Sheila is single, almost 56 years old, and recently left an empty nest, with four children in post-secondary school or living on their own, she writes in an email. “I’m thinking about retirement and wondering what my financial future will be like.”
Sheila makes about $187,000 a year in salary, bonuses, and incentives. She has a small survivor benefit from the Canada Pension Plan of $5,150 a year.
In the short term, she wants to keep her kids through college, travel to Europe, and do some repairs to her small-town Ontario home. She also owns a rental property with her four children: she owns 60 percent, the children 40 percent. Both properties have outstanding mortgages.
“Can I comfortably retire at 62 or do I have to work longer?” Sheila asks. “Will I have to sell my house and downsize to do that?”
His retirement spending goal after his home mortgage is paid off is $80,000 a year after taxes.
We asked Nushzaad Malcolm, a Certified Financial Planner at Henderson Partners LLP in Oakville, Ontario, to discuss Sheila’s situation.
What the expert says
Sheila should be able to retire comfortably at age 62 without having to sell any of her properties, as long as she maintains her savings goals and doesn’t substantially increase her spending, says Mr. Malcolm. She would benefit from increasing the mortgage payment on her primary residence when it comes up for renovation, the planner says.
Two of Sheila’s children have three years of post-secondary education left, one will graduate this spring, and the oldest finished school. They live alone and are mostly self-sufficient. Sheila has enough to pay for her education in her registered education savings plan.
The analysis assumes that the inflation rate will be 6.8 percent for two more years. “After two years, the assumption is that we return to the Bank of Canada’s 2% long-term inflation target,” Malcolm said.
It is also assumed that Sheila saves and invests her excess cash flow and that her investments earn a 5 percent annual return after fees and before taxes, which is in line with the balanced portfolio rate of return at long term.
Sheila has an RRSP deduction room of $50,000 (2022). She has chosen to maximize her defined contribution pension contributions (3 percent of salary) and receives a full match from her employer. This adds $9,000 to her DC pension annually, the planner says.
“In addition to this, he recently elected to have his bonus paid into his DC pension plan, resulting in an additional contribution of $22,000.”
Sheila also makes her own contributions to her RRSP of $6,000 a year.
“So your recorded contributions (excluding your tax-free savings account) total $37,000 a year,” Malcolm said. The expectation is that his RRSP’s room will be reduced by 2025 and that he will have to reduce his contributions by about $4,000 a year in 2025 and beyond.
“Maintaining this level of contributions throughout your employment is crucial to ensuring that you can achieve your retirement goals,” the planner said. Because Sheila’s marginal tax bracket is around 48 percent, every dollar contributed will provide up to 48 cents of a reduction in her tax bill. For Sheila, the tax savings can be as much as $15,600 each year.
Sheila typically contributes $6,000 a year to her TFSA, which has a balance of $23,635. She expects a $24,000 inheritance that she intends to pass on to the TFSA from her, increasing the balance to $47,635. If she still has some contribution space left over after the inheritance, she could choose to use the remaining space with a cash contribution or by transferring some unregistered assets to her TFSA, says Mr Malcolm. .
“You should be selective with your transfers, opting to move securities that have little or no implied capital gain,” he said. If the securities are at loss, you should not transfer them directly; rather, you must sell them, transfer the cash, and buy them back after 30 days (to avoid being denied the loss).
“Going forward, you can prioritize maximizing your TFSA room,” the planner said.
Sheila expects to pay off her personal line of credit (1.89%) by March 2024. Once paid off, she will have additional cash flow of $11,752 per year. The mortgage on Sheila’s house has an interest rate of 1.87 percent and biweekly payments of $900. It will mature in November 2025, at which time the planner assumes the rate will increase to 5 percent for the remainder of her amortization. Unless additional prepayments are made, the mortgage would be paid off in full in December 2037, when Sheila is 71 years old.
“Given the anticipated increase in interest costs (which are not deductible), we recommend increasing the payment by $692 every two weeks at renewal,” said Mr. Malcolm. This would increase the mortgage payment from $23,400 a year to $41,400, resulting in a full repayment by 2031, when Sheila is 65 years old.
Sheila has a mortgage on the rental property with an interest rate of 5.45 percent. She pays $540 biweekly. The mortgage will be paid off in April 2044, the planner says. The property has a slightly positive cash flow. The interest paid is tax deductible against the rental income claimed on Sheila’s tax return. Because she owns 60 percent of the rent and her marginal tax rate is 48 percent, she can claim about $5,669 of interest on the mortgage, which reduces her tax by $2,721.
Sheila is considering starting Canada Pension Plan benefits when she retires at age 62. 76, which is likely,” Malcolm said. It’s important to note that taking CPP before age 65 results in a reduction of 7.2 percent per year; in Sheila’s case, it would be 21.6 percent. Taking CPP after age 65 results in an increase of 8.4 percent per year, so delaying until age 70 will increase CPP by 42 percent.
“Sheila can use her low-income retirement years (62 to 69) to deregister her RRSP, locked-up retirement account, and defined-contribution pension at lower tax rates,” the planner said.
Sheila also plans to start Old Age Security benefits at age 65. “If you instead decide to delay your OAS, you can receive 7.2% more each year, delayed until age 70, resulting in a 36% increase in benefits,” he said.
Assuming she retires at 62, Sheila can meet all of her major purchasing goals and can retire quite comfortably, Mr. Malcolm says. “It’s important that she continue to earn her salary until retirement, maintain her savings goals and not dramatically increase her lifestyle expenses.”
You can leave the property as an inheritance to your children without having to sell any of the property. You will have enough liquid assets left at the end of the plan ($505,000 in future dollars at age 95) to cover your estimated final tax bill ($269,000 in future dollars) and probate fees ($62,000 in future dollars).
Person: Sheila, 56 years old, and her four children
The problem: Can you comfortably retire at age 62 without selling your home or joint rental property?
The plan: Sheila maintains her savings goals, maintains her income, and does not substantially increase her monthly expenses. She may want to increase the mortgage payments on her primary residence when it comes time to renew.
The reward: A comfortable retirement without financial difficulties and the possibility of leaving an inheritance for his four children.
Net monthly income: $12,664
Assets: Principal residence $1,600,000; rental property $240,000; bank account $1,500; unregistered account $15,000; TFSA$23,635; RRSP $303,632; blocked retirement account $135,486; registered educational savings plan $65,845; DC Pension $27,155. Total: $2,412,253
Monthly expenses: Mortgage $1,950; property tax $604; home insurance $122; utilities $324; maintenance $100; transportation $798; groceries and clothing $400; line of credit $979; vacations $300; charity $30; personal care $125; dinners and drinks $130; entertainment $130; life insurance premiums $202; cell phone/cable/internet $826; children’s education expenses $1,500; unrecorded savings $936; TFSA contributions $500; RRSP contributions $500; DC pension contributions $375; Voluntary pension contributions DC $1,833. Total: $12,664
Passive: Residential Mortgage $267,379; rental mortgage $178,198; line of credit $13,419. Total: $458,996.
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