Winnipeg Free Press - PRINT EDITION

Money makeover: a working retirement

Couple plan post-job goals with a little extra income in mind

  • Print

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."

giganticsmile@gmail.com

Pam and Dave's finances

INCOME

Dave: $24,000 annual gross ($1,491 net monthly, work pension; $300 a month from part-time work)

Pam: $85,000 annual gross ($4,333 monthly net)

 

EXPENSES

Monthly: $5,472

 

DEBTS

Mortgage: $99,000 owing at 4.64 per cent interest rate; payments of $692 bi-weekly; home assessed at $275,000

 

ASSETS

Dave RRSPs: $118,000

Dave savings: $9,000

Pam RRSP: $113,949

Pam work RRSP: $90,438

Pam non-registered GIC: $30,802 at 5.32 per cent, maturing 2012

Pam TFSA: $3,000

Home equity: $178,000

Republished from the Winnipeg Free Press print edition October 8, 2011 B13

History

Updated on Saturday, October 8, 2011 at 11:32 AM CDT: added art

Fact Check

Fact Check

Have you found an error, or know of something we’ve missed in one of our stories?
Please use the form below and let us know.

* Required
  • Please post the headline of the story or the title of the video with the error.

  • Please post exactly what was wrong with the story.

  • Please indicate your source for the correct information.

  • Yes

    No

  • This will only be used to contact you if we have a question about your submission, it will not be used to identify you or be published.

  • Cancel

Having problems with the form?

Contact Us Directly
  • Print

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

Have Your Say

New to commenting? Check out our Frequently Asked Questions.

Have Your Say

Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?

Have Your Say

Comments are open to Winnipeg Free Press Subscribers only. why?

The Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.

letters

Make text: Larger | Smaller

LATEST VIDEO

Steeves wants to divert BRT cash to rec centres

View more like this

Photo Store Gallery

  • Geese fight as a male defends his nesting site at the duck pond at St Vital Park Thursday morning- See Bryksa’s Goose a Day Photo- Day 08- May 10, 2012   (JOE BRYKSA / WINNIPEG FREE PRESS)
  • A goose flys defensively to protect their young Wednesday near Kenaston Blvd and Waverley -See Bryksa 30 Day goose challenge- Day 16 - May 23, 2012   (JOE BRYKSA / WINNIPEG FREE PRESS)

View More Gallery Photos

Poll

Do you think food-security issues are an important topic to address during this mayoral campaign?

View Results

View Related Story

Ads by Google