Marge and Bill were married for 42 years. They planned their retirement well. They lived modestly in a community near friends and an airport. This allowed them to be visited by, and to visit, their children and grandchildren, who lived in other provinces, without too much difficulty.
They had paid down their debts prior to retirement and had saved enough in registered accounts to live comfortably without worrying too much about their finances. They both counted on government pensions, CPP (Canada Pension Plan) and OAS (Old Age Security), to create a foundation for their retirement income.
Both were involved in their finances. Marge took care of the budget and paying bills. Bill ultimately managed the relationship with their financial advisor and enjoyed being involved in how their investments were managed. Bill was not overly stressed about running out of money.
However, just as they hit their retirement stride, tragedy hit. At the age of 72, Bill passed away suddenly of a heart attack.
Marge was left a young widowed retiree. While Marge and Bill had discussed the possibility of one passing away, this was always done with the expectation that it would be some time in the future as both were seemingly healthy. And while Marge had much support from family and friends to help her emotionally get through these difficult days, she felt overwhelmed and under-prepared financially. Marge is not alone in feeling this way about finances after the loss of a loved one.
Without Bill’s confidence in managing their investments, Marge’s doubts that she might outlive their finances began to take center stage as one of her greatest worries. She booked a meeting with their financial advisor and realized that she did not really have a strong relationship with him. Their interactions were slightly unnatural, and it felt that they were truly starting their relationship from zero. Feeling like she wanted a second opinion, Marge was referred to Tall Oak Private Wealth. Her primary question was, now that Bill was not around, would her retirement plan need to be adjusted?
Here are a few questions and considerations we explored with Marge.
1. As a widow, what changes should Marge expect to the household income?
CPP and OAS – Bill’s OAS payments will cease. This is because there are no survivor benefits with OAS (there is an Allowance for the Survivor payable to people between 60 and 64 with a low income). The household will lose $613.53 monthly or $7,362.36 annually from Bill’s OAS (the maximum OAS available in 2020). Marge will also lose Bill’s CPP payments. While there is a CPP survivor benefit equal to 60% of the deceased’s CPP retirement pension for those over age 65, this only applies to the extent that the combined survivor benefit and Marge’s retirement benefit do not exceed the maximum CPP retirement benefit payable. Since Marge was already receiving the maximum CPP benefit available, there will not be a top-up. Had Marge been receiving less than the maximum CPP, she could have received some additional benefit, but it would be capped to the CPP maximum. The maximum CPP available in 2020 for a 65-year-old is $1,175.83. The household loss of CPP income would equate to $14,109.96 annually.
Pension – Since Bill was not receiving a work pension, Marge would not experience any change here. However, it is worth noting that if Bill had been receiving a pension, the survivor benefits may be reduced upon the death of the primary member. Depending on the pension option originally selected, survivor benefits are generally 50%, 66 2/3%, or 100% of the pension amountupon the death of the primary member. This may mean an additional significant reduction in income for the surviving spouse.
Pension Splitting – Retirees can split certain retirement income, for example, money that is being taken out of registered retirement income funds (RRIF) after age 65. This allows a couple in retirement to equalize their incomes from a tax perspective and effectively reduce the amount of taxes they pay in retirement. In a world without income splitting, if one spouse receives $100,000 of income per year from their RRIF because they have built up their RRSP, while the other spouse receives no RRIF income, having stayed at home during his/her working years, the first individual would pay a lot more tax than their spouse. Due to the way the Canadian tax system works, the household would benefit with a much better net after-tax income if both spouses could assume $50,000 of income rather than one at $100,000. Pension splitting allows just that; it allows certain income to be split up to 50% from a tax perspective between two spouses to lower their combined taxes. The issue for Marge is that she may still need the same amount of income from her registered assets, but she will no longer be able to split with Bill. As a widow, she may pay significantly more in taxes.
2. What expenses will now change and how should Marge rework her budget?
It is clear that Marge should expect a change in her income given the above changes. But will Marge’s expenses change proportionally? While expenses will reduce, certain expenses will remain fixed. For example, housing costs (property taxes, utilities, house insurance) will not change significantly. Other costs are more variable; instead of maintaining two cars, Marge will likely keep only one. Food, entertainment, travel, clothing, and other discretionary costs will go down.
It is really important for Marge to redo her budget to see whether the reduction in her expenses will be proportional to the reduction in her after-tax income.
3. Are there any other major planning considerations Marge should consider?
This is a very difficult, emotional time for Marge. She may need support and time before making any major financial decisions, which means she should work with a financial advisor whom she can trust, who puts her at ease and who will work with her through these decisions.
One of the biggest changes that Marge will want to consider is to whom she would like to leave her assets when she passes away and how she would like her estate to be organized. She will need to update her will. She should also update her beneficiary designations on her registered accounts such as RRIFs and TFSAs (Tax Free Savings Accounts), as well as on any life insurance policies she may have.
Marge should also consider drafting new power of attorneys: one for property and one for personal care. These are very important documents, as they ensure that someone can step in should she become unable to make decisions for herself.
Losing a loved one is very difficult. Having to adjust to a new life takes time. Financially, adjustments will likely need to be made. It is critical to have someone you can trust by your side as you go through these major changes.
At Tall Oak Private Wealth, we work hard for our clients and are honoured to be able to support them as they go through some of their most difficult life challenges.
The views expressed in this commentary are those of Tall Oak Capital Advisors as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Statistics, factual data and other information are from sources Tall Oak believes to be reliable but their accuracy cannot be guaranteed. This commentary is intended for distribution only in those jurisdictions where Tall Oak Capital Advisors are registered. Securities-related products and services are offered through Raymond James Correspondent Services Ltd., member Canadian Investor Protection Fund. Insurance products and services are offered through Gryphin Advantage Inc., which is not a member-Canadian Investor Protection Fund. This commentary may provide links to other Internet sites for the convenience of users. Tall Oak Capital Advisors is not responsible for the availability or content of these external sites, nor does Tall Oak Capital Advisors endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Tall Oak Capital Advisors adheres to.
