William and Vi.The Globe and Mail
At 64, William is beginning to think about how he and his wife, Vi, will get by when he retires. Longer term, he wonders how Vi, who is 10 years younger, will fare financially after he is gone.
William, a government worker, earns about $98,000 a year. He will be entitled to a defined benefit pension of about $1,400 a month, or $16,825 a year, when he retires at the age of 68, with a 50-per-cent survivor’s benefit. Vi is no longer working. They have two grown children, some savings and a mortgage-free condominium townhouse in a Toronto suburb.
William wonders when he and Vi should begin collecting Canada Pension Plan and Old Age Security benefits. He says he is willing to work to the age of 70 if his health holds up. “Should we sell the house when I retire and move into a rental?” he asks in an e-mail. “Is my wife’s RRSP investment enough for her?”
As well, William wonders whether their investment mix is suitable. He plans to continue saving and investing as long as he is working. His long-term goal is to “leave sufficient money for my wife to live on,” William writes. Their retirement spending target is $2,500 a month.
We asked Matthew Sears, a financial planner and associate portfolio manager at T.E. Wealth in Toronto, to look at William and Vi’s situation.
What the expert says
William and Vi came to Canada in 2000, so they will not be entitled to full CPP and OAS benefits, Mr. Sears says.
At 65, William will be eligible for half the maximum OAS benefit, which is now $613.53 a month. If William begins drawing benefits while he is still working, part of the benefits would be clawed back because his income would be above the threshold of $77,580 a year, the planner says. Ideally, William would defer drawing government benefits until the age of 70. Deferring OAS to age 70, for example, would increase his benefit from $306.77 a month to $417.20 a month, the planner says.
Next, the planner looks at William’s CPP benefit, estimated at $544.29 a month at the age of 65, or 47.14 per cent of the maximum. By working past age 65, William could drop some years in which he did not contribute to the plan. As well, deferring CPP would add 8.4 per cent a year to the benefit up to a total of 42 per cent.
“By compounding the additional working years and the benefit increase from deferral, William’s CPP benefit would rise to nearly 78 per cent of the maximum benefit if he retires at age 68 and nearly 85 per cent if he works to age 70,” the planner says.
Mr. Sears recommends Vi also delay taking government benefits to the age of 70 if possible. “Of course, for both of them to delay CPP and OAS may be difficult if they don’t have the cash flow to support their lifestyle expenses,” the planner says.
Vi and William’s retirement spending goal is $2,500 a month, less than they are spending now. After subtracting loan payments and savings from their current outlays, they’d need about $3,150 a month to maintain their lifestyle, the planner says.
Mr. Sears ran a projection to Vi’s age 95 assuming an investment return of 3.5 per cent a year, an inflation rate of 2 per cent, and that the couple defer OAS and CPP to the age of 70. Once Vi begins collecting government benefits at 70, they have surplus cash flow, which is invested in a tax-free savings account. The planner assumes that they continue to live in their current home and that lifestyle expenses fall by 25 per cent after William dies at 95.
The result: They can maintain their current lifestyle of $3,150 a month to Vi’s age 95. They could spend up to $3,300 a month, but if they do, Vi will have drawn down all of the assets in her registered retirement savings plan by the age of 70, he says. At that point she would begin collecting CPP and OAS benefits. By the time William dies at 95, they will have accumulated $112,000 in the tax-free savings account, which Vi can draw on to her age 95 to cover her cash flow requirements. She would still have her house to fall back on.
Finally, Mr. Sears looks at the couple’s asset mix. They have 7 per cent in cash, 36 per cent in fixed income, 28 per cent in Canadian stocks or stock funds, 23 per cent in U.S. stocks and 6 per cent in international stocks. Based on their risk capacity and tolerance, a better balance would be 20 per cent cash, 40 per cent fixed income and 40 per cent equities diversified geographically, the planner says.
It will be important for Vi and William to maintain a fair degree of liquidity in their portfolio because they will need to draw on it heavily from William’s age 68 (when he retires and they have only his pension income) to his age 70, when he begins collecting government benefits, Mr. Sears says.
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Client situation
The people: William, 64, and Vi, 54
The problem: When to begin drawing CPP and OAS benefits. Will Vi have enough money to live on for the rest of her life? Do they have the right investment mix?
The plan: Defer taking CPP and OAS benefits to the age of 70 if possible. Target a portfolio that is 60 per cent cash and fixed income and 40 per cent equities.
The payoff: A clear view of how their financial future will unfold.
Monthly net income: $6,240
Assets: Bank accounts $11,500; his RRSP $11,305; her RRSP $85,000; estimated present value of his DB pension $182,280; residence $450,000. Total: $740,085
Monthly outlays: Property tax $295; home insurance $30; utilities $225; condo maintenance $285; transportation $430; grocery store $600; clothing $70; car loan $315; gifts, charity $130; vacation, travel $300; dining, drinks, entertainment $200; personal care $30; doctors, dentists $100; drugstore $220; life, disability insurance $65; phones, TV, internet $165; RRSPs $830; his pension plan contributions $395. Total: $4,685.Surplus of $1,555 goes to savings.
Liabilities: Car loan $11,500
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Some details may be changed to protect the privacy of the persons profiled.
Editor’s note: In a previous version of this article, William was incorrectly advised he could increase his Old Age Security entitlement two ways: by working past age 65, thereby adding years to his Canadian residency requirement; and by putting off receiving his benefit. In fact, the financial planner says, William can do one or the other, but not both.
