Sylvain* sees his next retirement coming with “a certain insecurity”. This is why he wants to take the problem backwards.
The situation
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 which is hitting hard leaves me perplexed about the value that each dollar saved for my retirement will be worth. »
Until a recent job change, he benefited from a defined benefit pension plan. This pension, 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 the rate of 18% of his salary of $101,000, $18,000 is paid there 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. His employer contributes to a workers’ fund which will pay him $600 per month from 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.
NUMBERS
Sylvain, 58 years old
- Salary: $101,000
- QPP pension at age 65: $1,200/month
- Defined benefit retirement annuity: at age 63, $1,800/month, non-indexed
- RRSP: $106,000
- TFSA: $92,000
- Workers’ fund: $8,500
- Unregistered savings: $23,000
- Defined contribution pension plan: $30,000 in cash
Carole, 57 years old
- Salary: $40,000
- RRSP (spouse contribution): $10,000
- QPP pension at age 65: $750/month
- Retirement pension at age 65: $600/month
Condo
Value of $300,000, fully paid
Planning backwards
“I find it’s always difficult for people to go to a financial planner and say, ‘What is 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 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 in 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? »
The answer
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?
How many candles?
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 his 2023 Projection Assumption Standardsthe Institute of Financial Planning (formerly IQPF) recommends instead using as the ultimate horizon the age at which one has only one chance in four (or 25%) of still being alive – 94 years for a man aged 58 and 96 years for a woman aged 57, according to the 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 is 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.
Indexed purchasing power
Martin Dupras therefore maintains uniform purchasing power until 98e Sylvain’s birthday, time when assets run out.
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 – retirement 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 RRQ will come into force on 1er January 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 carried out 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 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, in particular working longer (including working part-time during retirement), saving more between now and retirement, monetizing the main residence (which is ignored at this moment),” says Martin Dupras.
Contribute to your spouse’s RRSP?
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 result in profits, 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 unfortunate 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 is contributed, legally belongs to the other. »
* Although the case highlighted in this section is real, the first names used are fictitious.