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 youre lucky
enough to have a surplus, youll be planning how
you want to spend it.
In last months 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, Canadas
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 shed 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 Ive
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 wouldnt 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. Were not
talking major lifestyle changes, just the same kind
of belt-tightening Ive been doing lately,
Angela says. Giving up a few frills here and there;
thinking about what I need rather than what I want.
Ill still be able to take a nice wee trip each
year as long as Im 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
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,
heres 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. Its the little things, and the unplanned
big-ticket items, that throw spanners into so many budget
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
In general, become a more discriminating shopper, as
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, youre left with just
25 cents. In this situation you are much better off
foregoing the RRSP tax deduction and investing whats
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 its 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
Nevertheless, if it looks like youll be entitled
to some GIS at retirement, you certainly should consider
foregoing RRSP contributions, especially if your current
income is modest as well. In Angelas 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.
Its simply a matter of taking a bit of time to
investigate, and making sure to ask before you pay for
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
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. Thats
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. Thats 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 whos
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
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 dont think so.
Similarly, Joanne, a self-employed promotional consultant,
feels no need to stop doing what shes been doing
for 25 years simply because some imaginary clock
says its time to go. She too might consider
reducing her workload, but rejects the notion of quitting
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, shed 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 dont need to become an investment
expert in order to improve your investment portfolios
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
A seemingly modest incremental improvement in performance
can work magic on a marginal retirement plan.