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By Julie Cazzin with Allan Norman
Q: I have been the sole income earner while my spouse stayed home to raise our kids. After working for 35 years, I want to retire soon. I’m 56 years old and my wife Mary is 53. My plan is to work through to the end of 2023. I have run my numbers through retirement calculators and while I see the first three years as possibly lean, I am somewhat comfortable with the whole picture. My wife, however, wants me to work longer. She cannot see how we can go from living off $145,000 gross per year down to $70,000 gross.
We own a mortgage-free home worth $400,000, two vehicles and have a $28,000 loan. I have $83,000 in registered retirement savings plans (RRSPs) and $415,000 combined in a locked-in retirement account (LIRA) and a defined-contribution plan (DCP). My wife has two spousal RRSP accounts totalling $163,000 to which I contribute $25,000 per year. I still have $200,000 of past RRSP contribution room. We also have $37,000 in a bank account and I have a tax-free savings account (TFSA) of $9,000. And we may have a $350,000 inheritance from my healthy, 79-year-old father, but I don’t want to include it in the plan. Am I OK to retire? — Scott
FP Answers: Scott, retiring at age 57 may be tight, and if your wife is not on board then you might be going from one stress to another. Here’s what you need to consider while preparing your DIY retirement plan.
Retirement income check: You are now earning $144,000 per year, so after tax, employment expenses, loan payments and retirement savings, you’re left with about $77,000, which is the amount you’re currently spending each year.
Reducing your retirement income to $70,000 gross per year leaves you with about $55,000 a year for spending after tax and loan payments. What lifestyle reductions are you planning to make so you can live on an annual $55,000 net?
Gross income needs: Base your retirement income needs on after-tax income. A combined gross income of $70,000 a year from a registered retirement income fund (RRIF) results in about $59,000, whereas a $70,000 draw from your inheritance will be mostly tax free. Once you know your after-tax income needs, work out the best withdrawal strategy based on tax consequences.
Pension splitting: Pension splitting with RRIFs and lifetime income funds (LIFs) starts once you reach your 65th year, not before. You’ve done well here. Mary has accumulated enough in her RRSPs to be able to draw about $35,000 a year, giving you equal taxable incomes up to your age 65. At that time, her RRSPs will be depleted, but you’ll be 65, so you can split your RRIF income with her.
Spousal RRSP: You must wait two full calendar years with no contributions before you can draw money from a spousal RRSP and have it taxed in Mary’s name. The two-year calendar rule doesn’t apply to minimum spousal RRIF withdrawals. Play it safe and make 2022 your last contribution year to ensure a draw in 2025 will be taxed in Mary’s name.
LIRA and DCP: In Ontario, you can unlock 50 per cent of these accounts when converted to a LIF, and transfer the unlocked portion to an RRSP or RRIF. LIF accounts are often the first place to draw a retirement income from.
Old Age Security (OAS) and Canada Pension Plan (CPP): This is your only guaranteed income and it is indexed. You will be close to the maximum CPP, and Mary may have very little. CPP and OAS decrease by 0.6 per cent for every month you take it before age 65. After age 65, CPP increases by 0.7 per cent per month and OAS 0.6 per cent for every month you delay taking it. I think it’s too soon for you to decide when to start CPP and OAS.
Consider your possible early demise: Would Mary have enough money if you died early? She’d likely get 60 per cent of your CPP, but your OAS would stop. What about the inheritance from your dad, would she still receive it?
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Let’s assume investment returns of six per cent and inflation of three per cent and exclude your home equity and possible inheritance. Spending at your current rate, $77,000 net per year, means you’ll run out of money when you’re 67 and Mary is 64. If you can reduce your annual spend to about $56,000, you will have just enough to get you to age 90 if everything goes right. A lot can happen over 30-plus years.
Now, let’s look at things such as using home equity and the inheritance. Adding a $350,000 inheritance in 10 years means you could increase your after-tax income to $66,000 per year, which is getting closer to your current annual spending of $77,000 plus $4,000 for a car loan.
Of course, we can further improve this by using the equity in your home to get a reverse mortgage or by moving to an apartment, but how secure is Mary going to feel? If we include the inheritance and you work an extra two years, that potentially brings your after-tax income up to $74,000 per year.
Scott, I think you are forcing this a little and making it work by cutting your retirement income and not leaving yourself any wiggle room. To be fair to you, I’ve only looked at this from a financial perspective. From a health perspective, a change in lifestyle and early retirement may be the best thing for you. You never know what new opportunities will appear once you have de-stressed.
Allan Norman, M.Sc., CFP, CIM, RWM, provides fee-only certified financial planning services through Atlantis Financial Inc. Allan is also registered as an investment adviser with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or email@example.com. This commentary is provided as a general source of information and is not intended to be personalized investment advice.
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