YOUR RIGHTS

Your Retirement Budget

How to improve the bottom line

By Olev Edur

Preparing a retirement budget – taking stock of the income and pensions you have and comparing them to your expenses – is one of the first things you need to do in getting ready for retirement. Depending on your findings, you may have to work a little longer or pull in your belt a bit. Or if you’re lucky enough to have a surplus, you’ll be planning how you want to spend it.

In last month’s good times, we gave you three worksheets to help determine where your retirement finances stand. If your budget came up short, take heart. There are many things you can do. For starters, Canada’s Old Age Security/ Guaranteed Income Supplement (OAS/GIS) programs can provide as much as $12,000 a year to singles with no other income, more to low- or no-income couples. While this level of income would hardly underwrite an extravagant lifestyle, it certainly guarantees a lot of the basics.

Beyond that, you can employ any or all of the strategies below to achieve maximum benefit from whatever additional resources you might have. In some cases the results could be pleasantly surprising.

1. Reduce your expenses.

After completing the good times worksheets, Angela, a divorced sales clerk living in Guelph, Ont., has learned that a penny saved can be worth quite a bit more than a penny earned. Now 57, she had hoped to retire in modest comfort by age 65 at the latest. But given her savings to date, she feared she’d never be able to retire at all, and in bad moments, she dreaded the thought of having to sell her cosy bungalow to survive.

Although she was debt- and mortgage-free and owned a relatively new (three-year-old) car, Angela had only $40,000 in her RRSP, with a projected Canada Pension Plan entitlement of $3,000 a year at age 65, and an employer pension that would pay perhaps another $2,000 a year. (Angela re-entered the work force at age 47 after her kids reached their teens.) Even with OAS/GIS, her total retirement income, including earnings from her savings to date, would total less than $16,000, well short of her $20,000 retirement income target. Further growth in her existing RRSP assets would push her income potential up another few hundred dollars a year at most.

Angela had been contributing $100 a month to her RRSP via payroll deductions. However, by reviewing her living expenses, she found she was able to squeeze another $100 a month in savings from her take-home pay of $1,900. “It looks goofy, but a big chunk of that $100 came from buying a Thermos and bringing my own coffee to work every day,” says Angela. “Plus I’ve been looking around more for bargains when I shop.”

Even so, Angela doubted that she would be able to afford retirement at age 65. And indeed, even the $2,400 in annual RRSP contributions wouldn’t be enough in itself. Over the next eight years it would boost her RRSP to $76,900, assuming a conservative annual after-inflation growth rate of four per cent.

When Angela revisited her retirement budget, she found almost $100 a month in savings as well, reducing her income target to about $19,000. “We’re not talking major lifestyle changes, just the same kind of belt-tightening I’ve been doing lately,” Angela says. “Giving up a few frills here and there; thinking about what I need rather than what I want. I’ll still be able to take a nice wee trip each year as long as I’m careful.”

The benefits of saving a penny rather than spending it are twofold. First, a penny not spent is actually worth 1.30 cents or more (depending on province and income level) after tax. Second, a penny saved can be put to work compounding and growing for you immediately. And so, through modest thrift and sensible investing, Angela was able to chop her annual retirement income shortfall from the original $4,000 to less than $2,000, with minimal impact on her current and future lifestyle expectations.

And, if Angela were to start putting her annual $2,400 contributions into non-registered investments instead of RRSPs, she could do even better.

If you need to find savings in your retirement budget, here’s where to look:
Pay off all personal debts and avoid incurring any further interest charges. Those personal debts must be repaid with after-tax dollars, so a 10 per cent borrowing charge translates into the after-tax equivalent of earning 12.5 per cent or more (depending on your tax bracket) in guaranteed interest income; a credit card rate of 18 per cent translates into 22.5 per cent or more.

Scrutinize your spending on ‘incidentals,’ anything from daily coffees and chocolate bars to larger impulse purchases of clothing, household furnishings etc. It’s the little things, and the unplanned big-ticket items, that throw spanners into so many budget works.

Look at alternatives such as buying a slightly used car rather than a brand new one; depreciation can knock 30 per cent of the price of a given vehicle in just two years.
In general, become a more discriminating shopper, as Angela did.

