Curtis’s pensions and current investments aren’t enough to reach his goal, yet he is more anxious about his finances than he needs to be
In Alberta, a man we’ll call Curtis, 56, is raising his child, Max, 18, who is currently in post-secondary studies. Formerly a civil servant, Curtis now consults for $4,166 per month on top of the work pension of $4,350 he already receives. He brings home $6,239 after tax.
Curtis’s pension will drop will drop to $3,760 per month ($45,108 per year) at age 65. He is relying on his financial assets — including the proceeds of the sale of his home — to buttress his work and government pensions in retirement.
He worries that over the 34 years to his age 90, his income may be challenged. His concerns are understandable, but, as we’ll see, he has ample backup from other retirement income sources. His goal is a $72,000 annual take-home retirement income to age 90.
Retirement in stages
Curtis plans to quit his part-time consulting work at 65 and will have 25 years to cover until his estimated death at 90.
Curtis can work as long as his health holds out, but his pension indexation, which is only a fraction of inflation, won’t keep up with rising prices. “How can I maintain my living standard if the real value of my pension drops?” he asks.
Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Curtis. “His dilemma is that his pensions will not support his target retirement income. His present private investments are not sufficient to make up the difference. He will have to increase those assets and manage his costs.”
Curtis will find his cost of living rising if, as he has since sold his home, he continues to rent a city apartment for $2,000 per month for five months or more per year. As well, he has agreed to pay for a third of Max’s university expenses for two more years. Max will pay a third from the $10,200 RESP. Curtis’s ex-spouse will cover the other third.
We need to look at Curtis’s assets to determine what level of spending may be possible when he is fully retired. Those include his cottage, $350,000, the $10,200 RESP and his $27,000 RRSP. His liabilities included a $42,000 home equity line of credit. Sale of the city house liberated $427,500 after five per cent for selling costs. Having paid off the LoC and spent $15,000 to upgrade his vehicle, he expects to invest the $370,500 balance. He will pay rent for winter months and live in his cottage in summer.
He can put $112,500 into his RRSP, $75,500 into a Tax-Free Savings Account and the $182,500 balance can go to a non-registered investment account.
Calculating retirement income
At age 65, Curtis should have $3,760 per month or $45,120 per year from his employment pension. His CPP at 65 should provide $1,133 per month or $13,584 per year and his OAS $615 per month or $7,380 per year using 2021 rates. These pensions add up to $5,508 per month or $66,084 per year of taxable income.
Curtis’s RRSP topped up to $139,500 after sale of his principal residence with additional contributions of $900 per month (reduced from present catch-up additions of $1,500 per month) will grow to a value of $295,026 at his age 65 assuming a three per cent real annual return. That capital will generate $16,450 of annual income before tax for 25 years from retirement at 60 to his age 90 with all income and capital paid out.
A yet-to-be established non-registered account with an estimated value of $182,500 based on money from the sale of the house plus $600 per month for each subsequent month growing at three per cent per year after inflation for nine years, would have a value of $313,000. Starting at age 65, the account would generate $17,450 per year or $1,454 per month to his age 90. Finally, the TFSA starting with $75,500 and $500 per month for each successive month for nine years, would grow to a value of $161,294 and subsequently generate $8,993 per year or $750 per month for 25 years to Curtis’s age 90.
These income sources would add up to $108,977. After average tax at 22 per cent on all but TFSA cash flow and a cut from the OAS clawback would make total take-home income about $83,000 per year.
That’s beyond his $72,000 annual post-tax goal. Moreover, if he stops working in the city and renting at $2,000 per month, his cost of living would decline. On that basis, Curtis’s financial future is solid.
Management cost
Curtis is interested in security first and income enhancement after that. Most of his income will come from a work pension, TFSA and his non-registered investments. Indexed cash flows from Old Age Security, even with a deduction for the clawback, and the Canada Pension Plan will add annual increases. Those are guaranteed income sources. With that base, Curtis can take additional risk with his investments. He can also add to wealth and to profitability of his investments by selecting advisers with moderate fees. If he can get advice for one per cent of assets, he can grow his savings more quickly than if he pays typical mutual fund fees of 2.6 per cent. A 1.6 per cent difference on $500,000 of assets is $8,000 a year. That enhanced return could compensate for inaccurate inflation estimates or underperformance of investments.
“Curtis’s anxiety is understandable, but he really has a solid floor on his retirement income,” Einarson concludes.
Retirement stars: 5 ***** out of 5
