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Ontario man faces early retirement problem to pay for daughter’s tuition

But a government pension will ensure a safe and prosperous retirement

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In Ontario, a man we will call Ken, 64, is a public servant. His 22-year-old daughter, Rachel, lives with him while in college. Divorced not so long ago, he ended up paying for Rachel’s college tuition of $72,000 a year. He has a $1,250,000 house, $13,880 in his RRSP, $46,126 in his TFSA, $1,057 in taxable savings and an $8,000 car. The house has a mortgage of $178,946. His net worth stands at $1,140,117. His employment pension will have to be the basis of his retirement income because his savings, $61,063, are modest.

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Ken’s worry is that he will run out of money in retirement. Currently, as a mid-level manager, he earns $150,772 per year plus variable overtime. Taxes, benefits, union dues and pension fund costs reduce that amount to $9,715 per month. Rachel still has three years of school before graduation. It’s a bill for $216,000. He saves on food costs because meals are provided by his employer when he works 24 hours a day.

Tuition

Ken’s cash crunch is compounded somewhat by the termination of some payments his former partner used to make to Rachel. Ken took over with little hope of reimbursement. Rachel may be able to repay her father in the future, but establishing herself in her profession will take many years.

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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, BC to work with Ken. Moran thinks debt and cash management issues need to be addressed.

Ken’s total monthly expenses are $9,715. About 62% of that is Rachel’s $6,000 monthly tuition. His variable rate mortgage, currently at 3.05%, costs $1,308 per month. Ken can start receiving his Canada Pension Plan benefits in February 2023, although he continues to work in government.

Add up income

The basis of Ken’s retirement income will be his pension. In three years, on his 68th birthday, he will have 31.9 years of service at two percent of $150,773, or about $96,192 minus a bridge of $14,326. That will leave him with $81,867. If he retires in January 2023 at age 65, he would receive less – $75,935 per year. Working longer and deferring the start of his pension leads to an increase in his pension.

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Ken, who came to Canada at age 26, will be eligible for 39/40ths of the full OAS of $8,004 per year, which equals $7,804 per year. He can postpone the start to age 71 and then benefit from a retroactive year.

Ken has $46,126 in his TFSA. It adds nothing and keeps the account in reserve just for emergencies. It is therefore not part of his expenses. He has no RRSP contribution room because the pension adjustment limits it to 18% of earned income. This is already paid for by his government pension contribution.

If the current RRSP balance of $13,880 increases by 3% after inflation and is spent over 25 years until age 90, it would add $774 per year to his income for 25 years.

At age 65, he would have his government pension of $75,935, RRSP income of $774, CPP $15,043 and OAS $7,804 for a total of $99,556. At that level, $2,670 would be recovered and, after an average tax of 23%, he would have $74,603 per year, or about $6,200 per month.

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If he works until age 68, he will receive a labor pension of $82,000, an enhanced CPP of $18,804, an RRSP of $875, an enhanced OAS of $9,728 less a clawback of $4,445 for a final income of $106,962. After 23% tax, he would have $82,360 per year or $6,863 per month. Working three more years generates a net monthly income gain of $663 per month. Whether it’s worth it will be Ken’s personal decision.

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Ken’s public service pension is indexed to the rate of inflation. Working longer produces a higher indexation base and therefore a clear advantage in delaying retirement. The OAS clawback taxes the gain, but it will retain 85% of each indexing adjustment before income tax. And he can exercise some control over his ordinary tax rate by selecting investments that offer capital gains taxed on the basis of a current inclusion rate of 50%, i.e. only the half of a realized gain is taxable.

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financial freedom

In three years, Rachel will have completed her graduate degree. This will increase Ken’s personal disposable income from the $72,000 a year he currently spends on Rachel’s education.

The extra money Ken can save when Rachel finishes college can speed up his mortgage payment which, at the current repayment rate of $1,308 per month, has 12 years to run. If Ken doubles the repayment rate to $2,616 per month, which he can do in three years, the mortgage would be fully paid off in four and a half years after he stops subsidizing his education. This assumes that renewal rates do not increase drastically.

The greater cash flow Ken will have in three years when he no longer pays Rachel’s tuition will also allow him to fill his TFSA space. His TFSA balance is $46,126. The current TFSA limit, $81,500, increases by $6,000 per year. So it will be $99,500 in three years. When Rachel graduates, Ken can add to the TFSA balance. He plans to keep the TFSA as an emergency reserve and therefore not be part of the expenses.

By the time he turns 70, Ken’s mortgage will be fully paid – assuming he’s doubled his payments, Rachel will have his graduate degree and he’ll have a liberal budget for the trip he gave up to help Rachel . He will have a secure and prosperous retirement, predicts Moran.

Retirement Stars: Four **** out of five

Financial position

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