In British Columbia, a nurse we'll call Martha is 58. Divorced for nearly two decades, she has three children who have left home and established lives of their own. Her taxable income of $67,900 is ample for her current needs but, she worries it is not enough to pay off her $44,000 line of credit and enable her to travel in Europe.
"Some days I feel lucky to have what I have and other days I panic that I don't have nearly enough," Martha says.
What our expert says:
Facelift asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Martha in order to plan her retirement.
"She questions the concept of retirement," Mr. Moran explains. "She observes that some who have retired have unfulfilling lives. Her perfect scenario would be maintaining her current way of life for as long as she is able with a little more freedom. She knows that her brain will stay sharper and the length of her years of high-quality living will be longer if she continues to be intellectually challenged. From a financial perspective, the longer she works, the less she will have to be concerned about having enough money."
Martha's retirement will be more comfortable if she eliminates her line of credit. The debt, secured by her home, amounts to a mortgage. She can stretch payments to the end of her working life, but she could also discharge the debt over three years by paying $1,317 a month or over four years at $1,012 a month, assuming her interest rate stays at 5 per cent. Her current monthly savings, $1,820, is sufficient to pay off the line of credit within a few years. Given that interest rates will eventually rise, it would be helpful to pay it off within a few years, Mr. Moran advises.
Martha has a substantial asset in her defined benefit pension with optional indexation at the discretion of the employer. Payments have been raised to compensate for inflation for three decades, but it remains up to the employer to make additional contributions.
At age 61, she will be eligible for a benefit of $1,875 a month plus a $530 monthly payment until age 65. At that time, she will be eligible for Canada Pension Plan payments. Assuming Martha will have earned 85 per cent of the maximum Canada Pension Plan benefit by age 65, she would be eligible for benefits of $9,023 a year. The benefit is indexed and taxable. Martha will also be eligible for full Old Age Security payments of $6,028 a year. Those payments are also indexed and taxable.
Martha's registered retirement savings plan has assets of $104,000. If invested to produce a 6-per-cent annual return, then adjusted for inflation running at 3 per cent a year, her RRSP would grow to $127,907 in 2008 dollars at age 65. She generates $4,200 of RRSP space after adjustment for her employment pension and has $9,900 of RRSP space that she can use. She can add $468 per month - that's $9,940 plus seven years of new contribution space divided by 12 - to use up her RRSP capacity by retirement at age 65. If she makes full use of her RRSP saving capacity, her RRSP would grow to $171,000 by age 65 in 2008 dollars. That capital could support a payout of $9,818 a year, also in 2008 dollars, Mr. Moran calculates.
Martha could generate more retirement income from her RRSP investments by moving her money to mutual funds with lower management fees than she now pays.
She should also rebalance her portfolio, which is 75 per cent in bonds, to increase exposure to equities. Given that most of her retirement income is already in defined benefit and government pensions, she can afford a little more risk. Moving to 50-per-cent stock and 50-per-cent bonds would be reasonable for Martha, Mr. Moran explains. If Martha retires at age 65, she will have a total average annual income of $9,023 of CPP benefits, $6,028 of OAS, $9,818 of RRSP or RRIF income, and $30,168 from her employment pension. That's a total of $55,037 a year or $4,586 a month before tax. That is slightly more than her present monthly take home income of $4,489.
Martha should have paid off her line of credit. She will no longer make RRSP contributions or pay employment insurance premiums. There will be no work-related expenses such as commuting costs. She will be eligible for seniors' discounts on property tax, age credits and pension credits on her tax return. She should have as much or more disposable income in retirement than she has now, Mr. Moran suggests. And if she continues to work part-time, her income will be even higher.
"Martha is an example of changing attitudes toward retirement," Mr. Moran says.
"She has a career that she likes. At 65, she will have enough money to maintain her way of life, but she can travel more, and she feels, give more to her community if she keeps her profession and her job."
Martha, 58, a nurse in British Columbia.
Retirement anxiety: whether to just keep on working.
Do a feasibility test of retirement income, maximize RRSP contributions.
More disposable income in retirement than Martha now has.
Net Monthly Income
House $575,000, RRSP $104,000, cash $10,400, car $17,000. Total: $706,400.
Food $400, property taxes $143, utilities $400, home maintenance & garden $300, home insurance $65, critical illness insurance $71, car insurance $95, auto maintenance & fuel $200, RRSP $100, clothing $100, entertainment $30, travel $200, gym membership $30, cleaning service $130, pet care $30, charity & gifts $125, line of credit $250, savings $1,820. Total: $4,489.
Line of credit $44,000.
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