In addition to their pensions, Dana and Amir have savings and investments partly offset by a $418,000 mortgage.Kaja Tirrul/The Globe and Mail
The first time Dana retired, she and her husband, Amir, were both 58 years old and were leaving behind successful careers as teachers.
“We were not certain we could afford it,” Dana writes in an e-mail, “but a second career has completely shifted our financial outlook.”
A year or so after retiring, Dana went back to work in a different field, earning about $150,000 a year including a bonus. She’s also getting a defined benefit pension of $26,095 a year from her previous employer.
Now, Dana and her husband are both 63 years old, and Amir is still retired and collecting a defined benefit pension of $99,839 a year, indexed to inflation.
“We retired in 2020 after raising five children and seeing them launch successful careers,” Dana writes. They funded the first two years of first-home savings accounts for each of their five children “and it would be a dream to provide them with another monetary gift in a few years,” Dana says – “if we can do it without jeopardizing our own desire to travel, enjoy a comfortable retirement and keep our home in good condition.”
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In addition to their pensions, the couple has savings and investments partly offset by a $418,000 mortgage.
Dana hopes to retire “for good this time” by January, 2028, with a retirement spending target of $100,000 a year after tax, plus mortgage payments.
She wants to know how she and Amir should draw down their registered retirement savings plans and tax-free savings accounts. Should they pay down some or all of the mortgage? And can they afford to give their children $100,000 to $150,000 in total over the next few years?
We asked Ross McShane, an advice-only financial planner in the Ottawa area, to look at Dana and Amir’s situation. Mr. McShane holds the chartered professional accountant designation as well as financial planner designations.
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What the expert says
Dana and Amir have accumulated wealth largely through their pension benefits, Mr. McShane says. “Their cash flow is strong but their assets are modest, and they have a mortgage on their house,” the planner notes.
Servicing their mortgage payments and covering their lifestyle expenses is not a concern, he says. “However, funding large gifts to their children would mean they would be dipping into a sizable portion of their existing savings.”
Dana and Amir have TFSAs that could be accessed without tax implications, but this could leave them short in the event they were faced with other large expenditures, he says. Ideally, they do not want to be making large withdrawals from their RRSPs because that would push them into a higher marginal tax bracket.
“Rather than giving $100,000 to $150,000 in one lump sum to their children, they could continue gifting funds annually that the children could direct towards their TFSAs or FHSAs,” Mr. McShane says.
Dana’s income will allow them to build up additional wealth, either in the form of savings or debt reduction, the planner says. “In the long run, they are projected to leave a healthy estate.”
She has annual RRSP room of $27,000 and they have combined unused TFSA room of $85,000.
In terms of prioritizing cash flow, they need to decide whether to contribute to Dana’s RRSP, their TFSAs or accelerated mortgage payments.
“Given Dana’s current tax bracket, it would make sense to use up her annual RRSP room. She will be deducting contributions in a tax bracket that will be much higher than the bracket she will be in when the funds are withdrawn,” Mr. McShane says. She would also benefit from the tax deferral.
After making RRSP contributions, surplus cash flow can then be put toward additional mortgage payments or their TFSAs. The couple’s mortgage carries an interest rate of 3.78 per cent, which means their TFSAs would have to earn at least that much for them to be as well off, the planner says. “They should be able to achieve this rate of return on average,” he adds.
“The conservative approach would be to accelerate the paydown of their mortgage. Alternatively, contributing to their TFSAs would provide them with additional liquidity and the funds could be available for their mortgage when it renews.”
There is risk to Dana in the short- to medium-term if Amir was to die prematurely, Mr. McShane says. “She would get only 60 per cent of his pension, and she’d lose his OAS and most of his CPP.” Dana would already be receiving close to the maximum Canada Pension Plan benefits. “CPP caps the combined retirement plus survivor benefit at roughly the maximum CPP retirement pension,” the planner says.
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“Amir should consider a life insurance policy that would provide Dana with a tax-free payout to cover a portion of the lost pension income as an additional cushion, and provide peace of mind,” he says. “While my analysis suggests that Dana would be okay with the survivor portion of Amir’s pension, she would need to lower her spending to avoid depleting her capital in her later years,” Mr. McShane says. The couple’s mortgage is not insured.
They could choose to defer Old Age Security and CPP to age 70. “They would be further ahead in the long run to do so because CPP would be enhanced by 42 per cent and OAS by 36 per cent,” he says. At that time, their work pensions as well as government benefits and RRSP withdrawals will more than cover their expenses and debt payments, leaving them with an annual surplus.
“If they want more cash flow in their go-go years, they could draw CPP and OAS at 65, which would also serve to replace the pension bridge benefit that is lost at 65,” Mr. McShane says. Both of their pensions have a bridge benefit to age 65: Dana’s is $4,622 and Amir’s is $10,367. Their pensions are reduced by that amount at 65.
By Dana’s retirement date, they are forecast to have accumulated $675,000 of investments, Mr. McShane says. That assumes a rate of return on their investments of 5 per cent and an inflation rate of 2.1 per cent.
They need to cover expenses of $80,000 per year, indexed to inflation, as well as their mortgage payments. “I have also added an annual $10,000 expense buffer, as well as additional travel of $20,000 annually from 65 to 80, for total expenses of $110,000, plus mortgage,” Mr. McShane says. Vehicle replacement costs are added to these amounts.
If CPP and OAS are deferred, they will need to draw down about $60,000 annually from their portfolio until age 70, when their government benefits start, to cover expenses and debt payments beyond what their pension incomes will cover, the planner says. “There will be an opportunity to withdraw funds from their RRSPs in a relatively low tax bracket and to preserve OAS,” he says. The OAS threshold – the point at which the benefits begin to be clawed back – is currently $95,300 a year, each.
If the couple takes CPP and OAS at 65 instead, their portfolio withdrawal at that time would be minimal, he says.
Client situation
(Income, expenses, assets and liabilities provided by applicants.)
The people: Amir and Dana, both 63, and their five children aged 27, 29, 31, 32 and 33.
The problem: Can they afford for Dana to retire again and give some money to their children without jeopardizing their own spending goals?
The plan: Rather than lump sums, give the children enough each year to fund their TFSAs and FHSAs. Consider deferring government benefits to age 70.
The payoff: A clear road ahead.
Monthly after-tax income: $17,454.
Assets: Non-registered $15,150; her TFSA $90,177; his TFSA $115,305; her RRSP $122,935; his RRSP $78,295; her locked-in retirement account from previous employer $26,930; house $1,000,000. Total: $1,448,792
Estimated present value of her DB pension: $400,000; estimated present value of his DB pension $1,700,000. Total: $2,100,000. This is what someone with no pension would have to save to generate the same income.
Monthly outlays: Mortgage $2,190; property tax $560; home insurance $350; electricity $220; heating $260; transportation $790; groceries $1,000; clothing $100; car loan $1,400; gifts, charity $300; vacation, travel $1,665; personal care $50; dining, drinks, entertainment $800; sports, hobbies $100; subscriptions $20; health care $25; health, dental insurance $195; communications $310; buffer of $833; RRSP $2,250. Total: $13,418. Monthly surplus available for TFSA or debt repayment $4,036.
Liabilities: Mortgage $418,000 at 3.78 per cent; car loan at 2.9 per cent $20,000. Total: $438,000.
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