At 65 she has $261,651 in financial assets and a $58,000 mortgage with 20 years to run
A woman we’ll call Nellie, 65, lives in Ontario. A health-care professional, she brings home $1,125 per month for 15 hours work each week and adds $608 from the Canada Pension Plan for total income of $1,733. She has $261,651 in financial assets and a $58,000 mortgage with 20 years to run on which she makes $263 monthly payments. Other expenses eat up her income and she is unable to save very much. Moreover, inflation is reducing her spending power over time. She urgently needs to raise her disposable income and cut expenses. She needs to increase her liquidity, for with no cash outside an emergency reserve, she has few spending choices. She feels caught in a financial vise.
Nellie moved to her present residence in a small town to escape the high costs of living in Toronto. She obtained part time work but, due to the COVID-19 pandemic, her work hours were reduced. Now, she wonders, “If I work to 71, will that give me financial freedom?” The question is fundamental to having a secure retirement and being able to afford a few luxuries her present budget denies her.
Problems and resources
Her financial squeeze began in the crash of 2008 when she lost her full-time job. Nellie has worked part time since then in temporary positions, using her emergency reserve for expenses beyond monthly necessities.
She will qualify for a work pension defined-benefit plan payment of $160 per month at 65, $250 at 67 or $450 per month if she stays at work to 71. As well, she has $199,280 of RRSP assets and three permanent life-insurance policies with a cash value of $56,635 — or $45,635 net of $11,000 outstanding policy loans. Her house has an estimated value of $152,000. Her net worth is $344,651.
Family Finance asked Eliot Einarson, a financial planner who heads the Winnipeg office of Ottawa-based Exponent investment Management Inc., to work with Nellie.
“It has been a challenge for Nellie to live so modestly, but she prides herself on the ability to do so,” Einarson says. She would like to restore former monthly savings of $350, add $350 monthly for travel and $250 a month for a dog and a cat she is hoping to adopt, but would need $2,683 per month to do it.
A plan to raise cash
Nellie should consider giving up her life insurance policies for she has no dependents and can make better use of the money for her retirement. She could surrender the policies and so save premiums of $104 per month. About $32,500 of the $45,635 net cash value is taxable growth.
Were Nellie to add the taxable portion of life insurance proceeds to her RRSPs, she would save some tax for now and bring her RRSP balance to $231,780. The $13,135 post-tax remainder could go to a TFSA. This move would raise her retirement savings and eliminate her $104 monthly life insurance premium.
The enhanced RRSP balance with a three per cent annual return after inflation could pay $11,480 per year for 30 years to her age 95 when all income and principal would be exhausted. If the RRSP is left to grow six more years to her age 71, then with the same assumptions, it would rise to $276,764 and then pay out $15,866 per year of taxable income to her age 95.
Nellie’s TFSA with a value of $13,135 from investing money from cashing in insurance policies and growing at three per cent per year would generate $651 of tax-free income from ages 65 to 95. If left to grow for six years with the same assumptions to her age 71, the TFSA balance would rise to $15,690. That sum would generate $900 per year of tax-free income to her age 95.
Nellie receives $7,300 per year from the Canada Pension Plan. She can take Old Age Security at $7,362 per year starting this year or wait five more years and get a 36 per cent boost to $10,012 if she starts at 70. We’ll assume she starts this year and should get a one-time $300 COVID-19 relief payment.
Restructuring retirement income
Adding up the components of future income based on full retirement before 66, Nellie can have $11,480 from RRSPs, $651 from TFSAs, $7,300 from CPP, $7,362 from OAS and $1,920 per year from her work pension. That adds up to $28,713 before tax. With no tax on $651 TFSA payouts and 10 per cent tax on other income, she would have $2,160 per month to spend. A reduction in future savings or anticipated travel would be required to make spending match income. She would still have to pay her $58,000 mortgage. If she renews at an available floating rate of 2.1 per cent, which is about mid-market on the date this report is written, she would pay $217 per month for 30 years. Rates may rise, but the amount to be financed will fall over time. Her income would support present expenses without life insurance premiums or loan costs but not much more.
Retirement at 67 would increase her income. CPP already started would remain at $7,300 per year. OAS would rise to $8,422 with a 14.4 per cent boost over the age 65 sum payable, the work pension would rise to $3,000, TFSA payouts with two more years of underlying growth to $720 per year and RRSP payouts to $12,725 per year for a total of $32,167. With no tax on TFSA cash flow and 10 per cent tax, she would have monthly after tax income of $2,418.
Were Nellie to work to age 71 and defer taking OAS to 70 with a 36 per cent boost, her income would consist of $14,980 from RRSPs, $900 from TFSAs, $10,012 from OAS, $7,300 from CPP and her work pension of $5,400 per year. That adds up to $38,592. With no tax on TFSA payouts, she would pay tax at a 12 per cent average rate and with TFSA cash flow added back, she would have $2,840 per month. That would cover her anticipated $2,683 monthly expenses, Einarson estimates.
2 Retirement Stars ** out of 5