Retiring when you have little savings and do not own your home carries the risk of finding yourself lacking the resources to meet all your needs. Fortunately, small strategies, like working a few more years part-time, can make a big difference.
Michelle*, 62, would like to retire at 65. At the moment, she has a seasonal job which allows her to collect the maximum amount of employment insurance. She also receives her Quebec Pension Plan (QPP) pension of $250 per month. Single and without children, this income allows him to live well all year round. She also has a five-year-old car that is completely paid off and her furniture is new. Her lifestyle is low since her apartment, where she plans to stay, costs her only $575 per month. She doesn’t travel and it’s not in her plans. With no debt, Michelle has about $25,000 in her regular bank account. She wonders if her plan to retire in three years is realistic.
The first instinct of Marie-Ève Mc Lean, independent financial planner and group savings representative attached to Mérici Services Financiers, in Saint-Jean-sur-Richelieu, was to calculate Michelle’s current net annual income. Thus, to the insurable maximum for employment insurance which is $61,500, we have added 20 weeks of the maximum weekly amount given by employment insurance, i.e. $650, and $3,000 in QPP. That’s $77,500, so about $53,500 net.
“It’s still quite a high income, but in retirement, she would have a lot less,” she notes.
In fact, at age 65, Michelle would find herself with her QPP of $250 and the Old Age Security (OAS) pension of $699 each month. As the OAS is not considered in the calculation, she would be entitled to the Guaranteed Income Supplement (GIS) of $898 tax-free and also to tax credits for the GST/QST and for solidarity.
“Michelle would therefore have approximately $23,667 net, which represents 44% of her current net income,” indicates Marie-Ève Mc Lean. It might work, but it doesn’t seem like much to me. The ideal would be to find solutions so that she has a little more to live on each year, so as not to worry and to be able to deal with unforeseen events. »
The financial planner therefore advises Michelle to find, from age 65, a small part-time job that she will enjoy, that will not be exhausting and that she can keep until around age 70. Ideally, it would earn him around $15,000 per year. For what ?
“The first $5,000 earned is not considered in the SRG calculation, then only half of the next $10,000,” explains the financial planner. So this means that if she earns $15,000, only $5,000 will be added to her income to calculate GIS and it will be reduced by only $313 per month. »
It could also benefit from other measures put in place by the government to encourage people to extend their careers. Among other things, starting in January, contributing to the QPP will be optional for employed people aged 65 and over who are already receiving their pension.
“As Michelle will be entitled to the SRG, it would be good for her to stop contributing so as not to increase her pension which is included in the calculation,” says Marie-Ève Mc Lean. And this will give him more liquidity for his everyday life. Thus, with these strategies, she would see her net income increase to $31,732, which would allow her to significantly improve her quality of life. »
With this part-time job, Michelle would see her lifestyle improve until around age 70 and at the same time, she would avoid touching her $25,000 in savings that she could invest now to make it grow. “First, it is important that she places this amount in a tax-free savings account (TFSA) so that the income from her investments is sheltered from tax so as not to affect her SRG, explains Marie-Ève Mc Lean. His withdrawals will not affect his taxable income either. »
Then, she advises Michelle to consult a professional to establish her investor profile in order to choose the right products. “But already, I would advise her to avoid guaranteed investment certificates because that $25,000 is her only savings, so she needs to be able to access it easily. She could go for conservative mutual funds or a high-interest account, or invest part of the $25,000 in something safe to build an emergency fund and take a little risk on the rest, depending on his profile and his projects. »
Marie-Ève Mc Lean would also advise Michelle to take advantage of the coming years to contribute to a registered retirement savings plan (RRSP). “Her marginal tax rate is 36.12%, which is much higher than what she will have in retirement,” she says. If she chooses the FTQ Solidarity Fund, she will even have an additional 30% tax credit. So, if she invests the maximum for the tax credit, i.e. $5,000, this contribution would only really cost her $1,695 since she would save $3,305 in taxes. If she does this for three years, she would have $15,000, plus an estimated return of about 3.4% until she is 71, which would be almost $20,000. »
In addition to allowing you to accumulate a small additional cushion for your retirement, this strategy has the advantage of preparing you to live with a lower lifestyle, thereby reducing the shock of retirement, according to the financial planner.
Then, to avoid having an impact on her GIS, at age 71, she could transform her RRSP into a registered retirement income fund (RRIF) and empty it all at once.
“As it remains a small amount, it would not be hugely taxed,” she explains. Then, she could ask the government to estimate her income for the coming year to calculate her GIS given that she will have had a drastic drop in her income and emptying her RRIF is proof of this. »
She could deposit everything in her TFSA. “She would thus have around $3,500 that she could spend each year, until the end of her days, without impact on her SRG,” specifies Marie-Ève Mc Lean. That would give him $27,000 net starting at age 71, which would still make a difference to his quality of life. »
