We may tend to feel guilty if we haven’t saved for retirement. But sometimes, we can still do very well.
Marc*, 60, is single and earns $90,000 per year as a business manager. However, “for various reasons, each as bad as the other, I don’t have a cent saved for retirement,” he confides. However, he has no debt. And he likes to work, so plans to continue at least until age 65.
Marc also owns a condo worth $320,000. He plans to increase his payments in the fall to finish paying it in a year and a half. Subsequently, he estimates he can put aside around $40,000 per year due to his modest lifestyle. In retirement, once his condo is paid for, he estimates he can live on $1,500 per month, sometimes even $1,000. If he meets his soul mate, he could go live with her and rent her condo for around $1,300 per month to earn an income. Marc is now wondering how much to accumulate and how.
Mark, 60 years old
Annual salary: $90,000
Quebec Pension Plan (QPP): approximately $1,000 monthly at age 65
Value of the condo: $320,000, which will be completely paid in a year and a half
Mortgage payment: $2,500, and $3,000 starting in the fall
Annual interest rate: 3.45%
Condominium fees and annual taxes: $5,000
Inheritance expected within two years: $150,000
Expected monthly expenses in retirement: $1500, sometimes $1000
Evaluate your expenses carefully
While he maintains that it is important to take care of your assets as early as possible, at 60 it is a little late to start doing so, says Hadi Ajab, independent financial planner and collective savings representative attached to PEAK Investment Services. “But what saves Marc,” he assesses, “is that he has a good salary and a very sober lifestyle. »
However, he advises him to make a detailed budget. “Does he really need $1,000, or $1,500, or more some months? He must evaluate his lifestyle realistically, ensuring that he can afford a good quality of life. Because underestimating your expenses by $500 per month makes a big difference in your financial planning. »
Plan your government pensions
Properly evaluating his lifestyle is also essential for Marc because if he is right, so that he will really only spend $1,500 maximum per month in retirement, he has a good chance of not having to worry about it. with savings. Because when we look at his disposable income at retirement, at the moment, there is only his Quebec Pension Plan (QPP) pension and his Old Age Security (PSV) pension.
“So, if he still does not have a tax spouse, if he retires at age 65 and if he defers his QPP pension, he would only have his PSV of $698.60,” assesses Hadi Ajab. This amount is not considered in the calculation of the Guaranteed Income Supplement (GIS), which would give $1,043.45. On $1,742 per month, he could live very well. »
Then, for each year that he delays his QPP pension between ages 65 and 72, it would be increased by up to 8.40%. “So, if he waits until age 72 to request it, it would be increased up to 58.80%,” specifies the financial planner. As the QPP pension is taxable income, he will lose the majority of the GIS when he receives it, but he would be fine with this income. »
Build an emergency fund
Even if Marc ultimately does not, a priori, have to worry about his retirement, he still has an advantage in saving to have peace of mind and also be able to afford small luxuries. Hadi Ajab also immediately noticed that all of Marc’s assets are immobilized: they are in his condo. The financial planner therefore advises him to first build up an emergency fund for three or four months, approximately $15,000. He could place this amount in a tax-free savings account (TFSA). To go faster, he suggests that Marc reconsider his decision to increase his mortgage payment.
“He is already paying a good amount on his mortgage at a relatively low rate and has very little left to repay,” he says. He will have finished paying it before he retires. Having no investments, it would be wise to start investing this $500 per month right away. »
Save in the TFSA
Once Marc’s emergency fund is well stocked, he will be able to continue saving in a TFSA which he will dedicate to his retirement. “Thus, when he withdraws amounts, his GIS will not be affected, unlike if he withdrew amounts from a registered retirement savings plan (RRSP) which would be taxable income,” indicates Hadi Ajab.
We must also think about his inheritance of approximately $150,000, which is not taxable, which he will receive soon. “So quickly, your TFSA will be maximized,” notes the financial planner. He will then have to turn to tax-advantaged non-registered investments which will not significantly affect his GIS. »
Forget condo income
As Marc has no other residence than his condo, Hadi Ajab wishes to calm his enthusiasm regarding the income he could earn from renting it. “First of all, it’s a hypothetical question, but let’s say that one day he goes to live with his partner, he will have to pay her rent or, at least, part of his bills,” he explains. Then, if he ever starts to have rental income, he must consider that it will be taxable, and therefore that it will have an impact on his GIS. So it is not certain that he will, in the end, have any real gains from this rental. »
In addition, having a tax spouse would greatly change Marc’s situation. “The government would now look at the couple’s income to determine if they are eligible for the GIS,” he explains. If Marc is suddenly no longer eligible for the SRG, he could apply for his QPP pension earlier. In such a scenario, the RRSP could be interesting between now and retirement. Marc must therefore have good financial planning for his retirement and review it in the event of a change in his personal situation. »
* Although the case highlighted in this section is real, the first names used are fictitious.
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