Retiring Manager Fears Loss of Income and What it Means

Situation Couple worries retirement income may not last Strategy Pay off debt and plan transition via trust Solution Income for life sufficient to meet needs

In Toronto, a couple we’ll call Max, 65, and Nancy, 69, are hovering between partial and complete retirement. Nancy, who has retired, and Max, who works part-time as an administrator, spent decades in the civil service and both have indexed pensions. They fear that complete retirement and the loss of part-time income would make it difficult to maintain their way of life. That includes a $250,000 cottage, a $300,000 Florida condo and a $950,000 principal residence. They have two adult children well established in their own careers.

Max explains, “I would like to retire from my part-time position, but we are concerned that we will not have enough income to maintain our lifestyle.”

Family Finance asked Derek Moran, a registered financial planner and head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Max and Nancy. The purpose — to stress test their income and make sure it will meet or exceed their needs.

The Situation

The foundation of the couple’s fortune is their fully indexed public-service pensions which, in total, pay them $1,550 per month before tax. On top of that, they receive Canada Pension Plan benefits that total $1,518 per month. Nancy also receives Old Age Security benefits of $524 per month, though Max, who earns $4,230 per month before tax in his part-time job, loses most of his OAS to the clawback. They have variable income from their $200,000 of non-registered investments as well. It adds up to $17,140 per month.

RRSPs could support further income of $1,680 per month to Max’s age 90. Their total available investment income from all sources is $15,903 per month before tax.

Assuming they pay $5,437 per month in tax, their disposable income, $11,703, is more than ample for their monthly expenses of $9,742 net of savings. It is quite clear that Max’s temporary work income of $2,500 per month after taxes and various work-related charges is not essential. Cutting a few frills would keep them in the black.

Even if they did not take income from their registered investments, they would have about $10,000 per month to spend independently of Max’s part-time work income. If they lost both Max’s part-time income and their investment income, they would still have gross monthly income of about $13,600. With tax savings and a few spending reductions, they would remain cash-flow positive, Mr. Moran says.

So What is There for Them to Worry About?

“Whether Max realizes it or not, his apprehension about retirement has little or nothing to do with money,” Mr. Moran says. “The real issue is that men are often defined by their titles and paycheques. Individuals who hold positions with little or no status seem to make the transition to retirement more easily.”

To leave regular employment for the last time is to disconnect oneself from that identity. Going from a “sir” that regularly makes important decisions to plain Max or Max who is responsible for half the laundry can be hard on the ego.

When one retires from a prominent position, titles, corner offices and special reserved parking spots are lost. Customary status all but evaporates. It is the typical dilemma that clouds the financial analysis of retirement, the planner explains. When Max retires, he will lose many of his social contacts. He will face the challenge of making new friends.

In retirement we often refer to ourselves as who or what we used to be. The implication is that once retired, the good years are gone, though it is not true. Intuitively, Max has this negative perception and wants no part of it.

“With all of that time, energy, experience and money, shouldn’t Max and Nancy be able to make the next 25 years even more meaningful than the last 30?” Mr. Moran asks. “We believe they can. And when they do, they can set an example for others.” Year 1 (2011) Idle cash in their nonregistered account earns barely 1%. Use it to pay off a $25,000 car loan at 3.5%, which is 5% in pre-tax cost. Year 2 (2012) Nancy is already well established in retirement, but Max, if he has elected to be fully retired, may need to find meaningful ways to spend his time, whether a hobby he has never had time for or using his skills to help his community. Hopefully in doing so, he will also establish social connections. He can use his free time to develop expertise in

Five-Year Plan

capital markets and so raise the returns on family investments. Year 3 (2013) Nancy will be 71 and should transfer her RRSP into a registered retirement income fund. She should use Max’s lower age for the withdrawal formula. That reduces the annual payout minimum and the taxes on it. Year 4 (2014) It is time to think about estate planning issues. It would be useful to consider transferring all assets except those with listed beneficiaries into a trust. Using the trust to reduce the value of their worldwide estate would help to shelter the Florida property from potential U.S. estate taxes. As well, the children, if appointed as co-trustees, could take over management of their parents’ affairs when the need arises, Mr. Moran advises. If a professional trustee is designated, the beneficiaries should have the power to discharge the trustee at will and hire another. Year 5 (2015) Nancy is 74, Max 70. It is time to consider how their good fortune and accumulated knowledge can help others. They might consider redire
cting some of their wealth to good causes of their choice.

Looking Ahead

Both Max and Nancy have elected survivor benefits in their public-service pensions. They will always have sufficient money for their own needs, so they should act on their own idea, which is to gift their taxable portfolio to their children now, Mr. Moran says.

Finally, as Max and Nancy move into their 80s, they may want to consider what fraction of their money should be in financial assets and what fraction in real assets, such as homes, that provide both useful services and exposure to potential capital gains. They can sell their Toronto house and buy a condo to reduce house maintenance chores. They might sell the house and live in their cottage. The choices are personal rather than financial, but downsizing will tend to increase their cash on hand.

Alternatively, Max and Nancy may prefer to use a professional portfolio manager at a cost of 1% to 1.5% of assets under management. The manager can work for Max and Nancy directly or for the trust if they choose that structure. Their problem will become one of security rather than absolute income.

“This couple’s problem is not financial, but one of embracing the opportunities and accepting the challenges of the latter decades of life,” Mr. Moran says. “If they focus on what they will become and achieve as opposed to what they were, retirement may yet be the best years of their lives.”

Copyright 2010, The Financial Post, Used By Permission