Winding down self-employment and planning for retirement

Q. I am a 60-year-old female, working full-time employed/self employed on a 100% commission basis and averaging between $107,000 and $140,000 gross annual income.

I own my home, with a $70,000 balance left on my mortgage. My mortgage payment (not including property taxes) is $457 biweekly. The current market value of my home is about $325,000. 

In terms of investments, I have $39,000 in two RRSPs (current employer plan and a small amount from a prior employer), plus about $250,000 in RRSPs with my bank.

I have no TFSA.

I would like to retire at 63, or at least reduce my work hours, and I have no idea if either is possible. I can work as long as I like, even past 65 if I choose. I recently started taking Fridays off but keeping my production the same, with no decrease in earnings. I am considering reducing to three days this fall, and continuing with that schedule until I retire.

While I’ve considered downsizing, I’m not really ready to sell my home: I love outdoor space and my pool, and I’ve redone the entire house over the last 17 years. I do have extra space for sharing or renting out (a possibility for one of my sisters, who is around my age). I have also wondered about buying an income property or going in with my youngest son, who is 25. My eldest, at 37, has a full-time career, while my middle child, at 29, attends nursing school out of town. I have no grandchildren and don’t expect any in the next few years.

I contribute about $15,000 to $18,000 to RRSPs at tax time. The tax refund (which ranges $10,000 to $12,000) goes all or mostly towards my highest line of credit, which was as high as $52,000 but is now at $26,000. I also have about $8,000 in credit card debt, and another LOC at about $8,000.

In addition, I have $5,000 in savings, which I have thought to put towards paying down my LOC, or tax owing on my 2018 return (which I have yet to file).

My vehicle has been paid off since January 2020, and I hope to enjoy two or three years with no car payment. When I do start retirement, I’d like to buy a new or nearly new vehicle outright. 

I’m not sure if I want to stay in London, Ont., after retirement or stay part-time in a rental apartment and buy a modular home in a nearby resort and spend six months a year by the water (mine/my family’s happy place).

I am also wondering if I should take CPP payments starting now (I have till November 18, 2020, to get benefits retroactive to Nov 18, 2019) and using the $500 per month or to pay down my debt over the next few years. 

I may have given you too much information (you can likely tell I’m.a bit scattered around how to proceed), but hoping you can make sense of it and can help me with my plan and goals.
–Deborah

A. While you describe your thoughts as scattered, it looks to me as though you’re exploring ideas and wondering what’s possible. However, until you focus your thoughts in a little, I am not going to be able to provide direct advice, so it may be time for you to seek the services of a financial planner to help you: 

1. solidify your thoughts; 
2. discover what is possible; and 
3. come up with an action plan. 

I’ll give you some thoughts and comments in each of those three areas that you can use yourself, or keep in mind if you work with a financial planner.  

Try solidifying your thoughts by thinking about what is important to you and asking yourself some questions like the ones following the next paragraph.   This may be easier to do with a financial planner or someone you know? 

I get the sense that family, independence, open space and being near water are some of the things you cherish. In what way do those things factor into the financial questions you are asking? For example:

1. What is it about your outdoor space and pool that you love? And what else?
2. What would it be like sharing your home with your sister? And what else?
3. What did you do to reduce your work week from five days to four without a reduction in income? (Wait for the answer.) What would you have to do to only work three days a week?
4. What is the importance of owning a modular home in a waterside resort? And what else?  (Wait for the answer.) What would ownership give you over renting? And what else?

You get the idea.  Explore your thoughts, fully answer each question, and then ask yourself “and what else.” This is easier done with someone else—a planner, or maybe a friend.  If a friend is helping, have them phrase the questions so they start with “what” rather than “why.”      

Once you have a little more clarity, ask a financial planner to run computer simulations of each option, so you can see what is possible.  And when I say model everything, I mean everything: assets, liabilities and cash flow, right down to how much you spend on pet food.     

Modelling builds your confidence in the results of the computer simulation, which transfers to confidence in your decision making. It also provides your planner with more information to get to know you and help you, and it answers that common question, “how much money will I need in retirement?”

With everything modelled, you can start to answer some of your questions.  The idea is to play within the computer simulation, try things you are wondering about, and observe the financial implications. This is where scattered thinking comes into focus. Try something within the simulation, see the results, learn, try something else. Experiment with things like:

1. How long can you stay in your home before you have to sell? Do you have to sell?
2. What happens if you purchase a vacation property?
3. What other opportunities will you have with a rental income?

Once you have done that you can move on to the advice piece.  Because we haven’t had the benefit of talking or walking through the steps discussed above, I will provide some general answers to your questions and comments.

“I contribute about $15,000 to $18,000 to RRSPs with a refund ranging from $10,000 to $12,000”

This is an example of why it is helpful for your planner to understand your cash flow and see your tax return. An $18,000 RRSP contribution will generate an approximate refund of $7,800, not $12,000.  

As a self-employed individual you are likely claiming qualifying personal expenses that reduce your tax. Obvious expenses include vehicle expenses, internet, cell phone, plus probably a few others.  

Be aware that things you are writing off now can’t be written off when you retire.  Meaning if you keep your spending the same, your taxes may go up, requiring a larger retirement savings account. 

“I have $5,000 in savings and am not sure what to do with it”

Assuming your credit card interest rate is higher than your line of credit rate, and you have the room on your line of credit, use your line of credit to pay off your credit card, then use the $5,000 savings to pay down the line of credit.

Furthermore, unless you have a specific reason for a savings account, stop putting money into your savings account, and instead redirect that money to your line of credit.  You will save more line of credit interest than you will earn on the savings account after tax.  

“Should you rent space in your home or purchase a property with your son”

I don’t know if this is a wise move. Do you need the extra income? What extra amount do you need to earn to justify what you might give up? How secure is your son’s employment? This is the kind of thing to test in a simulator to witness the financial results. If you like the financial outcome, explore through conversations what the implications might be to you, your lifestyle, and your relationships.

“Should you take CPP now and use it to pay down debt?”

My guess is that you are better off not taking a reduced CPP now so that you can use the proceeds to pay down debt. Instead, use your current income to pay down debt. But don’t take my word for it: run it through a computer simulator and see the results yourself.  

Also, as you are self-employed, I would recommend holding off taking CPP as long as you can to increase your guaranteed-for-life, indexed CPP pension. Here is a recent study suggesting almost everyone should delay CPP to age 70, and use RRSPs to bridge the gap from 65 to 70.

Deborah, I have written a lot and probably haven’t given you the answers you were seeking. There is no way a financial advisor, without jumping to conclusions, would be able to properly advise you based on what you have written. I know you wanted to try this approach first, but I think it is time for you to seek out a planner. For now, I hope I have given you a bit of a guide to use while working with a planner.

(Oh, and get your taxes done!) 

Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.atlantisfinancial.ca or [email protected].

This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning and insurance services through Atlantis Financial Inc.