A woman named Tatiana, at 64 years old, is facing a crossroads in her financial journey. With nearly $2 million in assets, she finds herself in a position where she can finally put her money worries to rest and focus on her well-being and her family. But here's where it gets controversial: despite her substantial savings, Tatiana is anxious about her future income and the potential impact on her retirement plans.
Tatiana's financial story is one of resilience and determination. Over the past decade, she has been relying on workplace disability benefits and Canada Pension Plan (CPP) disability benefits due to an injury sustained at work. Additionally, she receives her late husband's work pension and the CPP survivor benefit. However, as she approaches her 65th birthday this spring, her disability benefits will come to an end, replaced by her work pension and CPP retirement benefits, which she anticipates will be lower than her current income.
This drop in income has Tatiana concerned, and she's right to be cautious. Any decline in her income will likely be partially or fully offset if she starts receiving Old Age Security (OAS) at 65. Tatiana has two adult children from her first marriage, owns a mortgage-free condo, and has a cottage in a Prairie province. Her real estate and financial assets total an impressive $1,877,000.
Her short-term goals are clear: she wants to stop worrying about money, travel more, and help her family. She even plans to give an advance inheritance to her two children. Her retirement spending goal is set at $72,000 per year after tax, a significant increase from her current spending of approximately $39,500.
We sought the expertise of Warren MacKenzie, an independent financial planner based in Toronto, to analyze Tatiana's situation. Mr. MacKenzie, a chartered professional accountant, provided valuable insights.
According to Mr. MacKenzie, Tatiana's past financial struggles have left a lasting impression. "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. Despite her financial challenges, Tatiana has more than enough savings and investments to achieve all her financial goals. However, her worry about running out of money persists.
In his forecast, the planner has increased Tatiana's lifestyle spending to $75,000 per year after tax. At 65, Tatiana will begin collecting OAS benefits of approximately $740 per month and combined CPP benefits of $1,410 per month. She will also receive her work pension of $1,660 per month and her late husband's pension of around $3,000 per month, totaling $6,810 per month or $81,720 per year, all indexed to inflation.
In 2027, her first full year of retirement, Tatiana's revised cash outflow is projected to rise to $76,500 per year after inflation for basic lifestyle expenses, $11,300 for income tax, and $7,000 for a tax-free savings account (TFSA) contribution, resulting in a total cash outflow of approximately $95,000. Her pension income will also increase during this period.
The planner assures that any cash-flow shortfall will be covered by 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. With these tax credits and her pension and investment income, her tax liability is estimated to be approximately $11,300.
Tatiana considers making an additional registered retirement savings plan (RRSP) contribution to utilize some of her unused contribution room. However, Mr. MacKenzie advises against this, explaining that she doesn't have enough years left for the contribution to compound on a tax-deferred basis. After she starts collecting CPP, OAS, and later, RRIF withdrawals, she will be in a higher income tax bracket than she is currently.
Each year, Tatiana is advised to 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% higher benefit. However, if her life expectancy is lower due to her disability, it may be better to take CPP at 65, as she plans to do, the planner suggests.
Tatiana is dissatisfied with her condo and would prefer to purchase a small house, which could cost more than $600,000. She estimates that the operating costs would remain similar. The planner assures her that this move would not significantly impact her financial forecast. Regardless of whether she stays or moves, if Tatiana lives to be 100 years old, the size of her estate will remain approximately 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 assures her. Assuming a 2% inflation rate, a 2.5% return on her savings accounts, and a 5% 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 owns a cottage valued at $325,000, and one of her children is interested in owning it. She wonders how she can pass the cottage on to one child without seeming unfair to the other. The planner suggests a fair solution: since she also has a substantial sum in cash and savings accounts, she could ask each child to place a value on the cottage. The child who places the highest value on the cottage gets it, and the other child will receive an equal amount of cash.
Tatiana admits that she doesn't consider herself knowledgeable about investing and is concerned about the possibility of a severe market downturn. More than half of her investments are in high-interest savings accounts earning about 2.5% a year at current rates. She also has approximately $475,000 in mutual funds, with 85% invested 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," Mr. MacKenzie explains. He advises her to request such a report from her financial adviser.
Over the years, Tatiana's financial situation will continue to evolve, and Mr. MacKenzie emphasizes the importance of keeping her financial plan updated to ensure she remains on track to achieve her goals. Tatiana's plan is straightforward: gain a better understanding of her assets and how she can utilize them to meet her goals. The payoff? Peace of mind.
At 65, Tatiana's monthly after-tax income from all sources is projected to be $6,315, including investment income. Her assets include savings accounts ($400,000), cash ($176,000), RRSP ($252,000), tax-free savings account ($224,000), residence ($500,000), and cottage ($325,000), totaling $1,877,000. The estimated present value of her two defined benefit pensions is $1,100,000 (planner's estimate based on a 5% investment return).
Her monthly outlays include a condo fee ($400), property tax ($400), water, sewer, and garbage ($100), home insurance ($110), electricity, and heat ($190), security, and maintenance ($45), transportation ($370), groceries ($400), clothing ($20), gifts ($50), vacation, and travel ($300), dining, drinks, and entertainment ($230), personal care ($50), pets ($50), health care ($55), life insurance ($260), and phones, TV, and internet ($255). The total monthly expenses amount to $3,285, leaving a surplus of $3,030.
Tatiana has no liabilities, and her financial situation is stable and promising. With the right guidance and a well-planned strategy, she can achieve her goals and enjoy a comfortable retirement. And this is the part most people miss: it's not just about the numbers; it's about finding peace of mind and the freedom to pursue the life you desire. So, what do you think? Is Tatiana's financial journey inspiring, or do you have a different perspective? Feel free to share your thoughts and insights in the comments below!
