Winnipeg Free Press - PRINT EDITION

Retirement, for one

With no work pension, Bob wonders if his RRSP will be enough

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Bob knows he won't be retiring early. Without a work pension to fall back on, he figures he has to work until at least 65.

The 61-year-old earns $57,000 a year working in the private sector and has saved $350,000 in an RRSP, entirely invested in GICs earning about three per cent per year.

Bob's finances

INCOME: $57,000 ($3,341 monthly net)




Home: $400,000

RRSPs: $350,000

Savings: $50,000

NET WORTH: $800,000

He also has $50,000 in a savings account, part of which he will use to buy a new car worth about $15,000 before he retires.

"My goals once I retire are to golf a little more, take a winter vacation every year in a warm climate and bike tour during the summer months," says Bob, who has no debt and owns a home worth $400,000.

He says he doesn't expect his monthly expenses of $2,866 to change much once retired, but he does estimate he will spend an additional $6,000 a year on vacations.

With no spouse and children to worry about, he plans to make his assets last as long as he does. But a question keeps nagging at him: "Can I really afford to retire?"

RBC financial planner Rod Lowry says Bob has enough money to fund his retirement plan, but it will not come without sacrifice.

At first glance, he's in good shape financially with no debt and about $800,000 in assets, including his home.

But the obvious downside is his only sources of guaranteed income are OAS and CPP.

When he retires at 65, he can expect about $19,848 annually from government pensions.

This is far short of what he will need to fund his annual expenses of about $34,392, or $2,866 a month.

"Bob's taxable pensions will not cover his pre-tax annual income need of $43,150 for expenses, creating a shortfall of almost $2,000 per month."

But the shortfall is likely to be higher because his monthly costs are not indexed to inflation, and he plans to spend an additional $6,000 a year on vacations.

While it may come as no surprise to Bob he'll rely on savings to fund much of retirement, he may be shocked at how quickly he will burn through his RRSP.

In the first year of his retirement, he will buy a new car, and he should also make one last lump-sum contribution to maximize his RRSP.

Those amounts alone will use up half of his non-registered savings. The remainder can be used to fund the monthly shortfall of about $2,000.

Then he will have to dip into the RRSP to pay for vacations.

By the time he retires, he will have about $450,000 in the registered account, based on maximizing annual contributions and a three per cent return.

To fully fund his expenses, vacations included, he will need to withdraw about $32,352 a year for a total combined gross income of $52,300.

"The increase in additional registered income, however, pushes Bob into a higher tax bracket," he says. "This increases his marginal tax rate from 27.75 to 34.75 per cent, on any amount above $43,562, based on 2013 tax brackets."

Indexing this income to inflation, his retirement savings would be depleted by age 80.

While it's likely he won't be travelling much at that stage, he probably will need more than OAS and CPP to pay his bills. As a result, he'll likely have to sell his home, and rent or buy a small condo at a substantially lower price so he can use the surplus from the sale to fund his needs.

Another option is use a home equity line of credit once he retires to fund vacations.

Bob would only withdraw enough funds from his retirement savings to have a taxable income up to $43,562, allowing him to remain in the lower tax bracket.

"This would provide an after tax income of $34,396, fully funding his monthly expenses except for travel," Lowry says. "The remaining $6,000 required for that would come from a credit facility against the house, which he can repay when he sells it."

This strategy would extend his retirement savings until age 85, at which point he'd have to sell his home, buy a life lease or some other form or lower cost housing while using the remaining proceeds to fund other expenses not covered by CPP and OAS income.

Bob should still have plenty of equity left in his home even after borrowing $6,000 a year for 14 years, assuming he stops travelling at age 80.

"If the home increased in value by two per cent a year, its value would be $527,000 at age 80 and his debt against it would be about $84,000 plus interest."

Bob's interest initially would be $17.50 a month per $6,000 at 3.5 per cent. If rates rose to 6 per cent, his monthly costs would increase to $30 per $6,000, and if he borrows all $84,000 by age 80, his interest costs would then be about $420 per month. Inevitably, Bob may end up borrowing even more just to pay the interest costs later into this plan, Lowry says.

For this reason and the fact Bob is risk averse -- considering he invests only in GICs -- borrowing against his home to fund his lifestyle may not be the best option.

As alternatives, he could scale back retirement spending or delay retirement a few more years.

Regardless of what Bob chooses to do, Lowry says the outcome should be largely the same.

"Bob can comfortably enjoy a nice retirement, easily affording a winter holiday each year, and still have plenty of equity remaining in the home should he need it."

Republished from the Winnipeg Free Press print edition July 20, 2013 B13

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