At 64, Tatiana is facing a crossroads in her financial journey, and it's a story that will resonate with many. With nearly $2 million in assets, she finds herself in a position where she can finally put her money worries to rest and focus on the things that truly matter - her family and her dreams. But here's where it gets controversial... despite her substantial wealth, Tatiana is still anxious about her financial future.
Tatiana's financial journey has been far from easy. At just 24, she found herself divorced and solely responsible for raising two young children, with no financial support from her ex-husband. She later remarried but is now widowed. These experiences have left a lasting impression, and Tatiana's past financial hardships continue to shape her perspective.
Her short-term goals are clear: she wants to travel more, help her family, and provide an advance inheritance to her two children. She aims to increase her retirement spending to $72,000 a year after tax, a significant jump from her current spending of around $39,500.
We consulted Warren MacKenzie, an independent financial planner based in Toronto, to analyze Tatiana's situation. Mr. MacKenzie, a chartered professional accountant, has some reassuring news for Tatiana. He believes she has more than enough savings and investments to achieve all her financial goals.
At 65, Tatiana's income will shift. She will begin collecting Old Age Security (OAS) benefits of approximately $740 per month and combined Canada Pension Plan (CPP) benefits of $1,410 per month. Additionally, she will receive her work pension of $1,660 per month and her late husband's pension of around $3,000 per month, totaling $6,810 per month or $81,720 per year, all indexed to inflation.
In her first full year of retirement in 2027, Tatiana's revised cash outflow is projected to rise to $76,500 per year after inflation for basic lifestyle expenses, $11,300 for income tax, and $7,000 for a tax-free savings account (TFSA) contribution, resulting in a total cash outflow of approximately $95,000. Her pension income will also increase during this period.
When it comes to tax credits, Tatiana will be eligible for both the disability tax credit and the age credit when she files her tax return in 2027. With these credits and her pension and investment income, her tax liability is estimated to be around $11,300.
One of Tatiana's concerns is whether she should make an additional registered retirement savings plan (RRSP) contribution to utilize some of her unused contribution room. Mr. MacKenzie advises against this, explaining that she doesn't have enough years left for the contribution to compound on a tax-deferred basis. After starting to collect CPP, OAS, and later, RRIF withdrawals, she will be in a higher income tax bracket than she is currently.
Each year, Tatiana should use funds from her high-interest savings account to contribute to her TFSA. If she expects to live well into her 80s, it might make sense to delay CPP until age 70 to take advantage of the 42% higher benefit. However, if her life expectancy is lower due to her disability, it may be more beneficial to take CPP at 65, as she plans to do.
Tatiana is dissatisfied with her current condo and would prefer to purchase a small house, which could cost more than $600,000. She estimates that the operating costs would remain similar. Mr. MacKenzie assures her that this move would not significantly impact her financial forecast. Regardless of whether she stays or moves, if Tatiana lives to be 100, the size of her estate will remain approximately the same.
Tatiana may eventually decide to sell her home and move into a retirement home. Mr. MacKenzie assures her that the sale proceeds, along with her pension income, will be more than sufficient to fund a comfortable retirement home. Assuming a 2% inflation rate, a 2.5% return on her savings accounts, and a 5% rate of return on her investments, she is on track to leave more than $1 million (in today's dollars) to each of her two children.
One of Tatiana's concerns is how to pass on her cottage, valued at $325,000, to one of her children without seeming unfair to the other. Mr. MacKenzie suggests a fair solution: since she also has a substantial sum in cash and savings accounts, she could ask each child to place a value on the cottage. The child who values the cottage the highest would receive it, and the other child would receive an equal amount of cash.
Tatiana considers herself unknowledgeable about investing and is concerned about the possibility of a severe market downturn. More than half of her investments are in high-interest savings accounts earning about 2.5% a year at current rates. She also has approximately $475,000 in mutual funds, with 85% invested in equities and the remainder in balanced funds.
Mr. MacKenzie advises Tatiana to ask her financial adviser for a report comparing her performance to the proper benchmark, as this will help her understand if her adviser is delivering value.
Over time, Tatiana's financial situation will continue to evolve, and Mr. MacKenzie emphasizes the importance of keeping her financial plan updated to ensure she remains on track to achieve her goals and enjoy a peaceful retirement.
Tatiana's story is a testament to the power of financial planning and the importance of understanding one's assets and how to use them effectively. With the right guidance and a clear plan, she can achieve her goals and finally put her money worries behind her.
