By Anderw Allentuck, Financial Post | Link to Article
By Anderw Allentuck, Financial Post | Link to Article
A man we’ll call Louis, 55, arrived in Canada in 2005. He lives and works as a refrigeration repair technician in Southern Ontario. Divorced, he helped put his two sons, both in their mid-20s, through university, bought a condo and watched it appreciate. Now he’s assessing the situation when he retires and no longer brings home $3,723 a month after tax.
The problem, of course, is his late start in building financial assets and participating in the Canada Pension Plan and qualifying for Old Age Security benefits. Planning for retirement is a special challenge.
“I don’t want to work forever,” Louis says. “But can I retire at 65 with a decent income? I will have expenses before I retire, for example, paying down my mortgage. Should I think about moving to an inexpensive country in Latin America to get more from what will be a small retirement income?”
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Louis. “He has made a very good start from when he arrived in Canada a decade ago with just $500 in his pocket. He has accumulated a respectable net worth in his short time here.”
Financial outlook
Solutions start with Louis’s balance sheet. He has $151,000 net worth, most of it in his $205,000 condo on which he owes $88,000, his RRSPs with a value of $20,500, and his TFSA with a $8,500 balance. His gross income is $55,120 a year.
Were Louis to retire at 65 he could expect $6,390 a year from the CPP, half the maximum $12,780 for those who have contributed the year’s maximum pensionable earnings for most of their working lives. He will qualify at age 66 for about half the maximum OAS benefit, currently $6,465 a year, or $3,232 a year. That adds up to $9,622.
His $20,500 worth of RRSPs, which are growing at $1,260 a year at 3% after inflation, should have a value of $42,425 at 65. If annuitized to pay out all income and principal in 25 years to age 90, the RRSPs would generate an average of $2,365 a year from retirement at 65.
His $8,500 TFSA, growing at $1,200 a year, should have a value of $25,600 at 65. However, if Louis adds $300 a month from discretionary savings for total contributions of $400 a month, the TFSA, growing at 3% with no tax, would have a value of $68,100 in 10 years when he is 65. Annuitized to pay out all capital and income to age 90, it would generate $3,800 a year.
At age 65, his income would thus be $6,390 from CPP, $3,232 from OAS, $2,365 from RRSPs and $3,800 from his TFSA.
The sum, $15,787, or $1,316 a month, would not bear significant tax but won’t be sufficient to support current spending of $2,118 a month (minus all savings and mortgage payments).
Read more: A Financial Plan