Meg, 66, is retired with no debt and a net worth of about $735,000.Tijana Martin/The Globe and Mail
Meg, 66, is retired with no debt and a net worth of about $735,000, most of which is tied up in her Vancouver-area condo.
She had been collecting long-term disability benefits, which ended when she turned 65.
Her income consists of Canada Pension Plan, Old Age Security and two small pensions from previous employers. Altogether they add up to $35,000 a year. “I have taken an economical approach all my life and have never lived above my means,” Meg writes in an e-mail. Despite her modest income, she has travelled extensively and hopes to continue to do so.
Her main question is how to access the $85,000 she has in a locked-in retirement account (LIRA) with the fewest tax implications.
“Can I withdraw the LIRA funds completely?” Meg asks. “What would the penalty be? Am I eligible for financial hardship?” (If a person can be deemed to be under financial hardship, it may be possible to access locked-in funds early.)
She wonders if she could appeal to the bank that holds her LIRA on compassionate grounds.
Given that most of her forbears died relatively young, Meg expects she may, too. “This knowledge has had a huge psychological effect all my life.”
Meg’s lifestyle expenses come to about $32,400 a year. She recently applied for the disability tax credit and received $16,700 for overpayment of taxes, which she tucked away in her tax-free savings accounts (TFSA).
“What is best for me?” Meg asks.
We asked Steve Bridge, an advice-only financial planner at Money Coaches Canada in Vancouver, to look at Meg’s situation.
What the Expert Says
“Meg has managed her finances exceptionally well despite never earning more than $50,000 a year while living in Vancouver – an impressive feat in an expensive city,” Mr. Bridge says. “Her financial discipline proves that a fulfilling life doesn’t have to come with lifestyle inflation.”
Meg receives $35,000 a year gross in income and comfortably lives on less than that, though $11,040 a year of that is condo fees – “a significant expense to keep in mind, especially given the potential for future special assessments,” the planner says. Her home is worth around $600,000, while her investment assets total $131,700.
“Her financial management skills are outstanding – many could learn from her example,” Mr. Bridge says.
Meg recently qualified for the disability tax credit, which has provided her with retroactive benefits.
Meg’s main goals are to continue travelling, budgeting up to $5,000 a year, to maintain a strong focus on her health and well-being, and to finish writing her third book, the planner says. “With these goals in mind, there are a few key financial areas she should focus on to ensure her money continues to work for her in retirement,” he says.
“First, it’s time to convert her locked-in retirement account (LIRA) to a life income fund (LIF) and start drawing from it,” Mr. Bridge says. Although she is not required to convert the LIRA until she is 71, it makes sense for her to do so now because she is in a low tax bracket, he says.
As to unlocking her LIRA funds – which is different from converting them to a LIF and withdrawing the funds gradually – she may be able to access some LIRA funds based on her income, so reaching out to her LIRA administrator is an important first step, the planner says
Also, some provinces allow unlocking at the time of conversion. This is based on where the original pension was registered rather than where she lives now. Again, she can check with the LIRA administrator.
Financial hardship unlocking is difficult to qualify for, but there are some technicalities that could apply, including low income or high medical expenses, the planner says. “Regardless, she’ll want a LIRA drawdown strategy that smooths out her taxable income over the coming years.”
Withdrawals from a LIF are taxable, and at 66, she must withdraw between 4.35 per cent and 7.52 per cent a year. If she has a shortened life expectancy, obtaining documentation from a doctor could allow her to access more of these funds sooner, the planner says.
Since LIFs take a long time to draw down, setting withdrawals to the maximum is often a smart move. “Another option would be converting the LIRA to a life annuity, but if she has a shortened life expectancy, this may not be the best choice.” Annuities do, however, provide peace of mind that you won’t run out of money, Mr. Bridge says.
The investments within the LIF can remain as they are, but she should keep two or three years’ worth of withdrawals in cash – ideally in a high-interest savings account or similar investment – while balancing fixed income and broad-based stock funds. “Keeping fees low is key, so she should consider broad index funds for the fixed-income and stock portions.”
Another area to review is her life insurance, the planner says. “She holds a $100,000 policy, but it’s worth questioning whether she still needs it,” Mr. Bridge says. “If it’s a term policy, is it nearing expiry? If it’s whole life, what is the cash surrender value?” Given that she has no dependants and no debt, there may not be a compelling reason to continue paying premiums, he says. “Unless there’s a specific purpose for keeping this coverage, it may make sense to let it go and free up some additional cash flow.”
Finally, Meg needs to consider what to do with the equity in her condo, the planner says.
Her condo fees of $920 seem high, but they include maintenance, heat, hot water, property taxes and internet. In addition she pays $125 for home insurance.
“If she loves her home and is comfortable with the costs, staying may be the best decision,” Mr. Bridge says. However, she does have alternatives. She could sell and rent, freeing up equity to enhance her retirement lifestyle.
If she needs additional funds but wants to remain in her home, a reverse mortgage could be an option, Mr. Bridge says. “Regardless of what she decides, it’s wise to plan for a long life – up to age 95 – unless significant health concerns indicate otherwise.”
Meg has done an outstanding job managing her finances and living well within her means, the planner says. With a clear strategy for drawing down her LIRA/LIF, a reassessment of her life insurance, and careful consideration of her housing options, she can continue to enjoy travelling and focusing on her well-being.
Client Situation
The Person: Meg, 66.
The Problem: How to draw as much as possible from her LIRA without prohibitive tax consequences or other penalties.
The Plan: Convert her LIRA to a life income fund and begin drawing the maximum annual amount . Reach out to the bank to see if she can unlock some or all of the LIRA early. If possible keep two or three years’ of cash needs in a high-interest savings account. Consider giving up the life insurance.
The Payoff: Peace of mind.
Monthly net income: $2,700.
Monthly outlays: Condo fee $920; home insurance $125; transit $40; groceries $400; clothing $150; vacation, travel $420; dining out, entertainment $200; subscriptions $50; other personal $110; health, dental insurance $120; life insurance $105; cellphone $60. Total: $2,700.
Assets: Cash $3,000; LIRA $85,000; tax-free savings account $30,000; $16,700 tax credit; residence $600,000. Total: $734,700.
Liabilities: None.
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