per year. Adding their RRSP income streams and CPP benefits of $10,239 for Rick and $4,699 for Marianne and then two OAS benefits at $7,623 each at current rates would provide total income of $76,915 before tax. After splits of eligible income and 13 per cent average tax, they would have $66,916 per year or $5,575 per month to spend. That would exceed their revised target.

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Working to 65

They would still not have much of a buffer for unexpected costs and certainly no luxuries. If Rick were to stay on the job another four years, his pension would pay $43,724 with no reductions. His RRSP could grow another four years with contributions of $410 per month and three per cent growth after inflation and would become $142,756. With the same growth, the RRSP would then be able to pay $7,070 for 31 years to his age 95. Marianne’s RRSP with no further contributions could grow four more years to $160,950 and then add $7,812 to annual family income for 31 years. With the OAS sums at 65, and eight per cent more CPP — based on contributions and rising payout rates — they would have a combined income of $89,985. Take off 14 per cent average tax and they would have permanent retirement income of $77,390 per year or $6,450 per month. That’s a 16 per cent increase in after-tax retirement income. The extra money is a cushion and a safety belt for higher living costs from uninsured illnesses or luxuries like travel. Moreover, if they open and maintain TFSA accounts with $6,000 annual contributions each, which is well within their earning capacity, then in four more years with growth at three per cent per person they would generate savings of $25,855 each. That would be their backup capital, new car and/or vacation fund.

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There is more the couple can do to enhance retirement income. They invest with a mutual fund dealer for a reasonable fee of one per cent per year. That covers a lot of their investment costs, but they can do more by making use of the time retirement will provide to study financial markets and to make some of their own investment decisions.

This analysis shows that Rick and Marianne can have a pleasant retirement with more income than they have expected, a larger reserve for unplanned expenses such as house or cottage repairs, and less likelihood of a cash crunch that might force them to borrow or to sell their cottage.

“They will have funds for bequests for children or good causes,” Einarson concludes.

Retirement stars: Three *** out of five

Email andrew.allentuck@gmail.com for a free Family Finance analysis.

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