Canadian Affairs Article: Can James, 71, and Valerie, 63, afford to move to a nicer neighbourhood?

Canadian Affairs asked me to review the financial situation of James and Valerie, a retired couple in Montreal. 

They dream of traveling twice a year, upgrading to a nicer neighbourhood, and replacing their car in a few years—all while maintaining a comfortable retirement with $64,000 a year in spending for the next decade.

Currently, their income comes from CPP, QPP, OAS, and GIS, and they have $500,000 in retirement investments. Their home is worth $525,000, with an $82,000 mortgage. But with James now required to convert his RRSP to a RRIF, they’re reassessing their long-term financial plan.

In the article, you’ll learn:

• Do James & Valerie have enough to fund their desired retirement lifestyle?
• What investment strategy could put them on track?
• How could a GIS strategy impact their financial plan?
• Should they adjust their spending, investment mix, or mortgage plans?
• What’s the best way to balance their goals while securing long-term financial stability?

CLICK THE LINK BELOW TO READ THE ARTICLE BY CHETAN RAINA:

Can James, 71, and Valerie, 63, afford to move to a nicer neighbourhood?

Financial Snapshot

James, 71

Valerie, 63

Pre-tax assets:

James’s RRIF: $184,000

Valerie’s RRSP: $221,000

Post tax assets:

James’s TFSA: $53,000

Valerie’s TFSA: $42,000

House: $525,000

(All invested assets in 60/40 ETF XBAL)

Liabilities:

Mortgage: $82,000 (5-year fixed at 2.79%. March 2027 renewal. Balance at maturity $75,214)

Income:

Employment income $0.

James OAS 2023: $8,354.52

Valerie OAS 2023: $0.

Valerie has not started OAS

James CPP/QPP 2023: $12,129.60

Valerie CPP/QPP 2023: $8,013.00

(Both have started CPP/QPP)

James 2023 Net Federal Supplements (line 14600): $5,367.66

Valerie 2023 Net Federal Supplements (line 14600): $5,367.66

Expenses:

Monthly mortgage: $411.25

Estimated other expenses: $4,600

Other:

James RRSP contribution room: $96,094

Valerie RRSP contribution room: $91,968

James TFSA contribution room: $39,221.27 + $20,000 withdrawn in 2024

Valerie TFSA contribution room: $70,282.97

Financial Plan

For the lifestyle that James & Valerie said they want, they need $74,000/year before tax for 10 years, then $56,000/year for 10 more years when they spend less, and then $51,000/year after their mortgage is paid off in 20 years. Their investments are 60% equities & 40% bonds, which should conservatively give them a long-term return of about 5.6%/year.

For this lifestyle, they need about $550,000 of investments. They have $500,000 in retirement investments. They are 8% short of their goal.

A retirement plan is a long-term projection. Since they are close, they could try it and they may well be fine, but it is advisable to be at least 10-20% ahead of your goal, not 8% behind.

This does not leave them the money they want to replace their car for $35,000 and move closer to their kids for $100,000.

Part of their issue is that they have been receiving $10,700/year tax-free of Guaranteed Income Supplement (GIS), which will stop next year after James starts the mandatory withdrawals from his RRIF. GIS is clawed back based on 50% income.

They have several options that could put them on track or at least help them:

Planning Options for James & Valerie:

1.       Reduce their retirement lifestyle:

Reducing their retirement lifestyle by just $4,000/year would put them on track for the lifestyle they want. For example, they could reduce their travel from $14,000/year to $10,000/year.

To be able to also afford both a $35,000 car and $100,000 to move close to their kids, they would have to reduce their lifestyle by $20,000/year before tax, or $15,000/year after tax for 10 years. For example, they could buy the car and move closer to their kids, but not do any travel – other than travel with little or not cost, such as visiting family.

Financial planning is actually life planning. With specific examples of different lifestyle options, they can choose which is more important to them.

2.       Invest for more growth:

They are invested 60% in equities and 40% in bonds, which conventional wisdom says is good for most people. However, studies have shown that a higher allocation to equities has been more reliable in providing for a 30-year retirement. This assumes it is within their risk tolerance, meaning that they could stay invested when their investments fall.

They could get educated on the expected long-term returns, size & length of market declines, and long-term reliability of returns of various investment options.

In their case, investing 80% in equities and 20% in bonds would put them on track for their desired lifestyle.

Investing 100% in equities would also allow them to either buy their car or give them $50,000 towards moving close to their kids.

3.       GIS Strategy:

It is possible to plan to get a higher GIS pension. With the GIS Strategy, you often have to do the opposite of what you would otherwise do. This is because seniors that get GIS are in the highest tax bracket in Canada, but if they don’t get GIS, they are usually in the lowest tax bracket.

The maximum GIS for a couple is about $15,700/year tax-free. They would have to have no taxable income other than OAS & GIS. In their case, they would need tax deductions to offset their CPP and RRIF income.

Valerie can defer all her RRIF income by keeping her RRSP and not converting to a RRIF. Valerie could have deferred her CPP, as well, but she has started it.

Together they get about $20,000/year from CPP and James’s minimum RRIF will be about $10,000/year. They need about $30,000/year in tax deductions to get the maximum GIS.

Being retired, they have limited opportunities for tax deductions. Their most obvious deduction is by contributing to their RRSPs. James has an RRSP contribution room of $96,094 and Valerie has $91,968.

If they contributed the maximum to both their RRSPs and then claimed the deductions optimally, they could get a total of $188,000 tax-free GIS income over the next 7 years. They could carry forward their deductions every year and only deduct the optimal amount. They should claim about $30,000/year in RRSP deductions to fully offset their CPP and RRIF income.

This $188,000 tax-free income over 7 years would allow them to live their desired lifestyle, and also buy their car and move closer to their kids. They could then afford everything they wanted.

They could make these contributions by cashing in both of their TFSAs to contribute to James’s RRSP before he converts it to a RRIF. This is the last year they can do this. They could then increase their mortgage by about $95,000 when it comes due in 2 years to contribute Valerie’s maximum RRSP.

It may seem odd to increase their mortgage at their age, but they would save more than 50% of a $95,000 RRSP contribution in higher GIS income and lower tax, while paying only a modest interest rate on it.

4.       Increase mortgage:

James & Valerie’s mortgage comes due in March 2027. They have a great mortgage rate of 2.79% now. It will be significantly higher after they renew it.

They may be thinking about paying it off sooner, either from their TFSAs or a higher mortgage payment. However, it is probably best for them to pay their mortgage as slowly as they can for 2 possible reasons:

–          They would have to withdraw from their investments to pay more on their mortgage. Their investments would probably be expected to earn more than their mortgage interest rate long-term, even after tax. Their current allocation should conservatively give them long-term returns about 5.6%/year. Without the GIS Strategy, they are in a 20% marginal tax bracket, so their after-tax return on their RRIFs should be at least 4.5%/year. Their mortgage rate is likely to average less than this long term.

–          They can defer tax by withdrawing less from their RRIFs and paying less onto their mortgage. If they do the GIS Strategy, they need their TFSAs entirely to contribute to RRSP. Their only investments left would all be RRSP or RRIF, and 50% of every withdrawal would reduce their GIS plus possibly cost them income tax. As long as they get GIS, it is worthwhile for them to withdraw as little as possible from their RRIFs. A minimum mortgage payment and no mortgage prepayments helps them defer tax.

Ed