This Ontario woman will need to work into her 70s to escape financial vise

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Were Nellie to add the taxable portion of life insurance proceeds to her RRSPs, she would save some tax for now and bring her RRSP balance to $231,780. The $13,135 post-tax remainder could go to a TFSA. This move would raise her retirement savings and eliminate her $104 monthly life insurance premium.

The enhanced RRSP balance with a three per cent annual return after inflation could pay $11,480 per year for 30 years to her age 95 when all income and principal would be exhausted. If the RRSP is left to grow six more years to her age 71, then with the same assumptions, it would rise to $276,764 and then pay out $15,866 per year of taxable income to her age 95.

Nellie’s TFSA with a value of $13,135 from investing money from cashing in insurance policies and growing at three per cent per year would generate $651 of tax-free income from ages 65 to 95. If left to grow for six years with the same assumptions to her age 71, the TFSA balance would rise to $15,690. That sum would generate $900 per year of tax-free income to her age 95.

Nellie receives $7,300 per year from the Canada Pension Plan. She can take Old Age Security at $7,362 per year starting this year or wait five more years and get a 36 per cent boost to $10,012 if she starts at 70. We’ll assume she starts this year and should get a one-time $300 COVID-19 relief payment.

Restructuring retirement income

Adding up the components of future income based on full retirement before 66, Nellie can have $11,480 from RRSPs, $651 from TFSAs, $7,300 from CPP, $7,362 from OAS and $1,920 per year from her work pension. That adds up to $28,713 before tax. With no tax on $651 TFSA payouts and 10 per cent tax on other income, she would have $2,160 per month to spend. A reduction in future savings or anticipated travel would be required to make spending match income. She would still have to pay her $58,000 mortgage. If she renews at an available floating rate of 2.1 per cent, which is about mid-market on the date this report is written, she would pay $217 per month for 30 years. Rates may rise, but the amount to be financed will fall over time. Her income would support present expenses without life insurance premiums or loan costs but not much more.

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