Financial Checkup: Laid-off 60-year-old need not fear

Susan had expected to be earning $80,000 a year or more until age 65. However, she doesn’t think she’ll be able to get anything better than a sales position paying about $20 an hour now.

Susan owns a condo in downtown Vancouver worth about $700,000, which has been paid off. She has $600,000 in RRSPs, $33,000 in a tax-free savings account (TFSA), a $25,000 emergency fund and $200,000 in non-registered assets inherited from her parents. Susan qualifies for full Canada Pension Plan (CPP) benefits but doesn’t have any insurance.

Susan has several nieces and nephews living in the city but doesn’t want to be a financial or personal burden to them.

Susan would like to be able to spend $50,000 a year after taxes but thinks she can live on $40,000 a year after taxes, if need be. She has no desire to travel as she has done so extensively for her job.

The recommendations: Both financial advisors say Susan isn’t in as bad financial shape as she fears. Her situation could become very tight, though, if she doesn’t secure a job for the next five years.

Neufeld’s projections indicate that Susan should be able to spend $51,000 in today’s dollars annually from age 65 to 95 if she works for the next five years and keeps her spending to what she earns during that period. However, if Susan can’t get a job, she’s probably looking at being able to spend only $40,000 a year.

Beauchamp is more optimistic. His projections suggest that Susan could spend $58,000 a year if she works until age 65 and takes no more than an average of $10,000 out of her non-registered accounts annually during that period. Even if Susan can’t get a job, she still could spend $46,000 a year to age 95 if she starts taking CPP now or if she adds $200,000 to her now-registered assets by downsizing her condo.

Beauchamp assumes a 5.3% average annual return after fees and 2% annual inflation.

Neufeld didn’t include Susan’s emergency fund in his projections but assumes a 5% average annual return and 3% annual inflation.

Beauchamp recommends that Susan get long-term care (LTC) insurance. The quote he got for a policy providing $500 a week for home or institutional care would cost $2,800 a year in premiums.

However, Neufeld doesn’t think Susan needs LTC insurance. He didn’t include the equity in her home as a source of retirement income in his projections; thus, he recommends that Susan earmark the equity in her home as capital that could be used if she needs LTC down the road.

Beauchamp also suggests enhanced medical insurance, at a cost of about $2,000 a year – a recommendation that Neufeld agrees with if Susan can find the money to pay the premiums.

Assuming Susan secures work for the next five years, Beauchamp recommends that she start taking CPP and old-age security (OAS) benefits at age 65.

However, if Susan converts all her RRSP assets into a registered retirement income fund (RRIF) at age 65, Neufeld says, Susan could delay receipt of both CPP and OAS until she is 70.

This strategy makes sense if Susan is in good health and has longevity in her family because CPP and OAS benefits rise by 0.7% and 0.6% a month, respectively, for every month that Susan delays taking these benefits to age 70, which makes this option excellent longevity insurance.

But, Neufeld also notes that even people without longevity in their family may want to consider delaying the start of their CPP and/or OAS if they’re worried about outliving their retirement assets.

In contrast, there are monthly declines in CPP benefits if they are begun before age 65. If Susan started collecting now, she would receive up to one-third less than she would get if she waits until she is 65. This is an argument, says Beauchamp, for Susan to downsize her condo rather than starting CPP now if she can’t find work.

Both advisors say that Susan should continue to make maximum TFSA contributions if she has the money or can transfer the amount from her non-registered assets without negative tax implications. Beauchamp suggests that Susan’s emergency fund be transferred to her TFSA to start.

However, both Beauchamp and Neufeld say there’s no benefit for Susan to continue to make RRSP contributions because she won’t get sufficient tax savings because of her lower income.

“You have to compare how much taxes you’re saving by making contributions with how much [taxes] you’ll pay when you withdraw the money [from the RRSP],” says Neufeld. In Susan’s case, her marginal tax rate will be higher when she takes RRIF withdrawals than it will be during the next five years.

Neufeld recommends that Susan convert all her RRSP assets into a RRIF at age 65 because she will need the money to live on once she retires.

Beauchamp thinks Susan needs to put only $500,000 into a RRIF at age 65 and leave the rest, about $100,000, in her RRSP to continue to grow tax-free until she is 71.

Both advisors say Susan should not deplete her non-registered assets earlier than necessary, as she might need a lump sum down the road when taking a large amount out of her RRIF would have negative tax implications. Neufeld’s recommendation is that Susan take money out of both accounts, depleting them “in tandem.”

Susan needs an up-to-date will, enduring power of attorney (POA) for financial and legal matters and a representation agreement for health-care matters. Neufeld strongly advises having a backup executor and holder of the enduring POA, plus a number of people listed on the health-care representation agreement, so that someone is around at all times.

Beauchamp says that having joint executors for a will can be a good idea, as it spreads the work between two people. He strongly recommends that Susan talk to potential executors before naming them. He also notes that Susan doesn’t have to have the same person for her enduring POA and the health-care representation agreement, given the potential time commitment for these duties.

Beauchamp recommends that when Susan transfers $500,000 of her RRSP assets to a RRIF, she put that money into a guaranteed minimum withdrawal benefit (GMWB) product that has guarantees to pay at least 5% cash flow a year for 20 years.

The GMWB, Beauchamp suggests, guarantees that the minimum payment will never decrease but has the opportunity to increase. The distribution amount is reviewed every three years and, if increased, a portion is locked into the remaining term. He notes that historical projections indicate that the GMWB’s return will exceed 5%, as the risk-management strategies used are designed to provide ongoing downside protection.

Beauchamp also recommends that 70% of Susan’s RRSP assets be held in a Canadian all-cap dividend growth fund and 30% be held in corporate bond funds. He also suggests that Susan’s non-registered assets be held in a corporate-class, T-series strategic balanced mutual fund with a 5% withdrawal rate.

Neufeld is reluctant to recommend GMWBs because he believes that it’s possible to construct lower-cost alternatives to deal with the market risk of retiring at an unlucky time. He recommends that Susan invest one year’s income in a high-yield savings account that will be used for her first year of retirement’s income and invest another year’s worth of income in a one-year guaranteed income certificate (GIC) and another year’s income in a two-year GIC.

The rationale behind this strategy is that if the equities portfolio has grown in value after the first year, Susan can take the following year’s income from the equities portfolio. But if the stock market performs poorly and the equities portfolio decreases in value, Susan can use the maturing GIC to replenish her high-yield savings account. If the GIC is not used for income, it would be reinvested for another two years.

Neufeld also suggests looking at whether an annuity would be suitable for Susan when she’s in her mid- to late 70s. The pricing of annuities at younger ages is based more upon long-term interest rates than on mortality credits, he explains, and, given the currently low long-term interest rates, this makes annuities too expensive for Susan now.

The overall asset mix that Neufeld suggests is 50% fixed-income and 50% equities invested in actively managed investment funds and exchange-traded funds (ETFs). All the equities should be dividend-paying stocks – 50% Canadian, 25% U.S. and 25% international; the fixed-income component should combine high-interest savings accounts, GICs, bond funds, individual bonds, preferred shares and ETFs.

Beauchamp would charge 15 basis points of investible assets – about $1,300 in Susan’s case – to develop this plan (but would waive the fee if he manages the assets).

Neufeld would charge about $500 for this type of plan.

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