A kitchen reno put a dent in this Alberta teacher’s TFSA. Now she has to catch up for her retirement

Posted on by Duane Roberts

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TFSA Personal Finance Family Finance

The choice comes down to fun now or fun later, says expert

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February 25, 2022 • February 25, 2022 • Read 5 minutes • Join the conversation Much of Brenda's TFSA portfolio was used for a kitchen reno. Much of Brenda’s TFSA portfolio was used for a kitchen reno. Photo by Gigi Suhanic/National Post Illustration

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A woman we’ll call Brenda, 56, lives in Alberta with two children, ages 22 and 14. She brings home $5,250 a month and adds $4,000 monthly in child support that will drop to $500 a month in two years. She would like to retire in a few years, but the timing of the end of her career is problematic. She must balance her expected expenses with her expected income. She will be able to count on a teacher’s pension that, with a $20,000 buyback contribution, can yield $44,517 per year from two years of age at age 58. Her goal: $5,000 a month after taxes when she retires.

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Brenda still has $1,700 a month to pay on her $26,040 outstanding mortgage. It will be paid in full in 15 months. Her private savings – $273,000 in RRSPs and $10,400 in TFSAs will increase her spending capacity, but will clearly not support her current budget of $9,250 per month. Adjustments must be made. Some, like a lower food bill when her kids move out of the house, will happen in due course. Others, such as deciding which accounts to use for future income, require analysis.

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Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Brenda. There are problems, he explains. Much of her TFSA portfolio was used for a kitchen reno, leaving a balance of $10,400. She can make up for the reduction by working part-time as a substitute teacher for $30,000 a year. In her 30 percent average tax bracket, Brenda has to earn $3,000 or get that much out of the RRSPs to be able to spend $2,000.

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Retirement Strategies

Brenda’s goal is to live in her house as long as possible. Her current expenses, $9,200 per month, will decrease as she finishes her monthly mortgage payment of $1,700, $3,000 for RRSP and TFSA savings, and $1,000 to the children. That’s a $5,700 reduction in current allocations, leaving $3,550 per month in core spending for retirement.

To cover those costs, Brenda can count on $273,000 in RRSPs and $10,400 in her TFSA. Her only debt is the mortgage on her $500,000 home. Her net worth is a respectable $890,260.

If Brenda retires in two years, she can buy back a year early when she was working part-time. She would get $44,517 annual gross income to the tune of $20,000.

Her RRSP, with a balance of $273,000 to which she can add $18,000 in 2022 and then $6,000 for another year, would grow to $314,902 in two years and then support payouts of $13,790 for the next 37 years until her 95-year-old. age. Those two sources add up to a pre-tax annual income of $58,307. After 19 percent average income tax, she could have a net income of $3,935 per month. That would cover her $3,550 retirement expense budget, but there would be nothing left for a new or newer car from time to time or other discretionary expenses.

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If Brenda waits five years to 61 years to retire when her younger child graduates from high school, her $20,000 buyback pension would increase to $50,493 pre-tax annual income. Its RRSP with two more years of growth would rise to a balance of $314,900 with $6,000 annual contributions and a three percent return after inflation. That amount would then support $16,687 taxable RRSP income until her age of 95. She would add $8,900 annual CPP (that’s $742 a month) at age 61 for a total income of $76,080. After 20 percent average tax, she would have $5,075 per month for living expenses. The $8,900 CPP is a major component of income, but it reflects a 7.2 percent annual reduction for each year before age 65 that it begins. Four years equates to a 28.8 percent annual reduction in CPP payouts forever. Brenda could avoid that loss by cutting spending by $742 a month for five years. Reducing travel and entertainment, currently $700 a month, by $400 and taking $300 from monthly grants to her children would do the trick. The choice comes down to having fun now or having fun later.

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Income Forecasts

Brenda’s TFSA, which was depleted for home repairs a few years ago, may rise this year and next from its current $10,400 balance by contributing $18,000 and $30,000, respectively, while still receiving child support. Those additions would raise the TFSA balance to $61,030 in two years when she’s 58. Then, if she adds $6,000 per year to her age of 61, when she plans to retire, the TFSA will have $85,790. That capital would support payouts of $4,375 per year until her age of 90. At 65, she can expect Old Age Security to start with initial payouts of $7,707 per year.

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With these income components, upon retirement at age 61, Brenda would have $50,493 in retirement, $16,687 RRSP income, $4,375 TFSA payouts, and $8,900 CPP payments. That’s a total pre-tax income of $80,455 per year. If TFSA’s cash flow is not taxed and the balance is taxed at an average rate of 22 percent, she would have $5,300 per month.

Finally, at age 65, she would add Old Age Security to $7,707 for a total pre-tax income of $88,162 per year. If TFSA’s cash flow were eliminated, her income would be $83,787. After a 22 percent average tax and recovery of TFSA cash flow, she would have $5,800 per month to spend.

Brenda was able to generate income by moving investments from their current mutual fund home to traded funds. Her investment dealer has placed her in a 60 percent equity and 40 percent bond allotment, which today guarantees low and declining fixed income returns. She could save one or two percent a year on fees using ETFs that replicate her high-fee mutual funds. On a current invested basis of $283,400, even one percent saved, $2,834 per year, would cover travel expenses or other expenses she might miss.

She could seek independent investment advice not linked to product sales, Einarson notes. The potential rewards could bolster her desired retirement.

3 pension stars*** out of 5

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This post A kitchen reno put a dent in this Alberta teacher’s TFSA. Now she has to catch up for her retirement

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