A Married Couple Plans a Lower-Income Retirement

Introducing Ruth and James

Ruth and James, born and raised in a smaller community in southwestern Ontario, went to work directly out of high school. They plan to make 2024 their last full year of work as they will turn 65 in 2025. Married at age 23, and the parents of two children who are now in their 30s and with their own families, they have been frugal for their entire lives.


Their frugal habits have served them well. They bought a modest home in an area that was close to their kids’ schools and convenient for public transit, allowing them to manage with one car throughout their married lives. Despite not pursuing higher education, the fact that they were able to begin working right out of high school meant that they didn’t have to go into debt to get an education and began setting money aside in RRSPs right from the beginning. That was especially important because neither of their earlier jobs offered pension plans. Eventually, they did have jobs with defined contribution pensions for several years, but the work environment eventually proved to be too much of a grind. They found jobs that paid a bit more but lacked the pension option.


Fortunately, right around that time, the TFSA came into being, and a friend who worked at an investment firm, told them that they should focus all their savings on that account because the current tax deductions from the RRSP weren’t that valuable to them at their incomes while the potential for tax-free growth and withdrawals made the TFSA much to be preferred. Although neither Ruth nor James ever maxed out their accounts, they still contributed every year and managed to build up some decent savings.


Their Current Financial Situation


Ruth and James work in comparable fields and are paid about the same amount. Combined, their gross employment income is $5,834 per month. After deductions, their net income is about $4,330.



Since they own their house outright, having paid off their mortgage several years ago, their monthly housing expenses are only a shade over $1,000. Monthly transportation expenses, which combines the cost of owning and periodically replacing one car, which Ruth uses to get to work, and the $80 per month that James pays for a transit pass, works out to a total of $740 per month. Their modest lifestyle still means they need to spend about $1,750 per month on personal expenses. Nevertheless, they each put away about $400 per month in their respective TFSAs.




In addition to their home, which they estimate is worth $342,000, Ruth and James maintain $5,000 in a joint chequing account, an additional nearly $15,000 in a TFSA high-interest savings account that they use for their emergency fund, personal RRSPs that are together worth about $89,000, TFSAs that focus on long-term investing worth nearly $128,000, and their respective defined contribution pension plans that are worth a shade over $88,000.


They estimate that their car is worth about $12,500. They tend to drive their vehicles “into the ground,” and expect it will not be worth more than $1,000 by the time they get a new vehicle.



Neither James nor Ruth has any debts. As noted above, their mortgage is paid off, and they also pay off their credit cards in full every month.



In addition to their small group policies, Ruth and James owned privately purchased term life insurance policies. But they reduced their coverage when their youngest child moved out and began to live on his own and reduced it further when they paid off their mortgage. Finally, at age 60, they cancelled the remaining policies entirely.


Looking Ahead to Retirement

Investment Plan

James and Ruth were fairly aggressive investors in their younger days, with a high allocation to equities until their late 40s. That’s when they began to seek a more balanced portfolio. As they approach age 65, they have decided to invest in a portfolio of 50% globally diversified equities and 50% fixed income. They think that will get them where they need to go and leave them with less concern for volatility, which they’ve grown less tolerant of as retirement nears.


Canada Pension Plan and Old Age Security

Ruth and James have been diligent contributors to the CPP their entire working lives. However, because CPP is a contributory plan, and neither has ever reached the Year’s Maximum Pensionable Earnings (YMPE), they will not be getting the maximum CPP when they retire. They estimate that they will each receive about $833/month at age 65.


As for OAS, as lifelong residents of Canada, they will get the maximum, $713.34 per month, as of this writing in the January to March quarter of 2024. This, too, they plan to take upon turning 65.


Spending in Retirement

Having lived frugally throughout their married life together, Ruth and James do not expect to change their overall spending dramatically. However, they would like to spend a little more on leisure activities if they can. Items they are considering are eating out at restaurants slightly more frequently, taking in other forms of entertainment, travelling, and gift-giving, both to charities and to their children. However, this very reasonable enthusiasm for spending is causing a bit of a challenge.


Success Rates

The current projections indicate that a poor investment outcome could lead James and Ruth to run out of money to sustain themselves by age 86. This is indicated by the 68% success rate in the lower right of the image below.



While many near-retirees might be surprised at this, a male-female couple who have made it to their mid-60s has an even chance of one of them living to age 94. While this estimate is based on a probability table developed by actuaries, each of our cases will work out uniquely. That doesn’t mean we should ignore this potential shortfall.


When presented with some options to strengthen the probability of a successful financial outcome in retirement, a 100% success rate was indicated if Ruth and James were willing to reduce their spending by $6,000 a year. As one might expect, that was not an acceptable alternative, especially given that there is a greater than 2/3 chance that everything would work just fine.


A proposal that they reduce their spending by $3,000 a year was also set aside for now. This would have brought their success rate up to 93%. Instead, they settled on a different option altogether: James would delay OAS until age 70. This would push the success rate to 84% and extend the success of their plan to age 91 even in the case of a bad financial outcome.



Each month that someone delays OAS past age 65, means a 0.6% increase in the amount of OAS that one receives. Delaying OAS to age 70 would mean a 36% increase in the amount of OAS for James, excluding the impact of adjustments for inflation. That pushes the monthly OAS payments from $713 to $970 per month in today’s dollars.


If one OAS delayed to age 70 works well, perhaps if Ruth delayed receiving OAS to age 70 that would help as well. As it turns out, it does. Ruth waiting to age 70 puts them up to a 93% success rate. Ruth and James readily agree to this solution.



Lessons to Be Learned?

I think the main lesson I learned by going through this exercise is that unconventional approaches* may be the solution you are looking for. The more conventional solution was to cut spending. Alternatively, it could have been to delay retirement or pick up a part-time job in retirement. But delaying OAS? Few Canadians want to delay the Canada Pension Plan. Even fewer wish to delay OAS. One of the nice things, though, is that OAS, while taxable, does not have an impact on your qualification for the Guaranteed Income Supplement (GIS). Yes, delaying OAS to age 70 means that you cannot collect GIS until then, but the potential to receive the tax-free GIS is not to be taken for granted.


The broader conclusion is that even though Ruth and James never had a high income or a net worth that approached a million dollars, let alone the $1.7 million that an infamous survey suggested was required, their frugal lifestyle and modest savings combined with government-sponsored benefits helped them achieve the retirement they wanted.



*Professional financial platform and images provided via adviice.


This is the 235th blog post for Russ Writes, first published on 2024-02-12


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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.