Tag:

Family Finance

Postmedia may earn an affiliate commission from purchases made through our links on this page.

Article content

In Ontario, a couple we’ll call Leonard, 54, and Bobbi, 51, live with their two children, ages 16 and 18. Leonard used to have a teaching job that paid $90,000 per year, but the pandemic forced many schools to close and his position was eliminated. He received $100,000 severance, $30,000 of which went to pay taxes. He has a new job with a retailer that pays $44,280 per year. Bobbi still has her job with take-home income of $71,856 per year. Leonard and Bobbi would like to retire in eight years, when they are 62 and 59, respectively, but waiting another year or two may be more practical.

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

One of the key decisions they are grappling with is whether to take the commuted value of Leonard’s teaching pension or to wait until he is 65 and take the annual payouts of $27,456 per year. The commuted value is $692,525, which would be split between a substantial cash payout that will incur taxes and a portion that would be held in a locked-in retirement account. The analysis is complex, as we’ll see.

Debt is an issue as well. They have a $1.1 million house with a $235,273 mortgage. Their mortgage has a 14-year amortization. To shorten the repayment period to the time Leonard is 62, the monthly mortgage payment, $1,707, would have to rise by $1,025 to $2,732 per month. They pay 2.74 per cent on the existing mortgage, as much as double current rates being offered by some lenders.

Family Finance asked Derek Moran, head of Smarter Financial Planning Inc. in Kelowna, B.C., to work with the couple.

The pension question  

Leonard has the choice to either commute his pension — that is, take an upfront payout of the amount of capital invested in secure assets, mostly bonds, needed to make its annual payments — or leave the pension’s capital with professional investors as is.

Commuting means getting a large sum now — one that can be reinvested or put to other uses — but giving up the security of a guaranteed annual payment upon retirement.

If he takes the commuted value, he will get $412,417 in fully taxable cash immediately while an additional $280,108 will be placed in a locked-in retirement account (LIRA). Using current Ontario tax rates, he would have to pay about $182,343 in taxes on the cash portion of the payout.

  1. None

    This researcher wants to get a PhD, but studying will put a dent in his retirement plan

  2. None

    This Ontario couple is spending $1,000 more a month than they make and it could come back to bite them in retirement

  3. Wayne and Lilly would like a $80,000 boat or recreational vehicle and $30,000 travel fund in their retirement.

    Couple’s pricey plans will challenge the cash flow of even these bulletproof pensions

Article content

Leonard has $61,404 contribution room in his RRSP. Using up that space by contributing a portion of the cash payout would cut his tax bill by $32,879 to $149,464, Moran explains, a wise move.

If Leonard chooses to keep the pension instead, it will pay him pay $27,456 per year, indexed to 75 per cent of the change in the provincial cost-of-living index.

The LIRA and the additional RRSP contribution will not be able to match that level of return.

If the sum of the $280,108 LIRA and the $61,404 enhanced RRSP — total $341,512 — grows at three per cent per year after inflation, it would become $472,732.48 by Leonard’s age 65, and could produce $23,415.98 per year in income, assuming continued growth at three per cent.  

The investment flow would be less than the pension, but the couple would have options: they could start the payouts sooner to facilitate an early retirement and would have $201,540 of after-tax cash to make up the difference.

That money could reduce their $235,273 mortgage. Once mortgage free, household expenses would drop by $1,707 per month. With the house paid off and $1,707 freed up, money could go to Bobbi’s RRSP.

Estimating retirement income  

Bobbi’s pension will be $45,012 at 65 or 15 per cent less, $38,260, at 60.

If both wait until 65 to begin drawing CPP, Leonard would get $12,720 per year and Bobbi $9,600.

Leonard will get full OAS, currently $7,380 per year, but because Bobbi came to Canada at age 31 her OAS will be a little less, $6,273 per year.

The couple has $27,102 in TFSAs, but we will leave that as an emergency fund, for now.

For ease of calculation, let’s assume they decide to target Bobbi’s age 60 to start drawing down their RRSP accounts, slightly later than they hoped to retire.

Adding the $44,563 they presently have in their RRSPs to the $280,108 commuted value and $61,404 RRSP addition gives a total of $386,075.

While we have assumed Leonard uses most of his space to reduce taxes on the pension payout, Bobbi still has $65,707 of contribution room.

If they were to put an additional $10,000 into her RRSP now, they would get a 29 per cent tax refund.

Assuming they do that and that she contributes $12,000 per year for the next nine years to her age 60 and the funds grow at three per cent per year after inflation the total in all RRSP accounts will grow to $639,871 in nine years. If they spend the RRSPs over 30 years to Bobbi’s age 90, they would support payouts of $31,818 per year, Moran estimates.

