August 21, 2017


10° C, A few clouds

Full Forecast


Advertise With Us

Money Makeover: Thinking ahead

Pensioner worries about spouse's financial security after he's gone

Hey there, time traveller!
This article was published 24/6/2011 (2249 days ago), so information in it may no longer be current.

Roberto worked for most of his life with the federal government while Sofia stayed at home to raise the children for most of her working life. And their retirement incomes reflect this historical division of paid and unpaid labour.

"I think it's fairly typical for people our age with a lot of couples where the husband has most of the pension income and the women not as much," he says.

Roberto spent his working life bringing home the bacon, while Sofia stayed home to raise their children.


Roberto spent his working life bringing home the bacon, while Sofia stayed home to raise their children.

With both of them entering their seventh decade of life, Roberto is increasingly concerned about providing for Sofia after he is gone.

"My concern if something were to happen to me, she'd be in a tough spot because the pension income and the CPP would be reduced by almost one-half of what they are now."

The couple has a combined annual income of about $48,000 -- after taxes and deductions -- with Roberto earning more than 80 per cent of that sum from his work pension and CPP.

They also have about $178,000 in savings with about three-quarters of the money invested in RRSPs. More than half of all assets are in Roberto's RRSP.

They're considering converting their RRSPs to RIFs (retirement income funds) soon and looking at options to provide Sofia with more access to guaranteed income if Roberto predeceases her. They're considering an annuity -- a guaranteed income stream for life -- because Sofia does not know much about the family finances. That's always been Roberto's role.

"I just don't think I'm quite as healthy as she is, so therefore I probably won't last as long as she will," he says. "I've kind of got a financial plan in mind, but are there other strategies?"

Based on their sources of guaranteed income alone, Sofia's financial stability will be negatively affected if Roberto predeceases her, says certified financial planner Doreen Sigurdson.

Sofia would see a substantial drop in guaranteed income because the survivor benefit from Roberto's work pension is 50 per cent of the present payment he receives.

In contrast, her expenses would only be reduced by a few thousand dollars from their current expenses of about $34,000 a year.

"Allowing for housing expenses remaining the same, we can estimate Sofia could maintain the same living standard at a cost of $22,000 per year, plus another $6,000 for extras such as home maintenance," says Sigurdson, who's with Edmond Financial Group in Winnipeg.

Roberto's pension accounts for more than half of their combined income. If he predeceases her, Sofia would receive less than $14,000 annually from his pension to go along with her CPP and OAS, which add up to less than $7,000.

"Another significant contributor to their income is Roberto's Canada Pension Plan at $7,736 per year," she says. "Sofia's CPP is nominal at $360 per year, but she'd receive 60 per cent of his entitlement as a survivor benefit if Roberto dies first."

All told, Sofia's estimated income should Roberto die would be about $25,000 a year.

This leaves her with a $3,000 annual income shortfall, Sigurdson says.

Roberto does have life insurance, but the $22,000 payout wouldn't be much help past a year or two.

Because he has health issues, it's unlikely he can afford additional coverage.

But they do have many options to make up for the lost income.

If they want total income security for Sofia, investing all of her RRSP funds in a life annuity would pay about $3,200 a year, indexed at three per cent a year. That alone would cover the expense shortfall.

"Annuities offer the benefit of lifetime guaranteed income with no investment management required. However, once purchased, they are locked in with no option for future lump-sum withdrawals."

Alternatively, they could withdraw $4,000 a year from their combined $147,000 in RRSPs, indexed at three per cent a year until she reaches 100.

"Minimum RRIF requirements dictate more than this amount must be withdrawn by the time they are age 72, but they could choose to reinvest the surplus amount outside of their registered plans."

So, at the very least, their savings would likely see her through.

But they should consider starting to wind down their RRSPs regardless of whether they need the income.

All withdrawals from RRSPs are fully taxable, and it's always best to plan to "melt down" those assets in an orderly, tax-efficient manner instead of being forced to do so and end up paying more taxes and losing income-tested benefits in the process.

"A review of their income tax suggests they could be drawing approximately $13,000 gross from their registered plans starting in 2011, with about $10,000 net of tax," she says. "Assuming a cautious four per cent investment return and increasing their withdrawals by three per cent each year, this would allow them to deplete their registered funds by the time Sofia is around age 81."

At this withdrawal rate, they would remain at about a 26 per cent tax rate, meaning they would still qualify for the full age tax credit.

More importantly, they would be transferring wealth accumulated in their RRSPs, paying potentially less taxes now, to more tax-efficient savings vehicles that address future concerns, such as providing tax-free income for big-ticket items and leaving money behind for their children if they so choose.

Otherwise, assets within the RRSPs could be taxed at a higher rate, particularly on the death of the last surviving spouse when the marginal rate could be more than 40 per cent.

These withdrawals can then be transformed into future sources of tax-free income by investing them gradually in their TFSAs.

"In 11 years, their RIFs would be depleted, but their TFSAs will have grown to more than $200,000," she says, based on a four per cent annual return.

But they also should consider a different asset mix than they presently have for the portfolio, which is roughly 60 per cent equity and 40 per cent fixed income.

"Roberto comments he is fairly risk adverse, and Sofia is not very involved in finances," Sigurdson says, adding he needs to bring Sofia up to speed on money management or find a trusted adviser.

"If we did have a big market downturn, their current allocation would likely cause them stress, which would be needless."

An alternative portfolio mix of 70 per cent fixed income and 30 per cent equity would likely provide them with the four per cent annual return they need.

Overall, however, their financial situation looks very good, Sigurdson says. They have no debt; they control expenses well, and they have many options for using their savings in the future.

That said, the strategy of transferring RRSP money to a TFSA would provide them with the most flexibility while addressing Roberto's concerns for ensuring Sofia is taken care of if he's not around.

"Roberto and Sofia don't currently need this extra income, so they have the opportunity to accumulate it in the perfect vehicle for retirees."


Advertise With Us

You can comment on most stories on 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 January 2015.

Photo Store

Scroll down to load more