Sylvain* sees his next retirement coming with “a certain insecurity”. This is why he wants to take the problem backwards.
Aged 58, Sylvain plans to retire (well-deserved, of course) in five years.
“I realize that for my investments, I no longer have 10 to 15 years ahead of me to redeem myself if I ever go down,” he confides.
The cost of living doesn’t reassure him either. “Inflation hitting hard leaves me perplexed about how much each dollar saved for my retirement will be worth. »
Until a recent job change, he benefited from a defined benefit pension plan. This annuity, not coordinated with public plans, will amount to $1,800 per month without penalty from age 63.
“I felt very lucky, but the benefit is not indexed,” comments Sylvain. How much will this money be worth in 15 years? »
With his new employer, the retirement plan is defined contribution.
At 18% of his $101,000 salary, $18,000 goes into it each year. He currently has some $30,000 there.
In addition, he pays $300 of his salary each month into a workers’ fund, where he has accumulated $8,500.
Sylvain has $92,000 in TFSAs, $106,000 in RRSPs and $23,000 in cash.
His partner Carole, aged 57, earns an income of $40,000. Her employer contributes to a worker’s fund that will pay her $600 a month starting at age 65.
Both plan to receive their QPP and Old Age Security benefits at age 65.
According to their most recent QPP statements, Sylvain and Carole should respectively receive pensions of $1,200 and $750 per month at age 65.
They live in a condo worth about $300,000, fully paid for.
“I find it’s always difficult for people to go to a financial planner and say, ‘What’s your retirement budget?’ You make a budget and at the end of the day it tells you that you don’t have enough money or that you have a surplus, and you readjust and you readjust again,” says Sylvain.
“I would like to do the opposite, or adapt my budget according to what I will have as a monthly amount in retirement. »
Hence a preliminary question: “How much can I expect to have as a gross monthly sum (net if possible) at age 63? »
Then a subordinate question.
Sylvain has been asthmatic since childhood. “I already see my lung capacity showing small signs of weakness, which makes me wonder about my life expectancy: what age should be used for the calculations? »
And finally one last question: “I had already put $10,000 into my partner’s RRSP. Should I continue like this, given that his salary is lower, and maximize this vehicle to have better income splitting in retirement? »
Planner Martin Dupras, president of ConFor financiers, posed the problem in the sense intended by Sylvain.
“We will aim for uniform purchasing power, that is to say a net income indexed to inflation,” he indicates as a starting point.
Until what age?
Because of his asthma, Sylvain wonders about his life expectancy. How many candles will he blow out?
For a 65-year-old Quebec man, it was 19.6 years in 2022, which brings him almost to 85 years old.
“Life expectancy essentially corresponds to the age at which 50% of the members of a homogeneous group (of the same sex and age) are still alive,” explains Martin Dupras.
“Simply counting on life expectancy as the age of exhaustion of capital therefore implies putting in place a financial plan which has a 50% probability of not holding up”, in the unfortunate case where this person is part of the cohort of survivors.
In its 2023 Projection Assumption Standards, the Institute of Financial Planning (formerly IQPF) instead recommends using as the ultimate horizon the age at which there is only a one in four (or 25%) chance of still be alive – 94 years for a 58-year-old man and 96 years for a 57-year-old woman, according to IPF tables.
When it comes to a couple who share their pensions and retirement savings, we instead use the age at which there remains a 25% probability that one or the other of the two spouses is still alive. That’s 98 years for a couple in their fifties.
Given Sylvain’s state of health, should we subtract a few years from this deadline?
“Sylvain’s condition does not seem severe enough to me to justify a shorter disbursement period,” replies Martin Dupras. In other words, survival seems to me to be a greater financial risk to manage than death earlier than expected. »
In short, let’s be optimistic and aim far.
Martin Dupras therefore maintains uniform purchasing power until Sylvain’s 98th birthday, when the assets are exhausted.
Still based on IPF standards, it assumes a net annual return of 4% on assets and an annual inflation rate of 2.10%. Remember that these are rates that apply for the entire duration of the projection, and not only in these difficult years.
The planner also assumes that to reduce the tax burden, both spouses will share their eligible pension income – pension plan and RRIF withdrawals from age 65 – as well as QPP benefits.
In these calculations, Martin Dupras assumes that the latter will be affected from the age of 65, according to the wishes of Sylvain and Carole.
“New provisions of the QPP will come into force on January 1, 2024, which will possibly have the impact of encouraging the deferral of benefits after age 65,” underlines the planner.
As you approach age 65, new calculations may be made depending on this eventuality.
But under current conditions, “the assets held, the contributions planned between now and retirement, the annuities from private retirement plans and the government annuities will allow the couple to maintain a purchasing power of $62,500 for the entire duration of the projection,” he announces.
Income after taxes and indexed to inflation, specifies the planner.
Very good. But will the expenses be of the same order of magnitude?
Sylvain will still have to undergo the exercise he dreads: estimating his retirement budget.
If it exceeds this $62,500, other possibilities “could be analyzed, including working longer (including working part-time during retirement), saving more between now and retirement, monetizing the primary residence (which is ignored at this moment)”, says Martin Dupras.
To reduce the future tax hit, should Sylvain contribute to his partner’s RRSP rather than his own, the equivalent of the $300 he pays each month into a workers’ fund?
Given the gap between current taxable income and expected retirement income, this maneuver would likely yield benefits, indeed.
Minor benefits, though. The amounts involved are low – annual contributions of $3,600 for five years – and “we will already split, up to 50%, Sylvain’s retirement plan benefits and Sylvain’s RRIF withdrawals from the age of 65 », underlines Martin Dupras.
If Sylvain and Carole are de facto spouses, “in terms of risk management, a separation could have regrettable consequences on the amounts contributed to the spouse’s RRSP”, also warns our advisor.
If they are married or in a civil union, the amount paid into their spouse’s RRSP, like all their RRSPs, will be part of the family patrimony that can be shared in the event of divorce. “But in a common-law relationship, the money, the second it’s contributed, legally belongs to the other person. »