Starting when Bobbi is 60, they would have her $38,260 pension and RRSP payouts totalling $31,818 for total income of $70,078 per year. After splits of eligible income and 12 per cent average tax, they would have $5,140 per month to spend. Assuming their mortgage, which costs them $1,707 per month, is paid in full, $50 RRSP and $200 monthly RESP contributions have ended, their expenses will have dropped to $3,873.

When both are 65 and they are receiving CPP and OAS, they would have Bobbi’s $38,260 pension, CPP income of $12,720 for Leonard and $9,600 for Bobbi, OAS sums of $7,380 and $6,273, and the RRSP payouts of $31,818 for total income of $106,051. After splits of eligible income and 15 per cent average tax, they would have about $7,500 monthly to spend, well in excess of their expenses.

While commuting the pension transfers investment risk to the couple, it also gives them flexibility and the potential for greater income in retirement.

Retirement stars: *** out of Five

0 comment
0 FacebookTwitterPinterestEmail

Dennis will lose about $7,000 in after-tax income per year if he pursues a PhD

Postmedia may earn an affiliate commission from purchases made through our links on this page.

Article content

In Alberta, a man we’ll call Dennis, 35, has several careers — one as a researcher in health care, one as an administrator on contract for a government agency and one as a graduate student heading for a PhD in medical statistics. His present income of $8,500 per month from his contracts leaves him with an average of $5,519 after tax.

Dennis focuses on his future: He does not expect to have kids, wants to earn his PhD and move from his $298,000 condo to a $550,000 condo. While enrolled in the PhD, Dennis will see his income drop to the $35,000 per year he’ll receive from a scholarship.

E-mail andrew.allentuck@gmail.com for a free Family Finance analysis.

Family Finance asked Eliott Einarson, head of the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Dennis on the question of cost and return. It’s one that involves calculating his present assets and their future value, as well as the impact foregone income during four years of study will have on their growth. We assume that all tuition costs will be covered by scholarships.

Advertisement

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

In this analysis, we will not assume the PhD generates an income boost, because that will depend on what kind of work Dennis ends up doing. If Dennis works in government, he could earn more than he might as an instructor or assistant professor.  As a result, this analysis will probably be on the conservative side, Einarson explains. We are assuming constant RRSP contributions, though the base for calculation could change, and we are excluding any defined-benefit pension that might go with a future job. That, too, could boost retirement income.

Article content

Pricing the future     

Dennis’s present monthly income, $8,500 from salary, leaves him with $5,378 per month after tax. Out of this cash flow, he adds $800 per month to his RRSP on top of $400 added by his employer and $500 per month to his TFSA while paying his condo mortgage of $960 per month, a $284 monthly car loan and $450 for tuition. He is left with $260 he can save for a move to a larger home on top of tapping his RRSP for a Home Buyer’s Plan loan.

In terms of assets, Dennis has a $298,000 condo, $22,000 in his TFSA, $90,000 in several RRSP accounts, $51,000 in a locked-In retirement account and $28,000 in cash. He also has a $20,000 car, bringing the total assets on his balance sheet to $509,000. His debts are modest — just a $157,000 mortgage and a $13,500 balance on the car loan. His net worth is thus $338,500.

Cost of a PhD

At the time he starts his PhD, his part-time income and money from a renewable scholarship, about $35,000 per year, would cover his mortgage and car loan. If he were to sell his condo for its $298,000 estimated market price less five per cent for fees and fussing, the gain less interest and principal paid on the condo might leave him with $126,000. For a $550,000 condo with a 25 per cent down payment, net $137,500, he could use money from sale of the condo plus $11,500 cash on hand. Remaining cash, $16,500, is for unexpected expenses and emergencies.

Advertisement

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

We’ll compare Dennis’s retirement income from work at present without the future PhD with income after he gets a PhD.

Retirement income

His RRSPs, excluding the $51,000 LIRA, total $90,000. With future contributions of $14,400 per year composed of $9,600 from his own funds and $4,800 from his employer, total $14,400, will grow to $924,090 in 30 years at this age 65. That sum could generate $45,773 taxable income for 30 years to his age 95. If Dennis were to take the next four years out of the calculation, the RRSP would grow to a value of $790,280 and provide $39,145 for the following 26 years to his age 95.

His LIRA account, with no further additions, would grow from today’s balance of $51,000 for 30 years to his age 65 at an assumed rate of three per cent after inflation to $123,840 and then pay $6,132 for the following 30 years to his age 95.

