Ann-Marie owns a condo worth about $950,000 that still has a $345,000 mortgage, and has saved diligently over the years.Galit Rodan/The Globe and Mail
Ann-Marie is 60 years old and works for the federal government, earning a salary of $125,000 a year.
She belongs to a defined benefit pension plan that will pay $68,338 a year, indexed to inflation and including a bridge benefit to age 65. When the bridge benefit ends, her pension will fall to $61,430.
Ann-Marie lives a modest lifestyle, spending about $64,000 a year, including her mortgage and housing expenses, but excluding savings.
She owns a condo worth about $950,000 that still has a $345,000 mortgage. She has saved diligently over the years, building up $473,000 in her registered retirement savings plan (RRSP) and $62,845 in her tax-free savings account (TFSA).
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Looking ahead, she hopes to retire at age 62 with an after-tax spending goal of $100,000 a year. This would give her enough to maintain her lifestyle, join a sports club, explore hobbies, and help her aging parents if they need financial support.
With these goals in mind, Ann-Marie is asking two key questions: Should she retire before age 65 to take advantage of the bridge benefit in her pension? Should she sell her condo, invest the proceeds, and rent a place that costs less?
We asked Thuy Lam, a certified financial planner with advice-only Objective Financial Partners Inc. in Markham, Ont., to look at Ann-Marie’s situation.
What the expert says
Ann-Marie’s pension statement shows her normal retirement age is 65, but she has the option to start her full pension, with no reduction, as early as age 60.
That means she can stop working at 62, as she plans, and not have a reduction in the pension.
“It’s worth noting that most defined-benefit pension plans don’t give you extra money if you retire and delay the pension payments once you have passed the unreduced date. So, starting her pension when she retires at 62 probably makes sense,” Ms. Lam says.
The longer Ann-Marie waits to start her Canada Pension Plan (CPP) and Old Age Security (OAS) benefits, the higher those payments will be, and neither affects her bridge benefit.
In 2028, her first full year of retirement, Ann-Marie’s income will break down as follows: Pension $69,700, RRSP withdrawal $40,000, and non-registered withdrawal of $32,400, for a total before-tax income of $142,100 and taxable income of $125,600. Subtracting TFSA contribution of $7,500, income tax of $28,200 will leave her with $106,400, in line with her inflation-adjusted spending target.
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The second major question is whether Ann-Marie should keep her condo or sell and rent. If Ann-Marie keeps her condo after retiring, projections show she is expected to run out of financial assets by age 67 if she tries to meet her $100,000 a year spending goal, Ms. Lam says.
“At that point, she would need to unlock the value of her condo – likely by selling it or borrowing against it with a home equity line of credit.”
On the other hand, if Ann-Marie sells her condo when she retires, the picture will change dramatically. After paying off her mortgage and covering selling costs, she would be left with about $630,000 in cash, the planner says. After funding her spending needs, if she tops up her TFSA and invests the rest in a non-registered account, her money is projected to last for her lifetime.
“In fact, by age 95, she could still have an investment balance of around $815,000.”
That assumes a rate of return on a balanced portfolio averaging 4.8 per cent a year net of fees and an inflation rate of 2.1 per cent.
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From a cash flow perspective, renting could also improve Ann-Marie’s flexibility. Right now, her condo costs her about $3,500 a month, which includes mortgage payments and condo fees. If she rents instead, she feels she could likely find a suitable place for $2,500 to $3,000 a month. That would free up $500 to $1,000 a month – money that could either be invested for her future or spent on activities that bring her joy, like travel, hobbies, or supporting her parents, the planner says.
“In short, selling the condo gives her a larger pool of investable assets earlier and lowers her monthly expenses,” Ms. Lam says. “Both benefits improve her chances of enjoying a long and secure retirement.”
Though renting often looks like the simpler solution, it comes with trade-offs Ann-Marie should consider, the planner says. Ann-Marie could face higher housing costs later in life when she’s on a fixed income. Renters face risks such as the landlord selling or not renewing leases.
“It’s important for Ann-Marie to consider housing that may be geared for retirees to provide more stability as a renter,” she says. “There may even be a hybrid solution with a downsize that pays off her mortgage and lowers her home ownership costs in a smaller condo.”
While Ann-Marie’s overall financial outlook is strong, there is another challenge she faces: she is a single-income retiree. Unlike couples, she doesn’t have the ability to split income with a spouse, which means more of her income will be taxed in her own hands.
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Between her defined benefit pension, bridge benefit, CPP, OAS, and eventual RRSP/RRIF withdrawals, Ann-Marie will have a fairly predictable – and mostly taxable – income stream. This could put her in a high tax bracket and even expose her to OAS clawback, where part of the OAS benefit is reduced for higher-income seniors.
To manage this, Ann-Marie could consider an RRSP meltdown strategy: drawing down some of her RRSP in the early years of retirement, before CPP and OAS begin, to smooth out taxable income across her lifetime.
She should delay CPP and/or OAS. By waiting until age 70, these benefits increase substantially, and she could reduce the risk of OAS clawback while ensuring a higher indexed income later in life. Deferring benefits to age 70 would increase CPP by 42 per cent and OAS by 36 per cent. This could be particularly beneficial if Ann-Marie’s health and longevity are good, especially if her investment risk tolerance is low.
Since TFSA withdrawals are tax-free, continuing to build this account provides increased flexibility. Ann-Marie has done an excellent job preparing for retirement. With a solid pension, meaningful savings, and valuable home equity, she is well-positioned to achieve her goals.
Client situation
The person: Ann-Marie, 60.
The problem: Can she afford to retire when she is 62 and still achieve her spending target? Should she sell her condo and rent?
The plan: Selling the condo will be key to achieving her retirement spending goal. She may also want to defer government benefits to age 70.
The payoff: Goals met without having to worry about running out of savings.
Monthly after-tax income: $8,055.
Assets: Bank $11,035; RRSP $473,000; TFSA $62,845; residence $950,000. Total: $1.5-million.
Estimated present value of her pension: About $950,000. This is what someone with no pension would have to save to generate the same income.
Monthly outlays: Mortgage $2,155; condo fee $735; property tax $415; home insurance $81; electricity $75; garden $20; transportation $100; groceries, clothing $260; gifts, charity $105; vacation, travel $300; dining, drinks, entertainment $600; personal care $200; subscriptions $60; health care $10 (covered mainly by employer); phones, TV, internet $200; RRSP $375; pension plan contributions $1,056. Total: $6,747. Surplus goes to unallocated spending and saving.
Liabilities: Mortgage $344,590 at 4.29 per cent.
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Some details may be changed to protect the privacy of the persons profiled.