JENNIFER ROBERTS/The Globe and Mail
Mattie, a woman of modest means, will turn 72 next year. By the month's end, she has to decide whether to convert her $20,000 RRSP to a registered retirement income fund or cash it in and pay the tax.
If she converts the registered retirement savings plan to an RRIF, she will have to begin withdrawing the required minimum amount each month. Taking this money into income will eat into her guaranteed income supplement, her federal and provincial tax credits and her rent subsidy in the small Southern Ontario town where she lives.
Mattie's daughter, Dina, is her financial power of attorney and is helping her plan for the future. "My mother is fortunate to live in a subsidized apartment that is geared to income, but she lives in a very delicate balance," Dina writes in an e-mail. "As her income increases with the RRIF, the GIS will be reduced and her rent will increase," Dina writes in an e-mail.
The question: "Should she withdraw some of the RRSP and take a tax hit this year?" Mattie's father lived on his own until he died at 92.
"I want to make sure that she will have sufficient funds to live an independent life well into her 90s," Dina says.
Mattie has invested her modest savings in two mutual funds and Dina wonders if this is the best strategy. "How can my mother guard her savings and subsidies?" We asked Norm Collins, from Collins Financial Consulting of Dartmouth, N.S., to look at Mattie's situation.
What the expert says
Mr. Collins' base case is that Mattie converts her RRSP to an RRIF by year-end and begins withdrawing the minimum amount in 2013. He then explores three alternatives.
Mattie's monthly income is $1,708, broken down as follows: Old age security $543, Canada Pension Plan $485; guaranteed income supplement $358; work pension $182; sales tax rebate and Ontario tax credits for low-income earners $120; and non-registered investment income $20.
The RRIF income will cut Mattie's GIS by 50 cents for each dollar of additional income and her rent subsidy by 30 cents for each dollar. Of the $1,455 in RRIF income for 2013, Mattie will get only $290, with $1,165 being absorbed by lost GIS and rent subsidy, Mr. Collins says. (GIS is based on the previous year's income, so the changes do not come into effect until July 1 of the following year.)
Even so, because Mattie's income exceeds her expenses by more than $2,000 a year, she should have enough to last into her 90s, Mr. Collins says. He assumes she buys a used car in 2018 for $15,000, and that her expenses rise by 2.25 per cent a year (5 per cent for health and vehicle maintenance) to age 80, after which she spends less.
As for her savings, given Mattie's age, mutual funds invested in marketable securities are probably not the most suitable. Instead, Mr. Collins suggests a mix of guaranteed securities such as high interest savings accounts, term deposits and guaranteed investment certificates.
Based on this approach, he assumed a rate of return of 1.5 per cent a year even though Mattie could make more if and when interest rates rise. As long as her income continues to surpass her expenses, Mattie's nest egg will grow. Even at 1.5 per cent a year, her assets are forecast to double by the time she is 90, reaching nearly $80,000.
The first alternative to the base plan has Mattie collapsing her RRSP before year-end. Not only would she be faced with a tax bill, but she would lose her GIS for a full year. She'd also have to pay the Ontario health premium. Cashing in the RRSP would not affect the rent subsidy.
Once her GIS was restored, Mattie would enjoy her existing subsidies, but her assets would be reduced. "It is not until 2033, at age 92, that assets under this scenario are forecast to surpass those under the base scenario [by $909]," Mr. Collins says.
In a second alternative, Mattie collapses a portion of her RRSP immediately – $4,500, which would not trigger income taxes but would still result in reduced GIS in the following year. The remainder of the money would be rolled into an RRIF at year end. By 2028, when Mattie is 87, her assets are forecast to surpass the base scenario, "although by an immaterial amount [by $774]," Mr. Collins says.
Next he looks at what would happen if Mattie were to take $10,000 from her TFSA and buy a "prescribed" life annuity guaranteed for three years. The RRSP funds would be rolled into a RRIF just like in the base case. She would get $58.92 per month in annuity payments, of which only $1.84 would be taxable. Her assets are forecast to surpass the base case in 2028, when Mattie is 87.
Given that Mattie has enough to get by on even if she converts her RRSP to an RRIF and begins taking the income, "the marginal long-term benefit of any of the three [alternative] scenarios seems questionable at best, particularly in light of the short-term sacrifice," Mr. Collins concludes. If Mattie wished to travel a bit or needed money because of a medical emergency, "I suspect the benefit of greater assets in the short to medium term outweighs any benefit in the longer term."
Client Situation
The person
Mattie, 71
The problem
Whether to cash in her RRSP now to preserve her guaranteed income supplement and rent subsidy in future, or convert the RRSP to a RRIF and begin drawing income even though she will lose part of her subsidies.
The plan
Convert the RRSP to a RRIF despite the loss of subsidies because it leaves her with more in the way of assets now and the alternatives are not markedly better.
The payoff
Knowing that she can continue to live comfortably as long as her expenses remain low – and that hanging on to her savings is preferable to fretting unduly about her subsidies.
Monthly income
$1,708
Assets
RRSP $19,700; TFSA $18,100; chequing $500. Total: $38,300
Monthly disbursements
Rent $468; utilities $30; vehicle $368; Internet and phone $118; food $250; restaurants $50; entertainment $25; clothes $100; health $30; subscriptions $20; beauty $10; gardening $10; gifts $25; pets $15; charitable $5. Total: $1,524
Liabilities
None
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