The TFSA account with a present value of $22,000 with $6,000 annual contributions for 30 years would grow at three per cent per year to a value of $347,416 and could then provide income of $17,209 per year. If the TFSA were to miss four years of contributions early on, it would grow to a value of $291,668 by his age 65 and then provide $14,447 cash flow per year.

At 65, OAS would provide $7,380 per year and CPP $14,100 per year.

Adding up these sources of income, Dennis would have $73,385 taxable income in retirement at 65 for 30 years. After 21 per cent average tax and addition of TFSA cash flow of $17,209, he would have total income of $75,183 per year.

Advertisement

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

If Dennis takes the PhD route, he would have $66,757 taxable income. After 20 per cent average tax and addition of $14,447 TFSA cash flow, he would have $67,853 disposable income for the following 30 years.

The income Dennis foregoes while doing his PhD puts a dent in his savings that compounds over time, creating a tangible difference in his retirement, to the tune of about $7,000 in after-tax income per year.

That, however, assumes the PhD does not boost his income.

To make it financially worthwhile, Dennis would have to expect that the additional savings he could make with a PhD would over time grow to be enough to offset the lost retirement income. We can’t predict exactly much of a boost the PhD will bring, if any.

But we can estimate how much more he would have to save per year after earning the PhD to fill the hole from taking four years off.

To replace $7,000 in after-tax income, he would need to save enough to generate $8,300 pre-tax per year over a 30-year retirement.

Using annuity calculations and assuming a return of three per cent after inflation, the lump sum he would need at age 65 is approximately $167,000.

To accumulate that amount from over the 26 years after completing his PhD would mean setting aside $4,220 per year.

Advertisement

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

While there is no guarantee of a pay raise, health care is a lucrative field and a PhD subsidized by scholarships is a financially efficient way to enter it. The financial gains of an advanced degree and the value of career doors it opens are likely to exceed the income and savings given up for four years of graduate study, Einarson concludes.

“Knowledge does not have price tags, but in Dennis’s case, it should enhance income. Financially, the PhD should be a good investment.”

Retirement stars: 5 ***** out of 5

Financial Post

E-mail andrew.allentuck@gmail.com for a free Family Finance analysis.

Comments

Postmedia is committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. Comments may take up to an hour for moderation before appearing on the site. We ask you to keep your comments relevant and respectful. We have enabled email notifications—you will now receive an email if you receive a reply to your comment, there is an update to a comment thread you follow or if a user you follow comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

Retirement income

The new TFSA balance of $293,728 would provide $14,985 per year for the 30 years to Marcie’s age 95, assuming three per cent annual growth after inflation. The $92,165 non-registered account would provide $4,565 over the same time frame.

In addition to investment income, Henry would have a job pension income of $30,293 per year starting at his age 65.

Their expected annual CPP benefits will be $7,426 for Marcie and $17,185 for Henry. Their Old Age Security income will be $7,384 each per year in 2021 dollars.

When Marcie retires at 65, she will able to thus draw $5,141 from RRSPs, $14,985 from TFSAs, $4,565 from non-registered investments, $7,426 CPP and $7,384 for her OAS for a total $39,500 before tax.

Henry will still be working to his age 65, drawing a salary of $77,868 per year. That’s a family total of $117,368. After splits of eligible income and 15 per cent rate on non-TFSA income, they would have $8,500 per month to spend. That’s ahead of their $8,000 monthly after-tax target.

When Henry reaches 65 and retires, the couple will lose his $77,868 salary but gain his $30,293 job pension, $7,384 OAS and $17,885 CPP based on recently revised contribution rates. That’s a total of $95,062. After splits and 13 per cent average tax that would leave them with $7,054 per month, $946 below their $8,000 per month target.

If Marcie and Henry take control of their spending now, they can make up much of that gap and enjoy their financially secure retirement.

Financial Post

e-mail andrew.allentuck@gmail.com for a free Family Finance analysis

3 Retirement Stars *** out of 5

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

We can estimate retirement income in stages: 1) the period from Wayne’s age 62 in retirement to his age 65 with Lilly still working, 2) when Wayne is 65 and drawing CPP and OAS and Lilly is still working, and 3) when both are retired and both drawing CPP, OAS and company pensions.

Retirement income

In stage 1, income will be Wayne’s $40,164 annual pension plus a $8,244 bridge to 65 and Lilly’s $43,903 salary, and $4,767 RRSP income total $97,078. In stage 2, they will have Wayne’s $40,164 pension without bridge, Lily’s $13,788 pension, her $1,716 bridge to 65, his CPP of $13,077, his OAS of $7,384 and RRSP income of $4,767 for total income of $80,896. That would last until stage 3 when their income would be Wayne’s $40,164 pension plus Lily’s $13,788 pension, plus CPP benefits of $13,077 for Wayne and $8,858 for Lilly, two $7,384 OAS benefits and $4,767 RRSP payouts for total income of $95,422.

