If she plans carefully, she should have the cash for annual vacations and long-term care insurance, too
In Quebec, a woman we’ll call Nancy, age 58, works for a non-profit organization. She brings home $5,471 per month from her job and a partial pension from a divorce. Her financial assets add up to a robust $1.085 million in RRSP, TFSA and non-registered accounts with 20 per cent U.S. equities and 12 per cent other foreign stocks. She has $89,550 in non-registered cash left over from the sale of her former home. Her liabilities are one mortgage with a $200,000 balance and a monthly payment of $1,030. In financial terms, Nancy’s life is well ordered, but she is concerned: pay down the variable-rate mortgage, which has a 1.45 per cent current rate and renegotiate it when due in five years or invest the $200,000, leave it as is, and revisit the question in September 2023 when the note is up for renewal.
Nancy has other important retirement-related questions as well: when to stop working, when to start her draw on the Quebec Pension Plan — $1,130 per month at 65 or $700 per month at 60 — and whether she can afford annual vacations and even additional benefits, such as enhanced insurance coverage for long-term care. If she plans carefully, as we’ll see, she should have the cash for both.
Family Finance asked Caroline Nalbantoglu, head of CNal Financial Planning Inc. in Montreal, to work with Nancy.
Debt and investment management
The mortgage question is easy, the planner says. Last year her portfolio returns were 13 per cent. Her 1.45 per cent mortgage costs less than what her investments earn. She has sufficient money to maintain present mortgage payments. It is true that capital markets, which are richly priced, may slump, but the large difference between what her investments earn and what her mortgage costs suggest keeping the mortgage, the planner advises.
The investment portfolio is another issue. It’s 35 per cent in one company’s shares. That’s 66 per cent of her non-registered assets. When she got the shares from her former husband, they were transferred at his cost base, so a large capital gain is in store.
The stock yields 1.86 per cent. That is modest. Many Canadian and U.S. bank stocks and pharmaceutical firms have appreciably higher dividend yields. If she were to let her stock broker sell the shares, she would incur an estimated tax of 28 per cent.
Nancy could ask her money manager to sell a fifth of the stock per year over five years to keep her tax rate down and then invest in Canadian bank shares that yield an average 3.5 per cent. Her dividend income would rise and she would be more diversified. She would have more income and more financial security.
While she is working, Nancy should maintain her $4,800 annual RRSP contributions for her last year of work. That will push her RRSP/LIRA to $814,800. With 13 more years of growth at three per cent after inflation, she will have $1,197,000. She has the cash flow to raise her TFSA savings from $1,200 per year, as they are now, to $6,000, the present maximum allowed for the year or so to retirement.
If Nancy retires in 2022 at age 58 with $34,800 pension entitlement from her divorce, she would have $29,200 after tax income assuming a 16 per cent average tax rate. Her annual expenses are currently $52,440 net of savings, so she would have to cover the $23,240 difference. She has sufficient cash float in her non-registered accounts to cover the draw down for four years if we include incoming investment income. She can stop TFSA contributions and use her savings for the cost of a new or newer car to replace her decade-old model and needed home repairs.
Nancy should wait to age 65 to apply for her Quebec Pension Plan and Old Age Security benefits, Nalbantoglu suggests. At 65, her income would be $34,800 from her pension, $7,518 from Old Age Security, $13,560 from QPP including her partitioned amount of divorce settlement plus inflation, and in her non-registered accounts $11,000 from Canadian dividends, and $8,000 from foreign dividends converted to Canadian dollars, total $74,878. Her income after 25 per cent average tax would be approximately $56,000. That would cover present expenses of $58,440 per year less savings of $6,000 per year.
At age 71, Nancy will have to convert her RRSP and LIRA to RRIF and Life Income Funds (LIF). Her minimum withdrawal would be $64,000 and her income will rise to $138,878 per year or an estimated $85,385 after 35 per cent average tax and virtually complete loss of OAS to the clawback that presently starts at $79,054. Her present spending, $58,440 per year with her present mortgage cost of $12,360 per year, will be affordable with a surplus for grandchildren or a few indulgences.
There is embedded travel cost risk in her investment portfolio. Her present travel spending, $5,400 per year, could be insufficient for future trips if the Canadian dollar loses value against, say, the U.S. dollar or a basket for foreign currencies. When rebuilding her investment portfolio, Nancy can ask her financial adviser to buy some assets, such as British banks in pounds or French banks in euros, so that costs of trips to the U.K. or France will not rise out of bounds. Likewise, she can ensure her foreign travel costs are adequate for travel emergencies by buying annual travel insurance. Each travel medical policy has a hefty upfront embedded issuance costs. Paying the issuance cost just once each year would be cost efficient.
There is also a matter of care. Nancy lives alone. The longer she waits to buy a care policy, the higher the cost will be. It’s a good idea to shop for a policy now. Getting some quotes from independent insurance agents would be costless and informative. That coverage would be protection from high costs that could cripple her portfolio and future spending.
Coverage at Nancy’s age is costly, but if Nancy wants that protection, it is better to shop the market with independent insurance agents sooner rather than later. She has the excess income over spending to pay for it, so it’s a benefit to consider, Nalbantoglu suggests.
Retirement stars: Four **** out of five
This article was written by Andrew Allentuck, and was originally published in the Financial Post, July 29, 2021