Ben is 61 years of age. Karen is 55 years of age. They are wondering what type of retirement lifestyle their current assets and pension entitlements will generate for them.

Ben is 61 years of age. Karen is 55 years of age. They are wondering what type of retirement lifestyle their current assets and pension entitlements will generate for them.

Ben has approximately $700,000 in RRSPs. Karen has $400,000 in her RRSP. Ben has $40,000 in a TFSA. Karen has $60,000 in her TFSA.

They have two children, aged 25 and 23, who are still getting some help from their parents but should be self-sufficient in the long run.

They have a mortgage of approximately $500,000. They are paying $3,700 a month in mortgage payments. Their principal residence is worth approximately $2,500,000.

Ben’s salary is $90,000 a year and Karen’s salary is $75,000 a year. Their net income after tax is approximately $130,000.

What are the risks Ben and Karen must navigate in retirement?

Life Expectancy

Ben and Karen have a joint life expectancy of approximately 35 years. Life expectancy is one of the most misunderstood aspects of retirement income planning, yet it is one of the most important factors. Most people assume that life expectancy is the same as lifespan. This is not correct. Instead, life expectancy is the median number of years people of a particular age group will continue to live. In other words, 50% of a particular age group will die before this number of years and the other 50% will die after.

Thus, when planning for retirement, it is important to look beyond your life expectancy because there is a 50% chance that you will exceed it.

We have used Karen’s age 95 as their joint life expectancy in our illustrations.  Inflation

The inflation rate is usually measured by the year-over-year change in the consumer price index (CPI). It measures how much a “basket of commonly purchased goods and services” increases in price over time. For example, if the inflation rate was 3%, Karen would need an income of $126,000 in 20 years to buy the same basket of goods that you could buy today for $70,000. 

Stock Market Volatility

In retirement, you should be prepared for a stock market correction every single day. When you are working and accumulating retirement savings over long periods, stock market volatility is not a concern as long as your portfolio is properly diversified. One of the greatest risks in retirement planning, however, is having the stock market drop substantially just before or just after you retire. Proper diversification techniques alone will not offset this problem.

Spending Patterns in Retirement

There are three stages to retirement: the first is called the “Go-Go” stage, the second is the “Slow-Go” stage and the third is the “No-Go” stage. We would all like to spend most of our retirement in the “Go-Go” stage. This stage is typically very active as your energy is high and you are fulfilling your retirement dreams. The “Slow-Go” stage is when your energy starts to wane. Your health might not be a major factor, but you just don’t have as much energy as you did earlier in retirement. You probably have seen older relatives or friends go through this stage. The “No-Go” stage is when your activities are restricted because of health and other physical or mental impediments.

Typically, when individuals reach their mid-to-late retirement (the “Slow-Go” stage), we like to see their day-to-day living expenses met by government pensions (CPP and OAS), company pensions, and a personal pension plan (life annuity). You cannot outlive these income sources and they do not need to be managed. We believe the best time to buy a life annuity is in your late 70s. We also recommend that you use your registered funds (LIF, RRIF, etc.) as they are fully taxed on your death (they do pass tax-deferred to your spouse), and thus have less value to your eventual estate. For example, if Karen died today her entire RRSP balance would be taxed as income with up to 50% going to the government. You want to redeem your registered funds over your lifetime, if possible.

Results

If Ben and Karen retire at the end of the year, we estimate they could generate an after-tax, after-inflation income of approximately $59,000 per year. If they retire in two years’ time, we estimate they could generate approximately $70,000 per year. If they retire in four years’ time, we estimate they could generate approximately $80,000 per year of net spendable income.

The biggest issue that Ben and Karen face is the $44,400 they pay every year in mortgage payments. 

One solution is for them to sell their principal residence and move into a smaller property to relieve themselves of the mortgage.

If Ben and Karen want to keep the house, we would suggest we take the funds in the TFSA and pay down some of the mortgage. This would reduce their outstanding mortgage to approximately $400,000 and the payments to approximately $2,900 a month. If they increased the amortization to 25 years it would be reduced to approximately $2,650 a month.

Another strategy is to defer their property taxes and use these funds toward their mortgage. 

Property tax deferment is a low-interest loan program that helps qualified BC homeowners pay their annual property taxes on their principal residence. You must be at least 55 years of age to be eligible for this program. 

The current interest rate is 4.95%. The rate is set every April 1 and October 1 at the prime rate minus 2%. 

The property tax deferment program uses simple interest. You are only charged interest on the principal deferred amount that has been borrowed. You are not charged interest on top of interest.

If they used their TFSAs to pay the balance of the mortgage, then their retirement income would be reduced. 

They could generate approximately $57,000 per year of after-tax, after-inflation income if they retired at the end of this year, approximately $65,000 per year if they retired in two years’ time, and approximately $75,000 per year if they retired in four years’ time.

I would suggest they defer their CPP until they are 70 years of age. CPP increases with the rate of inflation and is the best form of longevity protection we have in Canada. You cannot outlive these payments.

I would suggest that they continue to work for two or three more years if they want to keep their principal residence.

I would suggest they continue to maximize their RRSPs until retirement. 

Any funds not being used to maximize their RRSPs should be put against their mortgage.