Assuming they split eligible income, apply eligible pension income and age credits and pay 14 per cent average tax in each stage, they would have monthly after-tax income of $6,960 in stage 1, $5,800 in stage 2 and $6,840 in stage 3. That would easily cover their anticipated spending. An accumulating surplus could pay for the boat or RV or some part could go to a TFSA for a permanent emergency reserve.

Wayne and Lilly can buy the boat or the RV, travel, donate to good causes, or increase financial security by investing their surplus in TFSAs. They have left planning their future to others, but they would do well to take charge of their plans to make the most of their secure and ample resources.

e-mail andrew.allentuck@gmail.com for a free Family Finance analysis

3 Retirement Stars *** out of 5

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

Olivia’s total invested financial assets, $492,000, put her in a position to hire an investment manager for fees well below the 2.6 per cent average charged by mutual funds. She could have the liquidity she needs, tax planning for when she is 71 and has to convert her RRSP to a Registered Retirement Income Fund and perhaps even better returns along the way. Those fee savings could go straight into her TFSA.

A custom portfolio would be structured and traded for her needs rather than the needs of others. As well, a restructuring of her investments and her tax rate, which will rise when she starts taking Canada Pension Plan and Old Age Security benefits, would be valuable.

Shopping for custom management would be worthwhile, Einarson says.

There are two final matters Olivia should consider.

First is the problem of care, should she need it. At her age, long-term-care insurance policies are costly and constrained in terms of their payouts. She could discuss arrangements for care and how it will be financed with her family as a form of pre-testamentary transfer of wealth, Einarson suggests.

Finally, Olivia also needs to consider what will happen when she passes away, for she has no spouse to whom she could transfer assets. Her capital is substantial and death will be a costly event if her registered investments still contain significant taxable sums.

Those scenarios should be years away. Olivia is healthy and employed, and her income before tax, $90,000 per year, gives her many investment and lifestyle choices. She is headed to a solid retirement.

Retirement stars: Three *** out of five

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

0 comment
0 FacebookTwitterPinterestEmail

Article content

In Ontario, a couple we’ll call Hank, 55, and Judy, 56, have built their lives with a lot of assets — and a lot of debt. They take home $11,463 per month from their jobs, his with a transportation company, hers with a petrochemical firm. They’ve lived in Canada for 20 years, raised two children to their mid-20s. Now they want to plot their retirement in 10 years.

Their problem is the debt. They must slash it if they want afford to move to someplace warm year-round for their retirement.

They have loans of $789,200 including a home mortgage of $452,000, a mortgage on a rental unit for $225,000, $12,000 for RRSP loans, an unsecured $35,000 line of credit, and $48,200 for car loans. Their $1,955,000 of assets less $789,200 liabilities leaves them with net worth of $1,165,800.

E-mail andrew.allentuck@gmail.com for a free Family Finance analysis.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Hank and Judy. His plan — make their portfolio more tax efficient, cut risk and redirect savings to get to a goal of $80,000 in after-tax retirement income (or between $100,000 and $110,000 before taxes).

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

The stats released also show a breakdown of TFSA holders by income level, with 52 per cent of TFSA holders reporting a total income of under $50,000 on their 2018 return. The average TFSA balance at Dec. 31, 2018 of $20,300 was pretty consistent across all income brackets from $20,000 up to $90,000. For those with total income above $90,000 and up to $250,000, the average balance was slightly larger at about $27,000. For the highest income-earners, or those Canadians with an income of over $250,000, the average TFSA balance was just shy of $43,000.

Of course, with all this talk of TFSAs, let’s not forget that we are in the middle of RRSP season, as you only have until March 1, 2021 to contribute to your RRSP to be entitled to claim a deduction on your 2020 return. For 2021, the new RRSP dollar limit is $27,830 or 18 per cent of your 2020 earned income, whichever is lower, less any pension adjustment from your employer. (You have until March 1, 2022 to make this year’s contribution.)

When asked whether someone should contribute to an RRSP or TFSA, my standard reply is: “Both!” But for most people, that’s simply not an option due to a lack of funds, so it’s important to point out a few critical differences between the two savings plans.

