The situation
Bruno*, 59, suffered a ruptured aneurysm five years ago. Since then, he has been off work. “I will not start working again,” he wrote.
He has suffered three ruptured aneurysms: two have been stabilized and the third is monitored regularly with magnetic resonance imaging (MRI) scans.
“I am worried because my insurance will end at age 65. »
Currently, Bruno receives a tax-free amount of long-term disability insurance of $3,400 and disability benefits from the Quebec Pension Plan which amount to $1,470 per month. However, at age 65, the Quebec Pension Plan will reduce this amount to $842 and long-term disability insurance will end.
“I don’t understand this reduction in the QPP from $1,470 to $842,” he said.
For the moment, Bruno has no debt and has a paid-off car with 100,000 km on the odometer. It will one day change, he observes. The 50-year-old manages to place $700 per month in his TFSA. However, he lives alone in an apartment that costs him $1,456 per month.
“With the cost of living continuing to increase, I will surely have to find other accommodation,” he explains. Which will pain me, because I am happy here. »
“I would like to prepare for my 65th birthday,” he continues. Do you have a disbursement strategy to recommend to me to pay less tax and benefit from existing assistance programs? »
Numbers
Bruno, 59 years old
Pension fund: none
QPP pension at age 65: $862/month
Locked-in retirement account (LIRA): $109,000
Registered retirement savings plan (RRSP): $270,000
Tax-Free Savings Account (TFSA): $40,000
Unregistered investments: none
Savings account: $3500
Analysis
Pierre-Raphaël Comeau, senior financial planning advisor at Laurentian Bank Securities, a financial services firm, looked into Bruno’s case.
His first question is simple to elucidate. Why will the Quebec Pension Plan reduce its benefits from $1,470 to $842?
PHOTO MARCO CAMPANOZZI, THE PRESS
Pierre-Raphaël Comeau, senior financial planning advisor at Laurentian Bank Securities
“Disability pensions are created to replace the income that would have been earned during the person’s working life between the ages of 18 and 65,” explains the specialist. These annuities are replaced by retirement annuities at retirement age. »
Imagine if we had to ensure the disability of all Quebecers until the age of 90, he says. Imagine what it would cost for every dollar earned. “It would be impossible to finance such a regime! »
The disability pension is automatically replaced by a retirement pension when people reach 65 years of age. There is no action to take.
As for the long-term insurance of $3,400, it was Bruno who paid and financed it when he was working for his former employer, recalls Pierre-Raphaël Comeau.
Review your cost of living
According to the planner’s calculations, Bruno has a net cost of living of $45,000 per year. At this rate, a disbursement plan is possible until Bruno reaches 85 years old.
Pierre-Raphaël Comeau uses a yield of 4.25% and inflation of 2.1%.
“On the other hand, he has no room for maneuver. It is absolutely necessary that its rent does not increase by more than 2.1% per year,” specifies the expert.
“If he reduces his cost of living by $300 per month starting at age 65 and is able to live on $42,000 net per year including a future car payment, that would work until age 90,” he calculates.
The other mathematical option is to save $1,100 per month from now until retirement. However, this ambitious scenario seems impossible to achieve, indicates Pierre-Raphaël.
The results of the financial planning software are clear: he would need an additional $65,000 in 2023 in order to maintain a cost of living of $45,000 net per year. But money doesn’t fall from the sky.
Pierre-Raphaël Comeau suggests that he think about the reasons why he likes his apartment. Would it be possible to recreate this well-being elsewhere? In a less expensive city where rents are cheaper? If he is next to the hospital and this reason takes precedence, perhaps he should consider cohabitation, says the planner.
“Sharing expenses can make a big difference in the wallet. And, when you live with a spouse, for example, you can split your income when filing your taxes. »
Fiscally speaking, putting your savings of $700 per month in a TFSA is the right thing to do, maintains Pierre-Raphaël Comeau. His income is not high enough to take full advantage of RRSPs.
If he had been younger, he would have been able to benefit from the Registered Disability Savings Plan (RDSP). “But it doesn’t work for his situation, he’s too old for that.” »
The CRI solution
There is another solution, specifies Pierre-Raphaël Comeau. The locked-in retirement account (LIRA) will become a life income fund (LIF).
As in the case of RRSPs which become RRIFs at age 71, you must withdraw a minimum amount based on your age each year. However, specifically for the LIF, you cannot withdraw more than a maximum amount authorized each year.
“This is to prevent someone from emptying the entire account and finding themselves penniless at age 75 and claiming the Guaranteed Income Supplement (GIS),” he explains.
But there are exceptions that allow you to withdraw more money. Bruno could obtain from his doctor “a medical certificate attesting that his physical or mental disability reduces his life expectancy”. The reduction in life expectancy does not have to be significant, the planner argues.
With this doctor’s note, the financial institution abolishes this rule of the maximum amount authorized each year and the LIF becomes like a RRIF that can be completely withdrawn. “It is worth remembering that all amounts withdrawn are taxable income. »
Around age 85, there will be approximately $60,000 remaining in Bruno’s LIRA transformed into a LIF. “There is no other way to get this amount than by having this doctor’s certificate. And it is this amount that will allow him to support his cost of living of $45,000 until he is eighty-seven and a half years old,” concludes the planner.