Lifestyle | Start fresh, elsewhere and with less income

Sandrine* has just dived. She wants to know if she can survive. She left the healthcare network last June to start a slow-paced independent practice. His income will plummet, too.

The situation

“It completely changes the reality of my retirement,” she says.

His job earned him an income of $44,000 in the first half of 2022. Since September, his small clientele, still scarce and fluctuating, has provided him with only $4,000.

The 50-year-old woman estimates that with three days and about ten customers a week, she could earn an independent income of about $36,000 a year.

“That means 40 clients a month to help. It’s a lot and I want to keep the price reasonable and accessible,” she explains.

“Fortunately, I was able to count on an inheritance to support me financially, as I am currently in deficit every month. »

Of this $58,000 inheritance, she put $25,000 in a tax-free savings account (TFSA) and kept the rest to do some renovations and cover her budget deficit.

Born in France, Sandrine moved to Quebec in 2001, at the age of 29. The long studies that followed and the birth of her son postponed her entry into the health network until 2012. “I find it difficult to assess how much I will receive once retired, because I will not have spent 40 years in Canada and I have only contributed nine years to RREGOP [Régime de retraite des employés du gouvernement et des organismes publics] “, she expresses.

Next September, his son will begin university studies in the region. Seeing an opportunity to start anew, she put her condo up for sale in order to acquire a less expensive property in the city where he will study.

After paying off the mortgage balance of $115,000 on the condo, which she estimates is worth $565,000, acquiring a new property for about $350,000, paying all the expenses and finally buying an $8,000 used car, she estimates he will have about $55,800 left.

To this sum will soon be added a second part of the inheritance of $110,000.

His prospective budget in his future home is $3,853 per month, including an $800 provision for taxes. She opposes income of $3,380, which includes the small pension of approximately $375 per month paid to her by the father of her child. In short, it foresees a deficit of $5,700 per year, which it intends to cover by drawing on its liquid assets of $166,000.

“My big question is how to finance the $6,000 I need per year without penalizing my retirement too much and keeping an emergency fund for the house,” she says.

Sandrine hopes to continue working three days a week until she turns 65.

As of December 31, 2021, six months before leaving her job, her statement of participation in RREGOP indicated that she had accumulated a pension of $7,700 from the age of 65.

The income recorded up to now in the Québec Pension Plan will provide him with a monthly pension of $334 at age 65.

She estimates that her pension rights accumulated in France will earn her an annuity of $5,000 per year from the age of 62, “or 64 if the bill passes”.

Will his project hold up to this small town?

The answer

Obviously, they used all the tricks and tricks of the trade to solve the problem.

“We are magicians! laughs Nathalie Bachand, financial planner at Bachand Lafleur Groupe conseil, who tackled the challenge with her colleague Mélanie Beauvais.

Their first precaution consists in adjusting Sandrine’s budget by adding an envelope of $800 per year for the replacement of the car, planned in ten years.

The two planners thus round up her cost of living (without tax provision) to $37,500. However, Sandrine predicts a self-employed income of approximately $36,000, from which taxes, social charges and the double contribution to the RRQ will have to be subtracted for a self-employed worker (a little more than $4,000 for income of $36,000). . Even adding the tax-free pension of $4,524 paid by her ex-spouse, which will end when their son completes his university studies, a deficit is looming…

The change in ownership, with a positive balance of $55,800, and the imminent arrival of an inheritance of $110,000 should produce liquid assets of nearly $166,000.

It’s about using them wisely.

The two planners estimate that Sandrine has TFSA contribution room in 2023 of some $58,000. “As soon as she receives her inheritance, we bail out the TFSA,” advises Nathalie Bachand.

At the beginning of each year, as new contribution room is generated, the annual maximum of $6,500 (in 2023) will be transferred to the TFSA from non-registered investments.

They also suggest that Sandrine dip into her non-registered savings to contribute $5,000 to the RRSP each year.

“She does not have a very high tax rate, but since the RRSPs will be withdrawn before age 70 when her income will be very low, she will pay less tax than the amount saved,” observes Nathalie Bachand.

Cover this deficit that cannot be seen

Over the next few years, taking into account the tax deductions for her annual contribution of $5,000 to her RRSP, Sandrine should therefore widen a budget deficit of approximately $4,500.

He will be mopped up by drawing first on his non-registered investments, then on his TFSA when the latter have been entirely transferred there. With her contributions to the TFSA and retirement savings plan (RRSP), Sandrine will drain her savings by approximately $16,000 per year during the first seven years, that is, until her non-registered investments are exhausted.

At 62, or possibly 64 if Emmanuel Macron wins her case, she will begin to collect her French pension currently estimated at around $5,000. The planners have made the conservative assumption that it will be indexed until it becomes payable, and then remain stable thereafter. So much the better for Sandrine’s budget if this annuity turns out to be fully indexed.

At age 65, it is the RREGOP pension that will fall into his hands, at the rate of $8,100 per year. But not the QPP or the Old Age Security pension (PSV), however, which our planners suggest deferring to 70 to improve them.

Between the ages of 65 and 70, this shortfall will be made up by first drawing on Sandrine’s RRSP, whose withdrawals will be minimally taxed due to her low income.

In return, she will receive from the age of 70 higher public pensions, adjusted to the cost of living and guaranteed until her death.

For the QPP, the bonus is 0.7% for each month elapsed since his 65^e birthday, for a maximum of 42% at age 70.

“The deferral to 70 years would give $12,300 per year. His real bonus will not be 42%, but it is still profitable to postpone, ”calculates Mélanie Beauvais.

In the case of OAS, the pension is increased by 0.6% for each month of deferral, or 7.2% per year. But for Sandrine, who arrived in Canada at the age of 29, the question becomes more complicated.

At 65, she will have lived 36 years in the country, rather than the 40 years that would entitle her to the full pension. She would then receive 36/40 of the normal benefit.

It is very likely that years of residence in France will be recognized under the social security agreement between Canada and France, the planners point out. As a precaution, however, they assume that this agreement will not work.

This is where it gets complicated.

For each year that she postpones the PSV, Sandrine adds one year of presence in Canada: she will be entitled to 37/40 of the maximum benefit at age 66, 38/40 at age 67, etc.

At age 69, she reaches the full 40/40 ratio.

But she cannot accumulate the years of residence and the bonus. At age 70, she will obtain the best of the two formulas: either 36/40 of the maximum pension increased by 36%, or 40/40 of the maximum pension.

“The best scenario is to weight the pension over 36 years and add 7.2% per year,” notes Mélanie Beauvais.

The PSV is thus fixed at $10,100 at age 70.

From the age of 70, Sandrine will earn an income of around $35,500, less a minimal tax considering the socio-fiscal credits, “which is not very far from her current cost of living”, note our planners.

Depending on how her real cost of living changes – her son will eventually leave home – her savings will run out somewhere around age 75.

“She may slowly start to run up a small deficit because her pensions from France and the RREGOP are not fully indexed,” says Nathalie Bachand.

“But she has longer coverage because we have postponed her pensions,” adds Mélanie Beauvais.

This postponement will allow him to maintain 85% of his cost of living in the long term, argue the advisers.

Eventually, she can make up for her small deficit by reducing her expenses, borrowing against the value of her house or buying a smaller property.

* Although the case highlighted in this section is real, the first name used is fictitious.