Case Study: Solving the Retirement Income Puzzle



Anne Hammond

Financial Advisor and Associate Portfolio Manager


“Retirement” – the word represents many things these days. It could be a lifestyle full of travel and adventures, or perhaps a transition to volunteer work. Personally, I like to think of it as “financial freedom,” when the need for paid work is no longer a requirement to achieve your lifestyle goals.

Whatever it means to you, it’s a big change going from receiving a regular paycheque from your employer to drawing smaller income streams from multiple sources. Co-ordinating them all to ensure you can maintain your lifestyle without paying too much income tax or running out of money can be much less stressful with some professional help.

Let’s look at the example of Jack and Jill. Jack is a professor at a local university, turning 65 in a few months; his wife, Jill, is a 57-year-old teacher. They plan to work another three years. At that point, Jack hopes to do some volunteer work in his field, while Jill plans to take him travelling with her as often as possible. They are both in excellent health with lots of longevity in their families.

Jack has a defined contribution pension plan (DCPP) at the university, meaning the contributions to be made are known (a percentage of salary), while the final benefit he receives will be determined by the market growth of the investments. He currently has about $820,000 in his pension plan, locked in under BC pension legislation.

When he retires, he can choose to keep the funds where they are and begin drawing income or transfer them into a Locked-in Retirement Account (LIRA) or Life Income Fund (LIF). Jack plans to consolidate these funds with his advisor to ensure that the funds will be monitored and managed to best serve their holistic financial picture.

Jill has a defined benefit (DB) pension plan, meaning that she knows how much income she will receive when she retires. Her pension benefit will be based on a combination of her highest average salary X a certain percentage X her years of service. When she retires, she’ll have to choose the terms of her pension, which will offer varying levels of protection for Jack if she predeceases him.

She’s leaning toward choosing the Joint Life 60% option with a 10-year guarantee. With this option, the amount will be guaranteed not to drop for the first 10 years even if she dies early. After the first 10 years, 60% of the income would continue to be paid to Jack for the remainder of his lifetime. With this option, at age 60, Jill expects to receive $3,500/month plus a bridge benefit of $1,000/month to age 65.

They each have about $250,000 in Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs). They own their home with no mortgage, and they rent out a suite in their basement for $2,000 per month.

They have many decisions to make, some of them now and some of them later. At the moment, Jack must decide whether to begin collecting his Canada Pension Plan (CPP) and Old Age Security (OAS) when he turns 65. Since Jack still plans to work for another three years, we have recommended that he delay starting these benefits until he is ready to retire.

Delaying CPP and OAS will be of benefit because at Jack’s current income level (approximately $165,000 per year), all his OAS would be clawed back for the first few years. But if he delays three more years and starts his OAS at age 68, his monthly OAS benefit will be increased by 21.6% (0.6% for each month after age 65). Jack must apply to delay his OAS because he received a letter from Service Canada about it.

Likewise, delaying Jack’s CPP benefits will result in a higher lifetime income from CPP. Not only will he continue to contribute for another three years, but his benefit will also increase by 25.2% (0.7% for each month he delays after age 65).

Jill will most likely begin collecting both her CPP and her pension at age 60 once she retires. Her CPP will be reduced by 36% (0.6% for each month before age 65).

As they approach retirement, they will need to decide how to structure their income based on their desired cash flow. They have indicated that they would like to spend about $140,000 per year (i.e., after-tax cash flow), and our projections confirmed that with their risk tolerance, they could comfortably maintain this income to Jill’s age 95 without needing to access the value of their home. Thus, we have recommended that their income might look something like this to start (using today’s amounts):

• $772/month from Jack’s OAS
• $1,507/month from Jack’s CPP
• $770/month from Jill’s CPP
• $4,500/month from Jill’s pension and bridge benefit
• $3,500/month from Jack’s pension plan
• $2,000/month from renting out the suite in their home

Their cash flow will have many more components than the single paycheques they received during their working careers, and some sources of income will not withhold income tax unless it’s requested. Jack could delay accessing his pension funds, but his LIRA/LIF will have some restrictions on withdrawals. Drawing on it before it’s required at age 72 – and before accessing his RRSP – will help manage their tax burden in later years and maintain flexibility for large lump-sum needs in the future.

There are many things to con-sider in your personal retirement income puzzle, and your advisor is more than happy to help you put the pieces together. ■

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