Cash-flow hazards ahead?

Mindy wants to join her husband in retirement, but fears a financial train wreck


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Mindy works while Rob, a pensioner, waits for her to retire.

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Hey there, time traveller!
This article was published 17/05/2014 (3186 days ago), so information in it may no longer be current.

Mindy works while Rob, a pensioner, waits for her to retire.

It’s a situation they’d both like to end soon.

“Can I retire at 60?” asked Mindy, 59, who works in administration for a non-profit.

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Once she starts pondering the this question, a flood of others arise.

“When should I take CPP? When do I draw on my RRSPs? Will our money last? Is our money properly invested?” asked Mindy, who, unlike her husband, will not receive a defined-benefit pension once she retires.

“What if my spouse dies? Will I have to sell our house?”

Rob earns a monthly pension of about $1,800, and Mindy fears if Rob dies before her, she will be cash-strapped and have to sell their home worth $250,000.

“It scares me, because I could lose half his pension.”

Tying into this concern is a projected shortfall between guaranteed sources of retirement income and monthly expenses. Currently, they earn about $5,300 a month and spend about $5,100 a month.

Once retired, their guaranteed retirement income would only be about $2,995 a month. Although Mindy says this sum should cover about two-thirds of retirement expenses, she would like a bit more breathing room because she is worried about burning through their savings, about $393,000.

Most of their money is invested conservatively, earning two per cent or less annually. Mindy says she knows this likely isn’t the best strategy for making their money last, but they worry about losing money if they invest in riskier assets.

Despite the uncertainty, Mindy remains hopeful about retiring next year. Still, she’s willing to do what’s necessary for a stable financial future.

“I will work longer to maintain our lifestyle, but if I could maintain it on our current savings, it would be really great to retire next year.”

Winnipeg-based certified financial planner Karen Diamond says Mindy and Rob have a lot of factors in their favour to facilitate early retirement for Mindy.

Most importantly, they appear to budget well.

“They have a detailed budget which is realistic and which includes an allowance for ‘undefined miscellaneous spending,’ ” said Diamond, a financial adviser with Diamond Retirement Planning. “So I feel quite confident they have a good idea of what they actually spend.”

Another upside for them is they have no debts.

So too is the fact they can split Rob’s pension income to reduce taxes once Mindy retires early.

“This is one of the few types of income which may be split before a pensioner is 65,” Diamond said. By splitting his pension income, Rob and Mindy can then strategically withdraw from other assets to keep taxes as low as possible, ensuring their savings last longer.

Although they don’t have much flexibility in this regard with income from OAS and CPP, which is fully taxable, they can draw money from their RRSPs, also fully taxable, when suitable, to ensure taxes on those withdrawals are minimized.

Non-registered investments can also be strategically drawn upon to minimize taxes, and TFSA income is always a good source of emergency cash that can be called upon without tax consequences.

Rob and Mindy could organize their savings better to lower taxes and increase annual returns. For example, they each have about $11,000 in unused TFSA contribution room, so they should transfer that amount from the non-registered savings account to their TFSAs. And they should continue to transfer the maximum amount every year to get the biggest bang for their bucks from this tax shelter.

Yet they also should rethink their investment strategy inside their TFSAs.

“There is not much point investing in GICs or daily interest accounts in a TFSA because of low interest rates and no growth potential for these products — nothing much to tax-shelter there — but they might consider investing in a product like a conservative income-oriented fund with a monthly pay structure,” she says.

The payouts for these investments range from three to six per cent annually, higher than the two per cent or less they’re earning in savings and GICs, so the tax savings on the investment income is much more tangible.

Although the principal is not guaranteed like a GIC, the trade-off for the additional risk is growth potential. Furthermore, because their guaranteed income sources cover about two-thirds of their projected retirement costs, they likely can afford to take on more risk in their portfolio, including their RRSPs.

“Their RRSP portfolios are mostly in guaranteed investments such as GICs and bonds,” she says. “They may want to review their portfolios to see if they can take on just a little more risk in order to achieve a long-term rate of return in the four to five per cent range.”

They should also take a closer look at Rob’s pension. Manitoba law stipulates the default survivor payout is 60 per cent of the deceased’s pension. Unless Mindy has signed a form stating otherwise, Rob’s pension won’t be cut in half if he dies before her.

Yet if Mindy is concerned about their savings lasting for the long haul, she could partially retire at 60 and work part-time for a couple of years to get a feel for how their expenses and cash flow match up.

She could also start receiving CPP while still working part-time. Her benefit will be reduced by almost 35 per cent, but she will still be contributing to CPP while working part-time, which will make for a modest increase in the benefit she receives.

“By taking it early, she would also be eligible for a survivor-benefit top-up if Rob predeceases her, but not if she waits to 65 to take it.”

So, long story short: Diamond says Mindy can retire at 60.

“But they have to remain vigilant and revisit their plan regularly to see if the realities which unfold in the years ahead are still reflected in the projections.”

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