At 50, it’s time for assessments for Nathalie* and Stéphane*. Do they have to find a second job to reach their retirement goal at 65? Will they work for nothing because of the tax to pay, as their friends say?
The situation
“We are 1973 editions. We are going to be 50 this year,” writes the couple who have a 14-year-old boy.
From generation X, Nathalie* and Stéphane* say that they studied at university in human sciences without knowing if they were going to get a job once they graduated.
“The first 10 years in the job market were difficult, with no job security, no retirement funds, working 70 hours a week to find our place,” they recall. Ten years also to repay our student loans, a long time at 6% interest. »
Nathalie and Stéphane relate that they slowly accumulated RRSPs and other savings to finally, at age 40, become homeowners.
“For five years, we have managed to earn $80,000 a year. A great success for us. »
Fifty-somethings now want to check with an expert how much they need to reach a retirement goal at age 65. They want to finance the same cost of living as at present, that is $100,000 net per year, even if this amount currently includes $20,000 in savings.
“For several years, and even more so with inflation, I have had to financially help my parents who made bad life choices,” Stéphane explains over the phone. I’m not sure how to manage to save more, except by working more. »
“Our friends keep saying it’s not worth it, because the extra $5,000 each we plan to earn will completely disappear in taxes.” I doubt. »
Stéphane specifies that there has not been a salary increase in his organization for 10 years and that the salaries offered in his field never keep up with inflation. It’s for this reason that the couple is considering working seven extra hours a week for 10 years by answering one of the many “We’re Hiring” near their home.
Unless it’s more advantageous to give a big blow next year by getting $27,000 more each?
Numbers
Natalie*, 50 years old
Salary : $84,000
QPP estimated at age 65: $1471
Defined Contribution Pension Plan: $208,000
RRSP: $233,000 (available space : $54,000)
TFSA: $7100 (available space : $85,000)
Not registered: $14,000
RAP reimbursement until 2029: $1600
Mortgage balance: $130,000
House value: $300,000
RESP: $25,000
RESP catch-up until 2025: $15,000
Stéphane*, 50 years old
Salary : $88,000
QPP estimated at age 65: $1145
Employer’s pension at age 65: $21,000
RRSP: $285,000 (available space : $45,000)
TFSA: $73,000 (available space : $25,500)
Not registered: $22,000
Advice
Jacinthe Faucher, financial planner, notary and tax specialist at the Société de services financiers Fonds FMOQ, imagined a dozen scenarios to answer the couple’s questions.
Beyond savings, the element that exerts a considerable influence for fifty-somethings, she underlines, is the supplementary pension plan of Stéphane’s employer. The $21,000 he will receive from the age of 65, which is added to federal and provincial pensions, will ensure that the couple are housed and fed.
In all of her scenarios, the tax specialist applied pension income splitting. Thus, the couple will never have to repay the Old Age Security pension, because retirement income will always remain below the threshold established by the federal government. This year, the threshold starts at $86,912.
PHOTO PASCAL RATTHÉ, THE PRESS
Jacinthe Faucher, financial planner, notary and tax specialist at the Société de services financiers Fonds FMOQ
Income splitting is so important. It makes a big difference to allocate some of the higher income from one couple to the other in the tax return.
Jacinthe Faucher, financial planner, notary and tax specialist at the Société de services financiers Fonds FMOQ
As Stéphane has a retirement fund from the age of 65, he benefits from the credit for pension income. “In some cases, you have to withdraw RRIFs to get that benefit,” explains the tax specialist.
Possible scenarios
By taking provincial and federal pensions at age 65, disbursing TFSAs until age 71, then RRSPs converted into RRIFs at age 71, Nathalie and Stéphane will have an annual income of $95,204 until they are 96 and 94 years old.
An interesting amount, but the desired objective is not achieved.
By modulating the annual income, the planner succeeds in proposing a second option. Nathalie and Stéphane could enjoy an annual income of $103,520 until age 85 and then live on $80,000. “Generally, we benefit more from travel and leisure before the age of 85. »
Since we always say that it is worth postponing government pensions to 70 years, Jacinthe Faucher postponed that of the federal government to 70 years in the third scenario. The annual income then climbs to $96,004.
“I agree with the postponement for someone who lacks money. However, it is necessary to live between 12 and 15 years more to compensate for the 5 years that one does not touch from 65 to 70 years. I let people decide, but I prefer to play with taxation than with life expectancy. »
Would the couple benefit from repaying the mortgage more quickly? No, because the annual income drops to $93,604.
In a fifth scenario, the planner transforms Nathalie and Stéphane’s non-registered investments into TFSAs in 2023. Result: Annual income remains at $95,204, but they get $20,000 more. “It pays for a trip and part of the cost of living,” she says.
Work for nothing, really?
In her sixth scenario, the tax expert makes Nathalie and Stéphane work 7 hours more per week at minimum wage for 10 years, as they proposed. Fifty-somethings therefore find themselves with $5,550 in additional income each.
“Of course there is tax to pay, but it allows them to save $3,409 each in a TFSA for 10 years. Annual income climbs to $98,404. We’re close to $100,000 for life. »
Natalie, with a 38% marginal rate, pays $2,114 in taxes. Stéphane, with a 39% marginal rate, pays $2,167. So they don’t work for nothing. They get $3436 and $3383 net in their pockets.
Would it be more tax-efficient to earn $27,750 each more in 2024, such as a bonus or a special contract? No, because they would pay more taxes. In this scenario, they owe $10,876 and $10,538 in taxes on the $27,750.
They also find themselves with $17,000 to invest rather than the $3,409 over 10 years.
Where to find the $102,000?
This is the amount that is missing in order to reach the objective of a desired annual income of $100,000.
Here are the options suggested by the planner to achieve this: review the budget, work more to save in a TFSA $7,500 per year for 13 years or $10,258 for 10 years, try to obtain a rate of return of 3.95% before retirement and 3.09% after retirement rather than the 3.45% suggested by the IQPF for the calculations.
“They could also say: we opt for the scenario that provides an income of $103,520 until age 85 and we remove the pressure to work more at age 50. »
By deferring the two government pensions to age 70, the annual income reaches $98,000 without additional work or savings. $49,684 is missing to reach the goal.
What if yields stagnate at -1%? In this darker scenario, the income provided would still correspond to $86,400.
With all these scenarios in hand, Nathalie and Stéphane can now choose how they will carry out the second part of their lives.
*Although the case highlighted in this section is real, the first names used are fictitious.