In Alberta, a couple we’ll call Maurice, 64, and Lori, 55, have retired. Their children are grown and gone, their finances are secure with assets of $1,741,500, no debts, and carefully tracked expenses of $67,932 per year.
While they are comfortable for now, their significant age difference has them worried about what will happen should Maurice die first. In that case, his Old Age Security pension, most of his Canada Pension Plan benefit and some of his work pension income would no longer be available to Lori. Today’s prosperity could become fragile at some time in the future.
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Family Finance asked Owen Winkelmolen, an advice-only financial planner who heads Planeasy.ca in London, Ont., to work with Maurice and Lori. He has broken down their income from investments, cash on hand, income from a rental apartment and pensions by stages.
The age gap
The nine-year age gap complicates planning, as it staggers the start of retirement benefits and increases the potential for Maurice to die well before Lori.
Maurice has recently begun to receive two small pensions. One provides $463 pre-tax income per month and has a 100 per cent survivor benefit for Lori. The other provides $242 pre-tax income per month with a 60 per cent survivor benefit. At 65, Lori expects to receive two pensions. One is $90 per month with a 100 per cent survivor benefit. Another pension will pay $84 per month with a 60 per cent survivor benefit. These are modest but dependable cash flows.
Maurice can draw CPP and full OAS benefits at 65. He would like to delay the start of his CPP, $777 per month at 65, to age 70 and therefore receive a 42 per cent boost over the age 65 amount to $1,103 per month.
He can afford the delay by drawing down his ample investments. He would like to start OAS at 65 at the present rate of $608 per month. In a sense, he is hedging his bets, accepting a bonus for CPP with a five-year delay and taking OAS to reduce his draw on financial assets.
Lori qualifies for much smaller CPP and OAS benefits. At 65, she will have resided in Canada for 33 years out of the 40 required for full OAS. Her OAS will therefore be $501 per month at 65. Her CPP will be $304 per month.
The couple receives $750 per month from renting out an apartment in their basement. They expect to terminate the rental in six years when Maurice is 70.
Maurice and Lori currently allocate $5,660 per month including $1,300 per month for travel. They expect that spending to continue.
Retirement income outlook
Adding up their income for the five years from Maurice’s age 65 to his age 70 when Lori will be 61, they would have his pension income of $705 per month, $608 OAS and rental income of $750 per month.
Their combined RRSP balance, $410,000 growing at three per cent for the 45 years from Lori’s present age 55 to her age 100, would generate $16,235 per year or $1,353 per month. On the same basis, their $154,000 of TFSAs would generate $6,098 per year or $508 per month. Their non-registered investments with a present value of $502,500 would generate $19,900 per year or $1,658 per month.
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These income flows add up to $5,582 per month between his ages 65 and 70.
When Maurice turns 70 and Lori is 61, they can add his Canada Pension Plan benefit of $1,103 per month, but lose the rental income of $750 per month, for a total of $5,935.
After 15 per cent average tax but no tax on TFSA cash flow, they would have $4,821 per month before 70 and $5,121 per month after 70 to spend.
Finally, when Lori is 65, she can add her $174 monthly pension and her $607 Old Age Security benefit. Five years later she can add her CPP of $304 per month for total income of $7,020 per month. After splits of eligible income, no tax on TFSA distributions, and 15 per cent average tax, they would have about $6,000 per month to spend.
Financial consequences of death
Were Maurice to die, Lori would have core investment income of $1,353 monthly RRSP/RRIF payments, $508 monthly TFSA income and $1,658 non-registered monthly income. She would have her own CPP and OAS if Maurice dies. But she would lose his Old Age Security ($608), part of one of his two work pensions ($97), most of his CPP benefit (about $700 of it) and the ability to split income with Maurice. The net result of all of these income cuts would be a loss of $17,008 in gross annual income per year and potentially a higher tax on her remaining income.
Lori could still meet her original goal of sustaining present spending but her surplus would shrivel. She nevertheless would be financially secure.
Their substantial non-registered investments including $60,000 cash held in GICs and chequing balances will make it unnecessary to raid their RRSPs or TFSAs as they wait for pensions to begin.
“Taking any pension early with a discount is sometimes driven by a need for cash flow in retirement, but this couple has ample investments to fund their present way of life,” Winkelmolen explains. “Maurice and Lori have planned well. Their financial security is not in doubt.”
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Retirement readiness 5 Retirement stars ***** out of 5