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Piloting her way to a comfortable retirement

Michelle Siu for The Globe and Mail/michelle siu The Globe and Mail

Four years from retirement and only recently earning a "pretty good" salary, Marianne is worried. She will get a pension of about $2,600 a month from the university where she teaches and she has some savings.

But does she have enough money to do some "long overdue" renovations to her home, pay for whatever care she might need in her old age and still leave something for her 20-year-old grandson, whom she has raised from infancy and who has special needs?

"My house, fully paid off along with the (one-time) land-lease price, will not appreciate in value because I live [in an Ontario jurisdiction]where homes cannot be sold on the open market," Marianne writes. "Hence, if I were to require some sort of assisted-living arrangement in the future, selling the house would not yield much." She estimates the value of the house and land lease at $175,000.

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She is considering a pension buyback that would give her two more years of pensionable earnings, thus adding to her retirement income, but it would cost $50,000. She's "yearning" to fix up her home. "Can I do both? One and not the other?" she asks.

Will there be enough of an estate to set up a special trust for her grandson, who receives Ontario Disability Support Program (ODSP) payments? "Will I end up eating cat food in my advanced age?"

We asked Linda Stalker of Henderson Partners LLP in Oakville, Ont., to look at Marianne's situation.

What the expert says

Marianne would have to slash spending and save a lot more to meet all her goals, Ms. Stalker says. Although her fixed costs are not high, her discretionary ones are.

Given her circumstances, Marianne cannot afford both the pension buyback and the home renovation, Ms. Stalker says. She can do one or the other. Because the home will not appreciate much in value over time even with the renovations, she'd likely be better off putting what money she has toward the pension buyback.

"If she is able to take out a mortgage on her home in the amount of the pension buyback, her annual pension will increase enough to make the interest payments on the loan and to pay back the principal over a 10-year time frame," the planner concludes.

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Marianne should direct the $300 a month she is saving outside of her registered retirement savings plan to a tax-free savings account, where gains are not taxed when the money is withdrawn. Based on her projected income, she will not have her Old Age Security clawed back in retirement.

Marianne wants to leave an estate for her grandson by way of a Henson Trust, a type of trust that allows a disabled person to still qualify for ODSP benefits even though they have inherited money because the money is controlled by a trustee. If Marianne continues on her current financial path she will have nothing to leave.

But if she lowers her target retirement income from $57,600 a year after tax to $50,960 – a difference of about $550 a month – she will have an estate of $165,480 in future (2040) dollars. That assumes she lives to age 90 and makes an average annual return on her investments of 5.99 per cent. She would be able to roll her registered retirement income fund to her grandson tax-free if he is the beneficiary.

Marianne's income in her first year of retirement will come from the Canada Pension Plan ($11,520), Old Age Security ($6,290) and her university pension plan ($30,430), for a total of $48,240. The balance would come from her savings, beginning with her non-registered and TFSA savings first.

Marianne could also set up a registered disability savings plan (RDSP) for her grandson that would allow a contribution of up to $200,000. Plan beneficiaries must qualify for the Disability Tax Credit under the federal Income Tax Act. RDSP contributions are not deductible for tax purposes but the investment income accrues tax-free.

Based on Marianne's retirement income, her grandson would be entitled to Canada Disability Savings Grants (lifetime maximum of $70,000) and Canada Disability Savings Bonds (lifetime maximum of $20,000 depending on income), both of which would go into the disability savings plan. Any money put in the RDSP would lower the amount available for the Henson Trust, Ms. Stalker says.

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The person

Marianne, 61

The problem

Near retirement, considering pension buyback, renovating home and providing for her grandson with special needs.

The plan

Borrow against home to finance pension buyback, keep renovations to minimum, spend less in retirement so there will be money left for her grandson.

The payoff

A comfortable and secure future for both of them.

Monthly net income



House $175,000; RRSPs $210,000; non-registered savings $43,000; present value of defined benefit pension $582,125. Total: $1.01-million

Monthly distributions

Property taxes, home insurance, repairs $385; public transportation $350; car rental $125; groceries $1,000; clothing $200; utilities, telecom $600; cleaning, gardening $400; vacation $300; entertainment $350; charity, gifts $350; medical expenses $300; life insurance $40; grandson's guitar lessons and other educational expenses $1,000; personal $400; RRSP savings $100; cash savings $300. Total: $6,200



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