Sheila’s retirement spending target after the mortgage on her home is paid off is $80,000 a year after tax.Christopher Katsarov/The Globe and Mail
Sheila is single, almost 56 years old and a recent empty nester, with four kids in postsecondary school or living on their own, she writes in an e-mail. “I’m thinking about retirement and wondering what my financial future looks like.”
Sheila earns about $187,000 a year in salary, bonus and incentives. She has a small Canada Pension Plan survivor benefit of $5,150 a year.
In the short term, she wants to support her children through university, travel to Europe and do some repairs to her small-town Ontario house. She also owns a rental property with her four children – she owns 60 per cent, the children 40 per cent. Both properties have mortgages outstanding.
“Can I retire comfortably at age 62 or do I have to work longer?” Sheila asks. “Will I have to sell my house and downsize in order to do that?”
Her retirement spending target after the mortgage on her home is paid off is $80,000 a year after tax.
We asked Nushzaad Malcolm, a certified financial planner at Henderson Partners LLP in Oakville, Ont., to look at Sheila’s situation.
What the Expert Says
Sheila should be able to retire comfortably at 62 without having to sell either of her properties provided she keeps to her savings targets and does not substantially increase her spending, Mr. Malcolm says. She would benefit from increasing her principal residence mortgage payment when it is up for renewal, the planner says.
Two of Sheila’s children have three years of postsecondary education remaining, one will graduate this spring and the oldest has finished school. They are living on their own and are mostly self-sufficient. Sheila has enough to pay for their educations in their registered education savings plan.
The analysis assumes the inflation rate will be 6.8 per cent for two more years. “After two years, the assumption is that we shift back to the longer-term Bank of Canada inflation target of 2 per cent,” Mr. Malcolm said.
It is also assumed that Sheila saves and invests her surplus cash flow and that her investments earn a return of 5 per cent a year after fees and before taxes, which is in line with the long-term balanced portfolio rate of return.
Sheila has RRSP deduction room of $50,000 (2022). She has opted to maximize her defined contribution pension contributions (3 per cent of salary) and receives a full match from her employer. This adds $9,000 to her DC pension annually, the planner says.
“On top of this, she has recently elected to have her bonus paid into her DC pension plan, resulting in an additional $22,000 contribution.”
Sheila also makes her own contributions to her RRSP of $6,000 a year.
“Thus, her registered contributions (excluding her tax-free savings account) total $37,000 a year,” Mr. Malcolm said. The expectation is that her RRSP room will be reduced by 2025 and that she will have to reduce her contributions by about $4,000 a year in 2025 and onward.
“Maintaining this level of contributions throughout her employment is crucial in ensuring that she can meet her retirement goals,” the planner said. Because Sheila’s marginal tax bracket is about 48 per cent, each dollar of contribution will provide as much as a 48-cent reduction of her tax bill. For Sheila, the tax savings can be as much as $15,600 each year.
Sheila typically contributes $6,000 a year to her TFSA, which has a balance of $23,635. She is expecting an inheritance of $24,000 that she intends to move into her TFSA, increasing the balance to $47,635. If she still has some contribution room left after the inheritance, she could opt to use up her remaining room with either a cash contribution or by transferring some non-registered assets into her TFSA, Mr. Malcolm says.
“She should be selective about her transfers, opting to move securities that have minimal to no embedded capital gain,” he said. If the securities are at a loss, she should not transfer them directly; rather, she should sell them, transfer the cash and repurchase them after 30 days (to avoid having the loss denied).
“Going forward she can prioritize maximizing her TFSA room,” the planner said.
Sheila expects to finish paying off her personal line of credit (1.89 per cent) by March, 2024. Once it has been repaid, she will have additional cash flow of $11,752 a year. Sheila’s home mortgage has an interest rate of 1.87 per cent and biweekly payments of $900. It will come due in November, 2025, by which time the planner assumes the rate will increase to 5 per cent for the remainder of her amortization. Barring any additional prepayments, the mortgage would be paid in full by December, 2037, when Sheila will be 71.
“Given the anticipated increase in interest costs (which are non-deductible), we recommend increasing the payment by $692 biweekly upon renewal,” Mr. Malcolm said. This would increase the mortgage payment from $23,400 a year to $41,400, resulting in a full repayment by 2031, when Sheila will be 65.
Sheila has a mortgage on the rental property with a 5.45-per-cent interest rate. She pays $540 biweekly. The mortgage will be paid off by April, 2044, the planner says. The property is slightly cash-flow positive. The interest paid is tax-deductible against the rental income claimed on Sheila’s tax return. Because she owns 60 per cent of the rental, and her marginal tax rate is 48 per cent, she is able to claim about $5,669 of the mortgage interest, reducing her taxes by $2,721.
Sheila is considering starting Canada Pension Plan benefits when she retires at the age of 62. “The break-even math indicates that it is financially a better decision if her life expectancy is lower than age 76 and financially a worse decision if she lives beyond age 76, which is likely,” Mr. Malcolm said. It is important to note that taking CPP earlier than the age of 65 results in a 7.2-per-cent reduction per year; in Sheila’s case, that would be 21.6 per cent. Taking CPP later than 65 results in an increase of 8.4 per cent per year, so delaying until the age of 70 will increase CPP by 42 per cent.
“Sheila can use her lower-income retirement years (62 to 69) to deregister her RRSP, locked-in retirement account and defined contribution pension at lower tax rates,” the planner said.
Sheila also plans on starting Old Age Security benefits at 65. “If instead she chooses to delay her OAS, 7.2 per cent more can be received each year, with a delay to age 70 resulting in a 36-per-cent increase in benefits,” he said.
Assuming she does retire at 62, Sheila is able to meet all her major purchase objectives and can retire fairly comfortably, Mr. Malcolm says. “It is important that she continues to earn her salary until retirement, keep to her savings targets and not drastically increase her lifestyle expenses.”
She can leave the real estate as an inheritance for her children without having to sell either of the properties. She’ll have enough liquid assets remaining at the plan’s end ($505,000 in future dollars at the age of 95) to cover her estimated final tax bill ($269,000 in future dollars) and probate fees ($62,000 in future dollars).
Client Situation
The person: Sheila, age 56, and her four children
The problem: Can she retire comfortably at 62 without having to sell her home or her jointly held rental property?
The plan: Sheila keeps to her savings targets, maintains her income and does not substantially increase her monthly expenditure. She may want to increase the payments on the mortgage for her principal residence when it comes up for renewal.
The payoff: A comfortable retirement without financial hardship and the ability to leave an inheritance for her four children.
Monthly net income: $12,664
Assets: Principal residence $1,600,000; rental property $240,000; bank account $1,500; non-registered account $15,000; TFSA $23,635; RRSP $303,632; locked-in retirement account $135,486; registered education savings plan $65,845; DC pension $27,155. Total: $2,412,253
Monthly outlays: Mortgage $1,950; property tax $604; home insurance $122; utilities $324; maintenance $100; transportation $798; groceries and clothing $400; line of credit $979; vacation $300; charity $30; personal care $125; dining out and drinks $130; entertainment $130; life-insurance premiums $202; cellphone/cable/internet $826; children’s education expenses $1,500; non-registered savings $936; TFSA contributions $500; RRSP contributions $500; DC pension contributions $375; DC pension voluntary contributions $1,833. Total: $12,664
Liabilities: Residence mortgage $267,379; rental mortgage $178,198; line of credit $13,419. Total: $458,996.
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