Situation: Man with low income, modest savings wants to plan retirement
Strategy: Use cash, TFSA for house down payment, grow emergency savings
Solution: An affordable retirement with a margin of safety
A modest income hasn?t kept a man we?ll call Robert from dreaming of a pleasant and secure retirement.
He is still working at age 65, earning $1,740 a month as a clerk in a Montreal retail shop. But the addition of $545 a month Old Age Security and $660 from the Quebec Pension Plan have given him a whopping 74% pay increase, pushing his monthly pre-tax income to $2,945.
What worries me is that with my limited assets, I would have trouble keeping my home, become destitute and be forced to live in an old folks home or, worse, live penniless on the street
Beginning in January, he gets another $420.42 a month from an annuity he signed up for in 1974 and has been paying $65.40 toward every month since.
For now, his two sons grown, he lives in a 725-square-foot apartment and has not had a car for 20 years, having sold the last when the cost seemed a waste of money compared with using Montreal?s excellent public transport system. Dinners out have been a rare occasion, not more than four times a year, he estimates.
Robert?s goal is to work another couple of years and then buy a fixer-upper cottage ? he?s checked the market ? with a $125,000 price tag and a 25% down payment in Ontario near the Quebec border. From there, in a used car he?d like to buy with a price tag under $10,000, he will commute to Montreal for work.
His goals in retirement are modest as they were in his working life ? ending work at age 67, a couple of big dogs, a quiet life in his small house. Yet Robert still fears his plan may fail.
?What worries me is that with my limited assets, I would have trouble keeping my home, become destitute and be forced to live in an old folks home or, worse, live penniless on the street. I?m worried that I have just enough money to get into very serious trouble, but not enough money to say out of trouble and realize my dream.?
Family Finance asked Caroline Nalbantoglu, head of CNal Financial Planning in Montreal, to work with Robert to estimate his retirement income and to determine how much he will have available to spend.
The good news is that Robert will be in the unusual position of actually having more money in retirement than he did in his working life. Living within his means and a guaranteed government pension should see him through.
Pre-retirement budget
The immediate cash cost for a $125,000 house would be $31,250 for the down payment. The car would bring the total bill up to $41,250. Cashing in substantial amounts of his $70,609 RRSP would incur tax.
But he can use some of the $30,730 he holds in cash for most of the down payment and make up the difference with a withdrawal from his $20,608 TFSA, Ms. Nalbantoglu suggests. He should keep some cash balance for moving costs, emergencies, etc.
His current budget will stretch further when retired, for he will no longer make $150 a month in RRSP contributions. He could start taking his $420 annuity income without pushing up his tax bracket. Property taxes, house and car insurance, house maintenance and higher utility payments than those he has now in his apartment would add up to perhaps $500 to $600 per month.
But he would no longer have to pay rent, currently $594 a month, and, with a car, he would not pay $76 a month he now spends on bus fare. That money would shift to fuel costs for his car. The problem is to adjust expenses to make the retirement feasible.
If he retains $950 a month from present $800-a-month savings plus $150 a month he can switch from RRSP savings that provides little tax relief, he can build a $22,800 nest egg for retirement in 2014, Ms. Nalbantoglu notes.
He should postpone dipping into his RRSP until age 71 or at least until he is retired. Any sooner and he will lose significant income to tax, the planner warns.
Budget in retirement
At age 71, Robert?s RRSP, which will have grown without further contributions but with compounding to $96,000 with interest at 5.25% per year, would provide minimum distributions of about $6,950 per year. He would have $6,540 OAS, $7,920 QPP, and $5,045 yearly annuity income for total income of $26,455 with very little income tax. His monthly disposable income, about $2,100, would more than cover present expenses less RRSP contributions and other savings.
Robert?s budget would swap present $594-per-month rent for mortgage payments which could be about $460 per month at 3.1% for a five-year term and a 25-year amortization with the exact amount depending on frequency of payment and such bells and whistles as life and disability insurance. Utility bills, home insurance, and property taxes would add several hundred dollars to monthly costs.
In retirement, Robert will have advantages that he did not have when working.
A little more than half his pre-tax income will be indexed government pensions. He will have a chance to build equity through paying down his mortgage. Indeed, with his frugal ways, he may find that he has sufficient cash flow to accelerate repayment of principal.
Robert?s two final years of saving from his wages and the resulting $22,800 cash balance plus modest interest would provide added spending power. If that turns out to be insufficient, he would still have his RRSP for a reserve.
?Robert can have the retirement he wants and reasonable financial security if he works another two years,? Ms. Nalbantoglu says. ?With RRIF income, OAS and QPP and annuity income, he will have more money to spend in retirement than he had when working. Years of patience and quiet saving, seldom dining out, saving what he could, will pay off. All that will push Robert from privation to enjoyment of life and security in a house of his own. His means will match his wishes.?
Need help getting out of a financial fix? Email andrewallentuck@mts.net for a free Family Finance analysis
Source: http://business.financialpost.com/2012/10/12/heres-how-to-fund-a-retirement-on-a-low-income/
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