First, with a TFSA, there’s no maximum age limit to contribute, unlike an RRSP, to which you can only contribute up to, and including, the year in which you turn 71 (unless you have a younger spouse or partner). This makes the TFSA an ideal vehicle for seniors over the age of 71 to continue to shelter their investment income or even to contribute the after-tax value of their mandatory annual RRIF withdrawals. The newly-released stats show that nearly 19 per cent of all TFSA account holders in 2018 were age 70 or older.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

As well, Anita can sell her cottage for $280,000 after fees and selling costs. That would provide $22,800 per year or $1,900 per month for 15 years.

Excluding any tax-free withdrawls, the pretax amounts add up to $7,833. After 20 per cent average tax, that will leave her with $6,266 per month, still a little short of her goal.

Her tax-free holdings can close the gap. First, her TFSA of $69,500 after top up will generate $5,650 per year or $470 per month for 15 years while the remaining $100,000 she has as a shareholder loan would produce $8,132 per year or $680 per month. That would make her total spendable income $7,416 per month, a little over her her $7,000 target.

In about 15 years at age 81, she will lose many of these sources of income, leaving her with only her government benefits and registered accounts. At that time, she plans to sell her principal residence and invest the funds to support her income needs. Assuming the property price only keeps pace with inflation she would net about $620,000 of capital after the sale. If invested to her age 95 and used as income she could expect this capital to add another $53,289 per year before tax, ensuring her comfortable retirement lifestyle can continue.

If Anita lives beyond age 95, with all of her financial assets spent, her house and cottage sold and their proceeds spent, she would have to rely on CPP and OAS which, using 2021 values, would add up to $1,656 per month. It is unlikely that this income would provide the late life retirement she imagines.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

The sum of these monthly components, $5,157, minus an average tax of 17 per cent, plus $265 per month from his TFSA would be $4,545 per month, or $54,540 per year.

Suzy is willing to take risks in a balanced portfolio with an 80/20 stock/bond blend. Assuming a three-per-cent return for this portfolio of registered and non-registered investments, she can expect her present $677,400 RRSP to generate an annuity of $26,823 per year, or $2,235 per month, for 45 years until she is 95, when all income and capital would be paid out.

Her non-registered investment account with a present balance of $284,480 would pay $940 per month, or $11,280 per year. She could add $7,380 per year, or $615 a month, from OAS and an estimated $8,760 per year, or $730 monthly, from CPP after she turns 60. That is a pre-tax total of $54,243 per year, or $4,520 per month. After 15-per-cent average tax on taxable income and adding her share of TFSA cash flow, $265 per month, she would have $4,100 per month to spend.

The rental, if they pay off the 30-year mortgage, would provide $24,000 annual income per year before $7,956 property taxes, operating costs, insurance, etc. Their net would be $16,044. That is a three-per-cent return on what would probably be an appreciating asset over time. If they move into the condo, they could sell their house for a present price of $1.3 million, less five per cent for fees and fussing, to net $1,235,000. The money they get would be invested subject to a decision about whether to hold cash or stocks.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

If they were to go the route of an insured mortgage, then after a $35,000 down payment, they would have a $565,0000 balance to pay. The CMHC fee in Ontario would be $22,600 and leave them owing $2,753 per month for, say, 22 years to Kathy’s age 65. With property taxes and insurance, say $500 per month, their total monthly bill for ownership would be $3,253. They can’t afford that, at least not yet.

They do, however, have $40,000 in cash on hand from Kathy’s severance pay. She is keeping $10,000 for tax and another $10,000 for an emergency fund. She has $9,976 in her TFSA and adds $95 per month. She has an RRSP and a spousal RRSP with a total value of $124,651 to which she adds $210 per month through a payroll deduction. They have two Registered Education Savings Plans with a total value of $13,077 to which they add $200 per month, half the allowable annual limit. They also have two cars worth a total of $35,000. Take off $41,203 liabilities and their net worth is $181,501. It is not much of a base for buying a home, but it could work, Einarson says.

If they use $40,000 from Kathy’s severance to pay off their debts, they would free up the cash flow they need to get into a house. They could then use $35,000 from RRSPs for a homebuyer’s plan loan for the down payment.

Their $9,976 TFSA and future savings could be used as an emergency reserve.

Waiting for Louis to find another job would make this plan an even better bet.

Retirement funding

If Louis can find another job which pays at least $30,000 per year with an estimated take-home of $24,000 after taxes and deductions, they could build retirement capital. Kathy, with the higher income, could contribute to a spousal RRSP for Louis. If she adds $1,320 per month to her $2,600 spousal RRSP then in 22 years at her age 65 she would have a balance of $503,195 assuming a rate of return of three per cent after inflation. That sum could provide taxable income of $28,055 per year for the following 25 years to her age 90.

0 comment
0 FacebookTwitterPinterestEmail
Newer Posts