The situation
Spouses Julie*, 44, and Carl*, 45, plan to retire at age 60, in around fifteen years.
They are seeking advice on the financial planning and feasibility of this early retirement project, while maintaining their lifestyle at a reasonable level.
Their financial statement is summarized as follows: couple income totaling $116,000, financial assets in a registered retirement savings plan (RRSP), a tax-free savings account (TFSA) and a locked-in retirement account (LIRA). ) to the tune of $390,000, their residence valued at $300,000 and free of debt.
However, the distribution of this income and financial assets between each spouse is very different.
On the one hand, Julie benefits from a good salary – $90,000 per year – and participates in the solid defined benefit pension plan (RREGOP) of the Quebec public sector.
On the other hand, Julie has very few financial assets in TFSA ($48,000) and her RRSP is still at zero, but with $31,000 in unused contributions.
According to her personal RREGOP statement, Julie would be eligible for a pension of $62,000 per year of her 60e at his 65e birthday. This life annuity would be reduced to $46,700 after turning 65, before the start of provincial QPP benefits.
But if Julie started receiving her RREGOP pension at the usual age of 65, her lifetime amount would then be around $55,000 per year, or almost $9,000 more.
On the other hand, her partner Carl, self-employed for two years, has a much lower income (around $26,000) and he does not have a retirement plan.
However, through his previous jobs and budgetary arrangements with his partner, Carl was able to accumulate $342,000 in retirement savings financial assets in his RRSP, TFSA and LIRA accounts.
Also, Carl has benefited for two years from transfers of unused RRSP contributions from his wife Julie, in order to compensate for his lack of a retirement plan.
“We agreed on this transfer in order to enhance Carl’s sources of income in retirement. [décaissement de REER, CELI et CRI, rentes du RRQ provincial et de la PSV fédérale]and while my own retirement income [rentes du RREGOP, du RRQ provincial et de la PSV fédérale] are already looking good, explains Julie during a discussion with The Press.
“But is this still the right way to do things? From a financial point of view? And tax? »
As for their planned retirement lifestyle, Julie and Carl’s current budget reaches a moderate total of $50,000 per year. Added to this amount are their payments of approximately $32,000 per year into their retirement savings accounts (RRSP, TFSA); a savings habit that the couple plans to maintain in support of their early retirement plan in about fifteen years.
In this context, Julie and Carl ask: “Are we on the right track in terms of financial planning for our retirement plan at age 60? Will we have enough sources of retirement income to maintain our lifestyle into old age? And without having to sell our house faster than desired in order to replenish our capital in retirement savings? »
The situation and Julie and Carl’s questions were submitted for advisory analysis to Julie Tremblay, who is a financial planner and financial security advisor at IG Gestion de Patrimoine, in the Quebec region.
Numbers
Julie: 44 years old
Employment income: $90,000
Personal financial assets:
– RRSP: $0
– TFSA: $48,000
– Savings account: $14,000
– Participant in the RREGOP pension plan of the Quebec public sector
Carl: 45 years old
Self-employment income: $26,000
Personal financial assets:
– RRSP: $260,000
– TFSA: $28,000
– CRI: $54,000
– Savings account: $22,000
Non-financial assets of the couple:
– Residence (equal co-ownership): $300,000
No debt liabilities
Budgetary disbursements: $82,000 per year
($13,000 linked to residence, $37,000 linked to lifestyle, $32,000 linked to retirement savings and RRSP and TFSA investments)
Advice
The first question from the forty-year-old couple concerns the financial and tax relevance of Julie transferring her unused RRSP contributions to Carl’s RRSP, in order to compensate for his lack of a retirement plan.
“Yes, certainly, in a context where they are married,” Julie Tremblay responds straight away.
“The spousal RRSP is an RRSP to which Julie contributes but to which her spouse Carl is the annuitant. In this way, because Julie has a higher tax rate than Carl’s, she therefore benefits from larger tax refunds by transferring her own RRSP contribution rights to that of her spouse, explains M.me Tremblay.
“At the time of retirement, Carl will be able to make withdrawals from his RRSP at a lower tax rate than Julie’s. This tax gap will allow them to make tax savings. Also, Julie’s contributions to her spouse’s RRSP will allow them to better balance their future income in retirement. »
PHOTO ERICK LABBÉ, LE SOLEIL ARCHIVES
Julie Tremblay, financial planner and financial security advisor at IG Gestion de Patrimoine, in the Quebec region
Mme Tremblay warns Julie “in the event that she and Carl live as common-law spouses”, instead of being married. “Julie must know that in the event of marital breakdown, her capital contributed to Carl’s spouse’s RRSP would be lost forever in the absence of a cohabitation agreement drawn up before a notary. »
Julie and Carl’s second question concerns the financial feasibility of their retirement plan at age 60, i.e. in around fifteen years.
“The couple mentions needing $50,000 net per year in retirement [après impôt] to support their lifestyle, notes financial planner Julie Tremblay.
“In terms of income, we know that between ages 60 and 65, the couple will receive $62,000 in gross income [avant impôt] of Julie’s RREGOP retirement plan. They will therefore have to disburse slightly from their personal retirement savings during this period to meet their needs of $50,000. This disbursement will mainly be from Carl’s RRSP,” explains M.me Tremblay.
Then, from age 65, the couple’s retirement income will consist of Julie’s RREGOP pension (reduced to $46,700 per year) as well as their respective pensions from the Quebec RRQ and the federal PSV.
In Julie Tremblay’s opinion, thanks to their “already significant” retirement savings and the absence of debt on their balance sheet, Julie and Carl’s sources of retirement income after age 60 appear sufficient to finance their lifestyle projected at $50,000 per year.
Furthermore, considering an inflation rate of 2.2% per year and a return of around 4.4% per year on their retirement savings capital, the financial planner estimates that Julie and Carl could even benefit a choice between two budgetary scenarios between now and retirement at age 60.
“Either they reduce their retirement savings effort a little while maintaining their projected retirement lifestyle of around $50,000 per year. Either they maintain their retirement savings effort at its current level [environ 30 000 $ par année] in order to have the means to improve their retirement lifestyle to more than $50,000 per year,” suggests Mme Tremblay.
Furthermore, she mentions “another interesting element in the couple’s financial situation”, that is to say the possibility of reducing their tax bill in retirement by resorting to splitting Julie’s annuity income in favor of Carl.
“They will then be able to level out their taxable retirement income by transferring up to 50% of Julie’s retirement pension [du RREGOP] for the benefit of Carl, indicates financial planner Julie Tremblay.
“This income splitting will be done annually when they file their tax returns. By doing this, Julie and Carl could reduce their tax bill in retirement, and also improve the sustainability of their retirement savings and net real estate assets. »
* Although the case highlighted in this section is real, the first names used are fictitious.