Coping with a pension shortfall

Question

I am a pensioner and need your help. Right now I can barely make ends meet with my pension income. I use my credit cards to take out cash to make it through the month. I have $29,000 in an RRSP and I’m thinking about closing that account. How much will I lose?

Answer

The good news—if there is any given your challenging circumstances—is that you will not lose anything, in the strictest sense. If you withdraw money from your RRSP you will pay tax on the money because the government considers it income. But if your income is low, and it sounds like it is, the amount of tax owing likely won’t be very much.

How much? Well, for argument sake let’s assume you live in Ontario and you’re in the lowest tax bracket—in other words, your income is below $39,723 a year. If your total income, including the money you’re withdrawing from your RRSP, comes in below that figure, then your marginal tax rate would be 20.05% in 2013.

The bad news is that this $29,000 is not going to go very far. Even if you are in the lowest tax bracket you could still be hit with a tax bill in the range of $6,000 by the time you’ve completely used up your retirement savings. Suddenly your $29,000 is down to just $23,000. If you take out $500 per month, or $6,000 per year, it will last you less than four years. You would alleviate your cash crunch in the short term, but not eliminate it.

You need a better plan.

Fixing a cash flow imbalance

There are essentially two things you can do to fix an imbalance in your cash flow. You can increase your income or cut your spending. I know that neither of these actions is simple nor appealing, but that is the bottom line.

On the income front, perhaps you could take in a roommate, rent out your parking space, ask a family member for a living allowance, or find a part time job. On the spending front, you could look at moving to a less expensive home, living with your kids, finding more tax deductions, or selling you car.

If you do choose to start withdrawing money from your RRSP, do it slowly versus in one lump sum to minimize the income tax you pay. There is also a chance that your investments are held in products with back end loads (also called deferred sales charges). You will want to minimize the impact of those charges, so ask the bank or brokerage before you request the funds.

Take the long-term view

In the absence of reviewing your situation in detail, I don’t know which ideas might work for you and I certainly don’t expect any of them to be easy. But now is the time to take a hard look at what you could do. Withdrawing money from your RRSP could fix your cash flow imbalance for a little while, but you need to think long-term.

There are resources out there to help you cope and the sooner you learn about them the better. You might also want to see if you’re eligible for the Guaranteed Income Supplement (Also see Finding Hidden Money)

Visit a non-profit credit counselor

Your first stop should be at a non-profit credit counsellor in your town. They will be able to help you look at your budget to see what changes you might be able to make to either increase income or cut spending. Equally important, they will be able to direct you to other services near where you live—for example, subsidized housing, food banks, and government programs targeted at people living with low incomes.

You have found yourself in a very difficult situation. And it serves as a cautionary tale for younger people who are not saving enough for their own retirement. Hopefully they will learn from your story and make hard choices now to make life easier down the road.

Good luck.

Click here to read about four unconventional ways to fund retirement

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.