Q.
I am a single 61-year-old and my concern for my nest egg is simply maintaining the capital. I’m not optimistic about the world economies and wonder if Treasury bills or
guaranteed investment certificates
(GICs) are enough of an investment to simply keep my principal intact over the next few years. I make about $60,000 annually and have about $200,000 in savings split equally between my
tax-free savings account
(TFSA) and
registered retirement savings plan
(RRSP). I have no employer pension and plan to take my
Canada Pension Plan
(CPP) and
Old Age Security
(OAS) at age 65, which I will be able to live on since the mortgage on my condo will be paid off by then. Is this a good strategy or am I overlooking something? I am a very conservative investor holding 80 per cent fixed income in my investments.
—Silvia
FP Answers:
Hi Silvia. With what is going on in the world I can understand why you are not feeling optimistic about world economies and why you want your principal protected. GICs will do this, but I think you are overlooking a few things. My concern is that you are accepting things as you see them, and having a conservative investment mindset may lead to conservative living and a retirement that is more frugal than it needs to be. Let’s not let that happen to you and instead come up with a conservative plan that will enhance your retirement.
One thing you may have overlooked is your spending needs. I don’t know you but will CPP and OAS, about $24,000 a year, really be enough? Most of it will be tax free once you are 65 and claiming the age credit but it may still fall short of really providing you with a comfortable retirement. Have you accounted for lump sum money needs such as a new car? We need to find a way to get your income up.
Other things you may have overlooked are longevity risk, inflation and loss of purchasing power, which are all related risks. Ask yourself: If you live a long time will your money run out? What about inflation, which is probably the biggest risk retirees face? As prices increase will you continue to be able to afford tomorrow what you can today?
GICs are great for preserving capital but they are not great at protecting purchasing power, which is the reason for investing in equities. There is a real risk with GICs that the after-tax return will be less than the rate of inflation. I’m sure you have heard the expression, “A million dollars is not what it used to be,” which is an eloquent saying about the loss of purchasing power.
The biggest thing you may be overlooking is how a conservative investment approach can curtail retirement living. Worries about the future may prevent you from ever spending your money until eventually you die with your $200,000 or more, never enjoying the experiences the money could have brought you.
A quick solution may be to increase your equity exposure but that adds volatility risk and I don’t think that is for you. I am going to lay out a conservative retirement plan, starting at age 65, that will reduce longevity risk and loss of purchasing power risk, make better use of your money and increase your guaranteed income.
Delay your CPP and OAS to age 70. Convert your RRSP to a registered retirement income fund (RRIF) at age 65 and draw about $24,000 a year, inflation adjusted, so the RRIF is depleted before the year you turn 69. Then the year you turn 69, draw $24,000, inflation adjusted, from your TFSA. This will give you the $24,000 a year you expected from CPP and OAS. Your RRIF will be gone and you will have about $70,000 left in your TFSA.
At age 70 you will start to collect your CPP and OAS. Your CPP will be at a minimum 42 per cent higher than it would have been at age 65 and your OAS about 36 per cent higher. This is guaranteed pension income, increasing with the rate of inflation, lasting the rest of your life no matter how long you live.
On top of that, you will collect the
Guaranteed Income Supplement
(GIS,) an income tested pension that will also increase by the rate of inflation. I estimate that with the CPP, OAS and GIS, your indexed income after age 70 will be about $36,000 a year, and from age 65 to 70 about $24,000, as you are anticipating. Would you want to do some part-time work for the extra income and social benefits between age 65 and 70?
To be fair, you could start your CPP and OAS at 65 and qualify for some GIS for an income of about $29,500 and at age 70 it would be about $32,000. You will still have your RRSP and TFSA but the forced RRIF withdrawals at age 72 will result in some GIS reduction.
Silvia, I hope I have given you enough to get you thinking. My suggestion is you take these ideas to a financial planner and model out a few different scenarios. I don’t have all your financial information and there may be a better CPP and OAS start date combination that maximizes the GIS than the one I described. It’s worth your time to look at a few options with a planner.
Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services and insurance products through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. He can be reached at alnorman@atlantisfinancial.ca.
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