Pam and Dave know what they want to do in retirement. They're just not sure how to go about doing it.
Dave, 59, retired earlier this year. He collects a pension of $1,490 a month, but he still works a couple of days a month, earning about $300. He has $118,000 in RRSPs but has no plans to touch them any time soon.
"I'm worried I'll live until I'm 90 and will use up all my savings by then," he says.
The couple's total monthly household expenses are about $5,472, including more than $1,000 in contributions to Pam's TFSA and RRSP.
Pam, 62, earns about $85,000 a year and covers most of the expenses aside from groceries and vacations.
She wants to retire at 64 but hopes to continue working part-time at her job.
"Another goal is to start collecting CPP as soon as possible, provided the government smartens up and removes the utterly unreasonable two-month stop-work requirement," she says. "If this happens, the amount received would be around $600 a month, and advice on the best way to use these funds would be welcomed."
Pam has an employer group RRSP and other registered savings for a total of more than $204,000. She also has about $31,000 in GICs from an inheritance and about $3,000 in a TFSA for short-term expenses such as home repairs.
Pam says she, too, would like to delay drawing on RRSPs as long as possible, but worries that may be an impossible goal because they have numerous pre- and post-retirement goals. For one, they want to pay off the $99,000 mortgage on their home, which is worth $275,000. They also want to buy a new car, and a few renovations would be nice, too.
They also want to spend a winter month somewhere warm once Pam semi-retires.
"We want to know if our goal is even feasible," she says.
Retirement income planning expert Daryl Diamond says it only makes sense if Pam and Dave continue to work for a little while into retirement, given their list of goals.
"But there are benefits to this approach beyond the obvious financial ones," says the author of Your Retirement Income Blueprint. "People do tend to relate to their employment, and part-time work provides fulfilment, purpose, structure and continued contact with a network of fellow employees."
Of course, Pam continuing to work on a part-time basis will also be essential to meeting their cash-flow needs early in retirement: the new car, debt retirement, etc.
"Their combined monthly after-tax cash flow required in retirement is $3,700," says Diamond, a financial planner with Diamond Retirement Planning in Winnipeg. "This number includes the expenses listed and the amounts of discretionary money they want, and it also builds in the annual cost of a trip down south for a month."
Diamond, however, did not factor the mortgage payment, $692 bi-weekly, into this amount.
But a mortgage pay-down strategy will be an important part of the retirement plan because they will have difficulty paying it off entirely by the time Pam retires.
Currently, they are paying about $18,000 a year toward interest and principal. In two years, it's likely they will have reduced the amount owing by $30,000. That leaves them with $69,000 on the mortgage, but they do have options to pay the principal down faster, including using Pam's inheritance money.
"While there may be some sentimental value to inheritance money, from a perspective of looking at things in the most efficient way, this money could be used to further reduce the amount owing," Diamond says. "So we could have a situation where $99,000 becomes a balance of $39,000 in two years' time."
Despite having reduced earnings in two years' time, they should be able to afford payments, which could be decreased to suit their needs. And they would likely be able to do so without tapping into their RRSPs much, if at all, which should be more than $340,000 combined in two years.
But they can bolster their savings even more during that time. Starting next year, Pam can begin CPP without stopping work -- one of many CPP changes that come into effect in 2012, including an increase in the reduction of the benefit for early withdrawal. Another downside is a new rule that requires all working pensioners to continue to pay CPP premiums at least until 65.
Despite the negatives, Diamond says he often recommends people take the payment as early as possible, because while the payment is guaranteed, your lifespan isn't.
The main problem for Pam if she takes CPP while working is her payments will be taxed at 43.4 per cent. But Diamond says she can use an RRSP strategy to help defer and reduce taxes.
"If she has unused RRSP contribution room that could shelter this payment or the vast majority of it, she should start this benefit," he says.
"That ends up in a revenue-neutral situation and contributes additional amounts in her RRSP."
When Pam semi-retires in two years, however, she'll likely have to use the CPP payments to help cover expenses. Dave will be 61 and earning about $1,700 a month after taxes, including his CPP, which he will start collecting next year. Just to cover their future expenses without the mortgage, Pam will need to earn $2,000 a month after taxes, or about $31,000 gross a year. Part-time work income and her CPP should cover that amount.
"This is all without touching RRSPs or taking into account that each of them will have an Old Age Security (OAS) cheque at their respective age 65."
That is not to say they should not touch the RRSPs at all. Instead, they should consider withdrawing money from those accounts in a tax-efficient manner. They don't have to spend the money.
But they're better off controlling withdrawals while they can rather than waiting until later when RRIF (Registered Retirement Income Fund) requirements force them to withdraw larger percentages and possibly pay more in taxes.
"Withdrawals also could be used for certain cash-flow needs that are different from what they have projected," Diamond says. "Or they could be part of a strategy where amounts are withdrawn from their registered accounts, taxes are paid at lower rates and the after-tax cash invested in TFSAs."
Because Pam and Dave are willing to work a little in retirement, they will have the financial flexibility to carry a small mortgage while achieving other goals such as buying a new car, he says.
"It's a strategy that should work fairly well for them."