2. Beware of the RRSP/GIS trap

Like Angela, anyone whose retirement income prospects are modest, and who thus may be entitled to some GIS benefits at age 65, should be extremely circumspect about putting any more money into RRSPs. When the money is eventually withdrawn, it will be taxed and could also reduce your GIS entitlement.
GIS is available to individuals earning up to $13,176 in income, but that figure excludes OAS of about $5,500, meaning Angela could earn almost $19,000 (OAS is considered taxable income) and still be entitled to benefits. Income below about $12,000 to $15,000 (depending on province and tax credit entitlements) is no longer taxable, but it will still affect GIS entitlement.

Every dollar added to your income reduces your GIS benefit by 50 cents. If you have to pay tax of 25 per cent on that dollar, too, you’re left with just 25 cents. In this situation you are much better off foregoing the RRSP tax deduction and investing what’s left after taxes outside the RRSP, again through payroll deductions if desired. At age 65, this unsheltered money can be used to “top up” your other income with minimal impact on your GIS entitlement or your tax bill, because most of it will be considered to be your own ‘capital’ that had already been declared as income and taxed.

Say, for example, that Angela paid tax on that $2,400 each year and invested the remaining $1,800 or so outside an RRSP. After eight years of three per cent after-tax growth, this part of her nest egg would grow to $18,300, while her RRSP would grow to $54,700. The $73,000 total is less than that original RRSP total of $76,900, although you would have to deduct about $2,600 in tax liability from that $76,900 for an honest apples-to-apples comparison.

So far, the net after-tax cost of Angela foregoing any more RRSP contributions for eight years would be $1,300. But once she reaches age 65 and becomes entitled to the GIS, every unregistered (instead of registered) dollar Angela can use to support herself will give rise to almost 50 cents more in GIS benefits. (A small fraction of her unregistered savings – only the part that represents growth during the year – will be deemed taxable income that year.)

In other words, at age 65, Angela could leave the RRSP alone, withdraw $4,000 yearly from the unregistered account, and thus balance her retirement budget for the next five years. In the process, she would receive almost $10,000 more in GIS benefits than if she had been taking the $4,000 annually from her RRSP.
Furthermore, her existing RRSP can continue to compound untouched for five more years to reach $66,000. (By the end of the year Angela turns 69, she must collapse the RRSP but the proceeds can be rolled into RRIFs or annuities.) If Angela were to buy a life annuity with that money at age 69 or 70, she would receive at least as much income as if she had paid $76,900 for an annuity at age 65 (assuming interest rates did not change much in the interim).

Of course, interest and annuity rates do change frequently, so it’s not possible to say what the exact result would be. And the validity of this strategy can depend to a certain extent on other circumstances. As a result, the numbers must always be worked out on an individual basis.

Nevertheless, if it looks like you’ll be entitled to some GIS at retirement, you certainly should consider foregoing RRSP contributions, especially if your current income is modest as well. In Angela’s case, avoiding further RRSP contributions would enable her to balance her retirement budget for five years and still have as much potential income afterward as she would have had by relying on the RRSP alone.

And finally, for those who might feel a twinge of guilt about “milking the system,” bear in mind that if this strategy works to your benefit, you should never have been sold an RRSP in the first place.

3. Be aware of all your entitlements.

OAS and GIS are not the only benefits available to low-income retirees (and others) in Canada these days. Other federal and provincial offerings might include further direct income assistance to low-income individuals or couples, as well as subsidies, grants or tax credits/deductions for home improvements, health care and more. The 2003 Canadian Subsidies Directory, lists programs.

Nor is it just federal and provincial governments that offer such programs. Some municipal governments offer assistance in certain situations, as do charitable organizations, even businesses. And of course, once you reach age 55, 60 or 65, depending on the program, you become entitled to discounts on practically every service or product you can buy, from insurance to ballroom dancing lessons. It’s simply a matter of taking a bit of time to investigate, and making sure to ask before you pay for anything.

4. Reconsider the timing of your retirement.

Anyone planning to retire early but caught by the 2000-2002 stock market downturn undoubtedly will have arrived at this line of thought already, as did Brian, a 52-year-old Vancouver stationary engineer. Brian figured the losses in his RRSP have set him back at least five years from his goal of retiring with an early pension at age 55 and travelling.

However, the good news is that, as with expense reductions, relatively short deferrals in your retirement target date can yield disproportionately large benefits. Each additional year of deferral means you can continue contributing to your savings, and they can continue compounding for one more year without withdrawals. Furthermore, those augmented savings will be required to last one year less. This double benefit could enable you to increase your annual retirement income expectations by 15 or 20 per cent in just two or three years, not five or 10 as David had initially expected. “That’s a piece of good news, for sure,” he says.

