Winnipeg Free Press - PRINT EDITION

How bad will it be?

Meaghan hopes delaying retirement will make her financial picture brighter

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Meaghan wants to retire next year to spend more time with her family and friends. There's just one problem, a big one.

"I'm concerned about whether I can even afford to retire," says the 64-year-old administrative worker.

Meaghan's finances:

INCOME: $61,680 ($3,294 a month net)

MONTHLY EXPENSES: $3,252

DEBTS:

Mortgage: $157,438 at 3.16 per cent fixed for five years

ASSETS:

Home: $210,000

RRSP: $43,639

TFSA: $1,293

Work pension: $654 a month at 65

Net worth: $95,494

While Meaghan has a work pension and some savings, she owes more than $157,000 on a home worth $210,000.

She has considered the alternatives to home ownership such as renting or buying a condo to cut costs, but she doesn't think she'd be much better off.

"It's six of one and half dozen of the other," she says. "I've even got my name on the list for four life leases, but I couldn't live more cheaply in a life-lease place."

For the time being, she's happy in her home.

But with only about $45,000 in savings, Meaghan says she will likely have to work longer to build up her work pension.

Earning almost $62,000 annually, she takes home about $3,300 a month, just enough to cover monthly expenses of $3,252.

Meaghan says she probably has to work a year or two longer to increase her work-pension benefit from the $654 a month she is eligible to receive at 65.

As a strategy to reduce her debt, she's also considering taking CPP while still working.

"I think I'm going to use it and OAS, as long as I'm working, to make additional payments on my mortgage."

Still, she's uncertain how to proceed. Should she invest the CPP payments or delay taking them until she retires instead?

Meaghan says she needs guidance that will give her the biggest and longest bang for her buck.

"If I were to retire, how bad is it going to be?" she asks. "How drastically do I have to change my lifestyle if I were to retire this year, next year or the year after?"

Certified financial planner MaryAnn Kokan-Nyhof says managing finances will likely be a challenge for Meaghan regardless of when she retires because she faces a substantial drop in cash flow.

The adviser with Desjardins Financial Security Investments in Winnipeg says working longer will certainly help, but she will still have to adjust to living off less money.

One thing Meaghan shouldn't do, however, is take CPP and OAS while she's working.

"Not only will that money be taxed in her highest tax bracket, she will potentially be in OAS clawback," Kokan-Nyhof says. "OAS repayments begin at a total gross income of $70,954, and her working income is already $61,680, so when we add in her CPP and OAS, her income will be over that amount."

Tax-wise, the additional income from these government pensions would be taxed at about 35 per cent up to $67,000 and any earnings above that would be taxed at almost 40 per cent.

On top of that, she would pay a 15 per cent penalty on about $6,400 of her income because it would be subject to the OAS clawback.

While Meaghan would like to use the additional income to pay down her mortgage faster, she's better off delaying receipt of CPP and OAS until she retires because it will put more income in her pocket in the long run.

With OAS, for instance, recent changes allow Canadians who turn 65 to delay taking the benefit for up to 60 months.

For every month Meaghan delays receipt, the benefit will increase 0.6 per cent per month, so delaying receipt one year will increase OAS from about $546 to about $585 a month. Holding off for two years will increase the payment to about $625.

CPP has also undergone recent changes that increase the amount pensioners receive when delaying taking the pension after 65. Previous to the change, the benefit increased 0.5 per cent for every month delayed past age 65. Now it's 0.7 per cent per month. If Meaghan can delay receipt of CPP one year until age 66, her benefit will increase to $824 from $760 a month at age 65. Waiting two years will bump it up to about $888 a month.

As well, Meaghan's work pension will increase substantially. If she waits one year, she will earn $822 a month instead of $654. Delaying retirement by two years will increase the payment to $929.

Compared with her current plan, delaying drawing on OAS and CPP will make for a modest but much-needed increase in retirement cash flow over and above her fixed expenses of $1,349 a month.

If Meaghan does take CPP and OAS at age 65 and continues to work until age 66, she'd have a monthly net retirement income of about $1,971, leaving her with about $622 in free cash flow.

Retiring at age 67, she'd have a net income of about $2,048 a month or about $699 in discretionary income.

In contrast, delaying CPP and OAS for one year will increase her monthly retirement income to about $2,045 after taxes, leaving her with $696 of free cash flow.

If she delays taking these pensions one more year, her income increases to about $2,196 after taxes, with $847 for discretionary expenses every month.

Compared with her current earnings from work, even the best-case scenario represents $1,104 less a month in discretionary income. Still, this is likely better over the long term than taking OAS and CPP at age 65 to pay down her mortgage faster.

If Meaghan took that route, about 40 per cent of her additional income would be going back to the government in taxes. Furthermore, paying a few thousand additional dollars annually on the mortgage won't make much difference to her financial situation.

"Meaghan has to accept the fact those mortgage payments are for life," says Kokan-Nyhof, adding the amortization period is 30 years. "She should treat them like rent."

Even if she doubled her mortgage payments, she'd only be mortgage-free at age 80.

"She'd likely need less money at that point, not more," Kokan-Nyhof says. "It's better for her to keep her bi-weekly payments low and save CPP and OAS until she retires at age 67."

Although Meaghan will experience a drop in income when she retires, working two extra years will make her finances more manageable. In addition, she can draw upon her modest RRSP savings, find part-time work and look for other sources of income.

"Perhaps she could consider taking a student as a boarder to help to cover some of the overhead of the home."

Regardless of what she chooses to do, the transition from work to retirement will be a big adjustment.

"Meaghan is simply going to have to learn to live on a reduced income," Kokan-Nyhof says. "But I do applaud her for reaching out, even late in the game, because it's never too late to get advice prior to making a decision that may have far-reaching consequences."

giganticsmile@gmail.com

Republished from the Winnipeg Free Press print edition October 19, 2013 B13

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