At 50, it’s time for assessments for Nathalie* and Stéphane*. Do they have to find a second job to reach their retirement goal at 65? Will they work for nothing because of the tax to pay, as their friends say?
“We are 1973 editions. We will be 50 this year,” wrote the couple, who have a 14-year-old son.
From Generation X, Nathalie* and Stéphane* say that they studied at university in the humanities without knowing if they were going to get a job once they graduated.
“The first 10 years in the job market were difficult, with no job security, no retirement funds, working 70 hours a week to make our place,” they recall. Ten years also of paying off our student loans, a long time at 6% interest. »
Nathalie and Stéphane relate that they slowly accumulated RRSPs and other savings to finally, at age 40, become homeowners.
“For five years, we have managed to earn $80,000 a year. A great success for us. »
People in their fifties now want to check with an expert how much they need to reach a retirement goal at age 65. They want to finance the same cost of living as they are now, or $100,000 net per year, even if this amount currently includes $20,000 in savings.
“For the past few years, and even more with inflation, I have had to financially help my parents who made bad life choices,” Stéphane explains over the phone. I’m not sure how to manage to save more, except by working more. »
“Our friends keep saying it’s not worth it, because the extra $5,000 each we plan to earn will completely disappear in taxes. I doubt. »
Stéphane points out that there has not been a salary increase in his organization for 10 years and that the salaries offered in his field never keep up with inflation. It’s for this reason that the couple is considering working seven extra hours a week for 10 years by answering one of the many “We’re Hiring” near their home.
Unless it’s more beneficial to give it a big shot next year by fetching an extra $27,000 each?
Estimated QPP at age 65: $1471
Defined contribution pension plan: $208,000
RRSP: $233,000 (available space: $54,000)
TFSA: $7,100 (available space: $85,000)
HBP repayment until 2029: $1600
Mortgage balance: $130,000
Home value: $300,000
REEE : $25,0
RESP catch-up until 2025: $15,000
Estimated QPP at age 65: $1,145
Employer pension at age 65: $21,000
RRSP: $285,000 (available space: $45,000)
TFSA: $73,000 (available space: $25,500)
Jacinthe Faucher, financial planner, notary and tax specialist at the Société de services financiers Fonds FMOQ, imagined a dozen scenarios to answer the couple’s questions.
Beyond savings, the element that exerts a considerable influence for fifty-somethings, she underlines, is the supplementary pension plan of Stéphane’s employer. The $21,000 he will receive starting at age 65, which is in addition to federal and provincial pensions, will provide the couple with room and board.
In all of her scenarios, the tax specialist applied pension income splitting. Thus, the couple will never have to repay the Old Age Security pension, because retirement income will always remain below the threshold established by the federal government. This year, the threshold starts at $86,912.
Since Stephane has a retirement fund from age 65, he benefits from the pension income credit. “In some cases, you have to withdraw RRIFs to get that benefit,” explains the tax specialist.
By taking provincial and federal pensions at age 65, disbursing TFSAs until age 71, then RRSPs transformed into RRIFs at age 71, Nathalie and Stéphane will have an annual income of $95,204 until they are 96 and 94.
An interesting amount, but the desired objective is not achieved.
By modulating the annual income, the planner succeeds in proposing a second option. Nathalie and Stéphane could enjoy an annual income of $103,520 until age 85 and then live on $80,000. “Generally, we enjoy more travel and leisure before the age of 85. »
Since we always say that it is worth postponing government pensions to 70 years, Jacinthe Faucher postponed that of the federal government to 70 years in the third scenario. The annual income then climbs to $96,004.
“I’m fine with the postponement for someone who’s running out of money. However, you have to live 12 to 15 years longer to make up for the 5 years you don’t get from age 65 to 70. I let people decide, but I prefer to play with taxation than with life expectancy. »
Would the couple benefit from paying off the mortgage sooner? No, because the annual income drops to $93,604.
In a fifth scenario, the planner transforms Nathalie and Stéphane’s non-registered investments into TFSAs in 2023. Result: Annual income stays at $95,204, but they get $20,000 more. “It pays for a trip and part of the cost of living,” she says.
In her sixth scenario, the tax expert makes Nathalie and Stéphane work 7 hours more per week at minimum wage for 10 years, as they proposed. People in their fifties therefore end up with $5,550 in additional income each.
“Of course there is tax to pay, but it allows them to save $3409 each in a TFSA for 10 years. Annual income climbs to $98,404. We’re close to $100,000 for life. »
Nathalie, with a 38% marginal rate, pays $2,114 in taxes. Stéphane, with 39% marginal rate, pays $2,167. So they don’t work for nothing. They get in their pockets $3436 and $3383 net.
Would it be more tax-efficient to earn an additional $27,750 each in 2024, such as a bonus or a special contract? No, because they would pay more taxes. In this scenario, they owe $10,876 and $10,538 in taxes on the $27,750.
They also end up with $17,000 to invest rather than the $3,409 over 10 years.
This is the amount that is missing in order to reach the goal of a desired annual income of $100,000.
Here are the options suggested by the planner to get there: revise the budget, work more to save in a TFSA $7,500 per year for 13 years or $10,258 for 10 years, try to obtain a rate of return of 3.95% before retirement and 3.09% after retirement rather than the 3.45% suggested by the IQPF for the calculations.
“They could also say: we choose the scenario that provides an income of $103,520 until age 85 and we take the pressure off of working more at age 50. »
By postponing the two government pensions to age 70, the annual income reaches $98,000 without additional work or savings. $49,684 is missing to reach the goal.
What if yields stagnate at -1%? In this darker scenario, the income provided would still be $86,400.
With all these scenarios in hand, Nathalie and Stéphane can now choose how they will achieve the second part of their lives.