Ontario man faces pre-retirement crunch in paying daughter’s tuition

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In Ontario, a man we call Ken, 64, is a civil servant. His 22-year-old daughter, Rachel, lives with him while she studies in graduate school. Divorced not long ago, he ended up paying Rachel’s college expenses, which totaled $72,000 a year. He has a $1,250,000 home, $13,880 in his RRSP, $46,126 in his TFSA, $1,057 in taxable savings, and an $8,000 car. The house has a mortgage of $178,946. His net worth is $1,140,117. His work pension must form the basis of his retirement income because his savings of $61,063 are modest.

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Ken’s concern is that he will run out of money when he retires. He currently earns $150,772 per year plus variable overtime as a middle manager. Taxes, benefits, union dues, and pension fund costs bring that down to $9,715 per month. Rachel has three years of school left to graduate. That’s a $216,000 bill. He saves on food costs because his employer works around the clock to take care of the food.

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tuition fee

Ken’s lack of money is made worse by the suspension of some of the payments his ex-partner used to make to Rachel. Ken has closed the gap and hardly expects a payback. Rachel may be able to repay her father in the future, but it will take many years to establish herself in her profession.

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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, BC to work with Ken. Moran believes debt management and cash flow issues need to be addressed.

Ken’s total monthly expenses are $9,715. About 62 percent of that is Rachel’s $6,000 monthly tuition. His adjustable-rate mortgage, currently 3.05 percent, costs $1,308 a month. Ken will be able to start receiving his Canada Pension Plan benefit in February 2023, although he will continue to work in his government job.

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The basis of Ken’s retirement income will be his pension. Three years from now on his 68th birthday he will have 31.9 years of service at two percent of $150,773, or about $96,192 less a bridging fee of $14,326. That leaves him with $81,867. If he retires in January 2023 at age 65, he would be paid less — $75,935 a year. Longer employment and postponing the start of retirement lead to an increase in pension.

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Ken, who came to Canada at the age of 26, is entitled to 39/40 of the full OAS of $8,004 per year, which equates to $7,804 per year. He can postpone the beginning until the age of 71 and then gets one year retrospectively.

Ken has $46,126 in his TFSA. He doesn’t add anything and keeps the account as a reserve only for emergencies. It is therefore not part of his expenses. He doesn’t have an RRSP space because the pension adjustment caps him at 18 percent of earnings. This is already paid for by his state pension contribution.

If the current RRSP balance of $13,880 grows 3 percent after inflation and is spent over 25 years to age 90, it would increase his income by $774 per year for 25 years.

At 65 he would have a state pension of $75,935, RRSP earnings of $774, $15,043 from CPP and $7,804 in OAS for a total of $99,556. At that level, $2,670 would be reclaimed, and after an average tax of 23 percent, he would have $74,603 a year, or about $6,200 a month.

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If he worked until age 68, he would have an employment pension of $82,000, $18,804 enhanced CPP, $875 RRSP, enhanced OAS of $9,728 less a $4,445 reclaim for a final income of $106,962. After 23 percent tax, he would have $82,360 a year, or $6,863 a month. If you work three more years, you’ll get a monthly income gain of $663 per month. Whether it’s worth it will be Ken’s personal decision.

Ken’s civil service pension is linked to inflation. Longer work results in a higher basis for indexing and thus a clear advantage over late retirement. The OAS clawback taxes profits, but retains 85 percent of any indexation adjustment before income tax. And he can control his ordinary income tax rate somewhat by selecting investments that offer capital gains that are taxed at a current inclusion rate of 50 percent, meaning only half of a realized gain is taxable.

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Financial Freedom

In three years, Rachel will have completed her advanced studies. Thus, Ken’s personal disposable income will increase by the $72,000 per year that he is currently committing to Rachel’s studies.

The extra money Ken can save when Rachel completes her postgraduate studies can speed up the payment of his mortgage, which runs for 12 years at the current amortization rate of $1,308 per month. If Ken doubled the repayment rate to $2,616 a month, which he can do in three years, the mortgage would be fully paid off in four and a half years after he stopped subsidizing her college. Assuming renewal rates don’t increase drastically.

The larger cash flow Ken will have in three years from not paying Rachel’s tuition will also allow him to fill his TFSA spot. His TFSA balance is $46,126. The current TFSA limit of $81,500 grows to $6,000 per year. So it will be $99,500 in three years. When Rachel finishes her studies, Ken can contribute to the TFSA credit. He plans to keep the TFSA as an emergency reserve and thus not part of the spending.

By his early 70s, Ken’s mortgage will be fully paid off – assuming he’s doubled his payments, Rachel will graduate and he’ll have a liberal budget for the travel he’s waived to help Rachel. He will have a safe, prosperous retirement, Moran predicts.

Retirement Stars: Four out of five ****

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