Tatiana has two adult children from her first marriage, a mortgage-free condo and a cottage in a Prairie province.Shannon VanRaes/The Globe and Mail
Tatiana is 64 years old and on her own again. For the past decade, she’s been collecting workplace disability benefits and Canada Pension Plan (CPP) disability benefits as the result of an injury at work. In addition, she gets her late husband’s work pension and the CPP survivor benefit.
This spring, when Tatiana turns 65, her disability benefits will cease. They will be replaced by her work pension and the CPP retirement benefit – amounts she says will be lower than what she is getting now.
She is worried about the drop in income. Any decline would likely be partly or entirely offset if she begins taking Old Age Security (OAS) at 65.
Tatiana has two adult children from her first marriage, a mortgage-free condo and a cottage in a Prairie province. Her real estate and financial assets total $1,877,000.
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Her short-term goals are to “stop worrying about money,” travel more and help her family. She also wants to give an advance inheritance to her two children.
Her retirement spending goal is $72,000 a year after tax, compared with about $39,500 now.
We asked Warren MacKenzie, an independent Toronto-based financial planner, to look at Tatiana’s situation. Mr. MacKenzie holds the chartered professional accountant designation.
What the Expert Says
Tatiana has faced financial hardship in the past, and it has left a lasting impression, Mr. MacKenzie says. “At age 24, she was divorced and raising two children with no financial support from her ex-husband.” She remarried later but is now widowed.
Tatiana has more than enough savings and investments to achieve all her financial goals, but she still worries about running out of money.
In preparing his forecast, the planner has increased Tatiana’s lifestyle spending to $75,000 a year after tax.
At 65, Tatiana will begin collecting OAS benefits of about $740 a month and combined CPP benefits of $1,410 a month. She will receive her work pension of $1,660 a month and her late husband’s pension of about $3,000 a month, for a total of $6,810 a month or $81,720 a year, all of which is indexed to inflation.
In 2027, her first full year of retirement, Tatiana’s revised cash outflow is projected to have risen to $76,500 a year after inflation for basic lifestyle expenses, $11,300 for income tax, and $7,000 for a tax-free savings account (TFSA) contribution, for a total cash outflow of about $95,000. Her pension income will have risen as well.
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Any cash-flow shortfall will come from her non-registered investment portfolio.
When she files her tax return in 2027, Tatiana will be eligible for both the disability tax credit and the age credit, the planner says. With her tax credits and her pension and investment income, her tax liability will be about $11,300, he says.
Tatiana wonders if she should make an additional registered retirement savings plan (RRSP) contribution to use up some of her unused contribution room.
“This is not recommended because she does not have all that many years for the contribution to compound on a tax-deferred basis,” Mr. MacKenzie says. After she starts collecting CPP, OAS and later, RRIF [registered retirement income fund] withdrawals, she will be in a higher income tax bracket than she is now.
Each year, Tatiana should use funds from her high-interest savings account to contribute to her TFSA.
If Tatiana expects to live well into her 80s, it might make sense to delay CPP until age 70 to take advantage of the 42-per-cent higher benefit. “But if her life expectancy is lower because of her disability, it may be better to take CPP at 65, as she plans to do,” the planner says.
Tatiana is dissatisfied with her condo and would prefer to buy a small house that could cost more than $600,000. She estimates the operating costs would be about the same.
The move would not have a meaningful effect on her financial forecast, the planner says.
“Regardless of whether she stays or moves, if Tatiana lives to be 100 years old, the size of her estate will be about the same.”
Tatiana may eventually decide to sell her home and move to a retirement home. The sale proceeds, along with her pension income, “will be more than sufficient to fund a nice retirement home,” Mr. MacKenzie says.
Assuming a 2-per-cent inflation rate, a 2.5-per-cent return on her savings accounts and a 5-per-cent rate of return on her investments, she’d still be on track to leave more than $1-million (in today’s dollars) to each of her two children, he says.
Tatiana has a cottage valued at $325,000 that one of her children is interested in owning. “She wonders how she can pass the cottage on to one of her children while not seeming to be unfair to her other one,” the planner says. “Since she also has a substantial sum in cash and savings accounts, one way to be fair to both children would be to ask each of them what value they place on the cottage,” he says. “She could explain that the child who places the highest value on the cottage gets it, and the other child will get an equal amount of cash.”
Tatiana does not consider herself knowledgeable about investing, Mr. MacKenzie says. “She is concerned about the possibility of a severe market downturn.”
More than half of Tatiana’s investments are in high-interest savings accounts earning about 2.5 per cent a year at current rates. She also has about $475,000 in mutual funds that hold 85 per cent in equities and the remainder in balanced funds.
“She does not know if her financial adviser is delivering value because she does not receive a report that shows her performance compared to the proper benchmark.” She should ask for one, he says.
Over the years, Tatiana’s financial situation will continue to change, Mr. MacKenzie says. “For her to enjoy retirement, she will need to keep her financial plan updated to confirm that she still is on track to achieve her goals.”
Client Situation
(Income, expense, asset and liability numbers are provided by the applicant)
The People: Tatiana, almost 65, and her two children, 40 and 46.
The Problem: Some of her income sources will drop when her disability benefits cease, and she is worried about running out of money.
The Plan: Get a better understanding of her assets and how she can use them to meet her goals.
The Payoff: Peace of mind.
Monthly after-tax income, all sources, at 65: $6,315, including investment income.
Assets: Savings accounts $400,000; cash $176,000; RRSP $252,000; tax-free savings account $224,000; residence $500,000; cottage $325,000. Total: $1,877,000.
Estimated present value of her two DB pensions: $1,100,000 (planner’s estimate based on a 5-per-cent investment return.) This is what someone with no pension would have to save to generate the same income.
Monthly outlays: Condo fee $400; property tax $400; water, sewer, garbage $100; home insurance $110; electricity, heat $190; security, maintenance $45; transportation $370; groceries $400; clothing $20; gifts $50; vacation, travel $300; dining, drinks, entertainment $230; personal care $50; pets $50; health care $55; life insurance $260; phones, TV, internet $255. Total: $3,285. Surplus: $3,030
Liabilities: None.
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