If you were to start collecting CPP or a private pension one year later, you might be entitled to hundreds or even thousands of dollars a year more in annual benefits. Each year between ages 60 and 70, your annual CPP entitlement increases by six per cent. And the accumulating benefits of some defined-benefit pension plans increase dramatically in the final few years before retirement.

As with Brian, Irene and John of Toronto, both in their mid-50s, lost more than a third of their RRSPs’ value when the market collapsed. Being self-employed without private pensions, they believed they would not be retiring at 65, let alone 60 as planned. Again, it turned out that retirement sometime before 65 was still feasible despite their loss.

As for Angela, any remaining shortfall in her long-term retirement finances could easily be remedied by working just another year or two on top of the measures already mentioned. That’s a far cry from never being able to retire, or having to retire in far less comfort than one had hoped.

5. Consider a working career after 65.

Yes, this may sound anathema to someone who’s been counting the days till they can drop the old shovel and go home for good, but what then? Golfing from dawn to dusk every day? Cruising the world over?

One of the worst afflictions that can confront a retiree is boredom, and indeed, many retirees soon tire of their pastimes and find something more to do. Countless Canadian retirees now provide volunteer services to their preferred organizations, while growing numbers are finding that working after 65 can be both financially and psychologically rewarding.

According to the most recent Canada Customs and Revenue Agency (CCRA) Taxation Statistics (2000 tax year), about 20 per cent of the 1.1 million Canadians aged 65 to 69 who filed tax returns were still earning income from employment, a business or a profession.

“I have no intention of quitting work just because I turn 65,” says Richard, a 56-year-old chiropractor. “Why would I want to do that when I can still help people? I might cut back on my hours, but quit altogether? I don’t think so.”
Similarly, Joanne, a self-employed promotional consultant, feels no need to stop doing what she’s been doing for 25 years simply because “some imaginary clock says it’s time to go.” She too might consider reducing her workload, but rejects the notion of quitting altogether.

Of course, many retirees find themselves working after 65 not from choice but necessity. Whatever the impetus, though, working beyond normal retirement age even on a part-time basis can vastly enhance your financial prospects during retirement.

Say Angela were to earn, say, $6,000 a year for working a day or two a week until age 69. The added income would reduce her GIS entitlement during those years, but she would need only about $1,500 a year from her unregistered savings to balance her budget. Her RRSP would continue growing and at 69, she’d still have almost $15,000 in unregistered savings to top up her future income without affecting her GIS entitlement. Doing so would also allow her RRSP to compound untouched for several more years. In fact, if Angela were to work, say, one more year full time and a couple more years part time, she would have an income surplus, rather than a shortfall.

Fortunately, too, demographics work in favor of retirees seeking continued employment beyond 65. The baby boomer bulge is on the verge of retirement and this is going to leave many employers scrambling for skilled help, full- or part-time.

6. Improve your investment skills.

One can almost hear the cries of indignation from would-be retirees whose savings were ravaged by Nortel et al. “Right! Sure! And how do you go about improving your investment skills when even all the so-called experts were caught with their pants down?”

The fact is, you don’t need to become an investment expert in order to improve your investment portfolio’s performance. You just need a modicum of common sense and systematic adherence to basic investment rules.

Good sense also means not avoiding stocks entirely. In late 2002, these pages urged readers to start considering “stocking up” again because market prices had finally fallen to realistic levels. And indeed, by September 2003, the S&P/TSE Composite Index was up almost 10 per cent over the beginning of the year, as was the Dow Jones Industrial Average.

For the rest, sound investing means building a “portfolio” that is balanced between fixed income and equity holdings, and provides enough diversity to ameliorate periodic market downturns in one area.

When it comes to fixed-income investments, you might want to avoid GICs and term deposits in favor of higher-yielding corporate bonds or mortgage-backed securities (MBSs). As far as equities go, stick with the stocks of conservative, high-quality companies to minimize your risk, and try to avoid putting too much emphasis on any single holding (as happened with Nortel). Periodically review and update your holdings if necessary to reflect cyclically changing market conditions.
A seemingly modest incremental improvement in performance can work magic on a marginal retirement plan.