Secure retirement means working to 70 for woman with patchwork of foreign pensions

Situation: 60-year old health care professional with pensions but late start in retirement planning 

Solution: Accept lower retirement income or work five or 10 more years to attain desired income

In Alberta, a woman we’ll call Gabriella, 60, works as a health-care professional. She brings home $5,200 a month and wonders if she can retire, as she hopes, on an annual income of $57,600 after tax. That’s about $72,000 a year before average tax at 20 per cent.

For now, she is far from her goal, but with diligent savings she might be able to close much of the gap between what her various pensions — two from abroad she earned before coming to __canada at the age of 50 and her present public service pension — and partial CPP and OAS will pay. Her two children are grown and gone and her dependents are just two dogs and a cat. 

There would seem to be few loose ends, but in fact, there are many. Her finances are a patchwork of accounts and foreign pension records. “I would like a plan to tell me exactly where I stand with my finances,” Gabriella says. “I would like to live comfortably on my pension and to be able to travel and live within my means.”

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To determine what those means are, Family Finance asked Adrian Mastracci, a financial planner and portfolio manager who heads KCM Wealth Management Inc. in Vancouver, to work with Gabriella.

“She wants to be financially secure, of course, and she wants to know when she can retire, what she has to do to make it happen with the income she wants, and to know what to do with her investments,” he says. “She is not likely to make her goal, though we can help her get close to it. She is not a risk taker and her financial knowledge is limited.”

Present finances

Gabriella has gross income of about $70,000 a year from her job and a $4,800 annual pension from a former job in Europe. Its value fluctuates with exchange rates. She has total assets of an impressive $944,500 and only $19,600 in liabilities — just $4,000 on credit cards and a car loan of $15,600. That produces net worth of $924,900. But most of this is not really her money.

Her assets are mostly held by pension funds: $337,000 is held by European pension funds and is subject to foreign exchange value changes. She also has $572,000 in the commuted or capital value of her present employment pension, but that money is not accessible except by early application with reduced benefits. The only money she can touch is $15,000 in her RRSP, $3,500 in a TFSA and $2,000 in cash. However, there is space for growth. She has $35,000 of RRSP space and $43,000 of TFSA room. She generates $1,180 in monthly savings, which she can use to get closer to her retirement income target.

Retirement income

If she retires at the end of her 65th year, Gabriella will have $230 a month from CPP, $217 a month from OAS, $1,094 a month from a foreign pension, her present $400 monthly European pension and $1,600 a month from her present job’s pension plan. It adds up to $3,541 a month or $42,492 a year before tax in 2016 dollars. That leaves her $29,508 per year short of her pre-tax retirement income goal at 65.

Gabriella can close this large gap in several ways. She gets annual raises of about four per cent. Those raises for the next five years will add $2,880 a year, or $14,400 over five years, to her gross pay. After tax at an average 20 per cent rate, she would have $11,520 in additional disposable income. On the way to that income she can use funds to pay off her credit card bills, which carry 19 per cent average interest rates, and then add $2,000 a year, or $167 a month, to savings. That would make her total monthly savings $1,347.  

She can allocate these savings to her RRSP space, which will expand with her salary increases. She can add $12,000 a year or more to her TFSA room until she hits the present $46,500 TFSA limit and then add the present limit of $5,500 a year. Additional savings can go to non-registered accounts.

If Gabriella adds $1,347 a month, or $16,164 a year, to her current $20,500 of cumulative savings, then in six years at age 65, assuming a four per cent return after inflation, she would have $137,500. If that sum were paid out over the next 30 years to her age 95, it could generate $7,950 a year. That would reduce the $29,508 gap to $21,558 a year or about $1,800 a month.

Working longer to meet retirement goal

If Gabriella wants to attain her $72,000 pre-tax target retirement income, she will have to work longer. If she were to add 10 years of work, another decade of contributions to RRSPs, and retire at 75, her savings, using the same assumptions but with no further bonuses, would rise to $405,275 — this also assumes that she puts nearly all the money into deferred-tax RRSPs until the end of the year she turns 71, and then into her TFSA. Her annuitized income over the shorter period of 75 to 95 would rise to $29,800 a year. The gap would be closed. Her average tax rate would be reduced by no tax on TFSA payouts and by age and pension income credits.

That Gabriella could attain pre-tax income of $72,000 by working another decade after 65 doesn’t mean that she will — it would be a contradiction of the idea of retirement. Nor is it certain that her employer would permit it, though she might work part-time or on contract.

Further, maintaining a four per cent rate of return after inflation is not a sure thing. The implied returns before 2.5 per cent inflation is 6.5 per cent, which we have used in this model. If Gabriella prefers to invest heavily in bonds with terms of no more than 10 years, or five-year GICs with returns of 2.5 per cent at best, the four per cent growth rate would be unattainable. On the other hand, if she puts most of her money into so-called dividend aristocrat stocks with total returns of six per cent — that is, four per cent for dividends and two per cent for growth — and if she accepts stock market volatility, she could get close to her four per cent return target, Mastracci says.

Gabriella’s retirement issues are not so much her job, which pays well enough, nor her several pension plans, but in unknowns including exchange rates for income paid by her foreign pensions, her own rather casual approach to keeping records and reviewing her investments, and by her present understanding of how investments work.

“Gabriella will need guidance if she is going to get anywhere close to her $72,000 income in retirement,” Mastracci concludes. “I think she must work a few years after 65 just to get a buffer for foreign exchange risk. If she works perhaps five more years to 70, she can have a secure retirement.”