Empty Nesters Wonder If They Have Saved Enough To Retire And When To Take Cpp And Oas

Married nearly 30 years, Laurence* and Sandra are officially empty nesters. Their two adult children are independent and building their careers and the couple are ready to fully embrace their next chapter — if they have saved enough.

Laurence is 58 and would like to retire by the end of this year. Sandra is 61, retired in 2019 and hasn’t looked back. The couple live in Ontario. Their primary residence is valued at $1.2 million. They own it mortgage-free and have no plans to sell. They also own about 50 acres of farmland, also mortgage free, which generates about $10,000 in gross annual income. They view the property as part of their children’s inheritance.

Laurence earns $148,000 in annual income before tax, while Sandra receives $58,000 a year before tax from her former employer’s defined benefit pension plan. The plan includes a Canada Pension Plan (CPP) bridge amount of $7,700 until she turns 65, at which time she will no longer receive the top-up.

Laurence will receive about $830 a month in CPP payments at age 60. This increases to about $1,300 a month at 65 and about $1,800 a month at age 70. Sandra’s CPP benefits are about $816 a month at age 60, $1,160 at age 65 and $1,600 at 70.

“When should we start to take CPP and Old Age Security (OAS) benefits?” asked Laurence.

The couple’s investment portfolio includes nearly $1.1 million in registered retirement savings plans (RRSPs) of $660,000 for Laurence and $433,000 for Sandra. The accounts are largely invested in equities across diverse industries, and in cash. Laurence continues to maximize contributions while Sandra stopped contributing to her RRSP when she retired. Laurence also has $200,000 in a locked-in retirement account (LIRA). Both Laurence and Sandra have tax-free savings accounts (TFSAs) with a combined value of nearly $360,000, almost equally split. The LIRA and TFSAs are also invested largely in stocks. They both maximize their TFSA contributions each year. All of their investment accounts are managed by a fee-based portfolio manager.

In addition to their investments, Laurence has a $100,000 whole life insurance policy that costs $750 a year and Sandra has two $50,000 permanent life insurance policies that cost about $1,500 a year. “We’ve had these policies for years, but they are not earmarked for anything in particular,” said Laurence.

The couple’s monthly expenses total about $9,000, an amount Laurence expects will likely continue in retirement, as they don’t plan on any significant lifestyle changes. Neither Laurence nor Sandra has any plans to work in retirement.

“Have we saved enough to allow me to retire this year?” Laurence wants to know. “And what can we do to ensure we keep our tax costs to a minimum?”

What the expert says

Laurence and Sandra have done the right things to place themselves in a great position for Laurence to retire this year, said Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management. They have paid off all debts, saved well through their working years, diversified their investments and successfully become empty nesters with independent adult children.

“Most people would consider them well off and envy the combination of assets and income sources. The only thing missing is a retirement income plan to give them the clarity and confidence they know they need before taking the final step into retirement,” said Einarson.

“Retirement income planning is essentially about meeting future spending needs from all cash flows. In Laurence and Sandra’s situation, if they stick to their $9,000 net monthly income needs they will have excess income, as minimum withdrawals increase with age on their registered assets. Combining all sources of income, they can easily meet future income needs, saving excess income created in TFSA accounts and a joint non-registered investment account, and increasing net worth throughout retirement.”

Einarson said a tailored retirement income plan will provide numerical and graphical data to verify how their financial assets will be affected by the income drawn over time. It will organize and analyze what is possible for Laurence and Sandra under a variety of scenarios.

A retirement income plan will also help them decide when to take CPP and OAS. That said, Einarson suggests that taking CPP at age 65 is generally a good compromise as it offers the standard pension amount, providing an indexed lifetime income without the early-age penalty or the deferred-age waiting period for higher payments.

“Insurance policies should be integrated into any retirement plan . They must be understood and earmarked for something, otherwise why would you own them? They may have potential to play a larger role in their estate planning but more information will need to be obtained and analyzed,” said Einarson.

“The retirement income plan will also demonstrate the most tax efficient way to create the income they need and demonstrate how that efficiency considers a future survivor and their estate. It completes their financial strategy. A fee-based investment management firm should ensure you have confidence in your future through access to the retirement planning process. If the services Laurence and Sandra are paying for are lacking, it’s reasonable to consider other options. Many people postpone retirement not by choice, but due to a lack of needed guidance.”

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* Names have been changed to protect privacy.

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