Let me introduce you to my three imaginary friends: Rory, Amy, and Rose. Earning only $35,000 a year at most, each has managed to sock away 5% of that income every year, and by age 67 have each accumulated $210,000 in savings.
At retirement, all three will have the same income: $6,624 in Old Age Security benefits, $9,500 from the Canada Pension Plan, and minimum RRIF withdrawals starting at $9,135 a year*.
For those still counting, Rory, Amy, and Rose each will receive $25,259 and pay $1,562 in income taxes.
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Rory and Amy get married. Their combined household income after taxes is now $47,394. Rose is alone, with $23,697 a year. And it is a truth universally acknowledged that the same standard of living is cheaper to buy for a couple than it is for a single person.
Houses cost the same whether one person or two people are buying them, cooking at home for two isn’t twice the cost as cooking at home for one, and a car that gets you from point A to point B won’t cost you double depending on if the passenger seat is occupied or not.
I think we’d all agree that in comparison to Rory and Amy’s $3,949, Rose’s monthly total income of $1,974 is going to be very difficult to live on.
This situation – while technically fair, since for the same amount of savings each person receives the same amount of income – doesn’t strike me as equitable. By treating every individual exactly the same, our retirement programs are either rewarding the choice to create a permanent household with someone else or penalizing the choice not to, depending on which side of the floor you happen to be arguing from.
(It’s here that I’m compelled to state that I don’t have an answer for this that is both fair and equitable, and I doubt anyone else does either.)
So what’s a singleton to do? Shack up for money? Hardly.
The truth is that short of making more money in your working years, retiring later, or marrying for money, there’s not much a singleton can do to bring his or her income in line with a couple of similar means, but forgoing RRSPs altogether in favour of TFSAs might make that income last longer by maximizing income-tested benefits like the Guaranteed Income Supplement.
Normally I’m not one to advocate cut-off-your-nose-to-spite-your-face strategies that reduce one kind of income to increase another, but lower-income singletons (and couples, for that matter) would be well-advised to calculate – at least roughly – the benefit they’re receiving from an up-front tax deduction for RRSP contributions against the reduction in GIS eligibility once those contributions are withdrawn and are counted as part of their income, which in turn has a big impact on how long their own savings will last overall.
Let’s go back to our friend Rose to illustrate my point. Her annual income of $23,697 is too much to qualify for the Guaranteed Income Supplement, even though her Old Age Security benefit isn’t included in the calculation.
If, however, her $9,135 RRIF withdrawal was instead a withdrawal from her TFSA, not only would she pay no income tax, she’d also receive a $3,608 GIS benefit.
Still counting? That means in real income she’ll receive $28,867 annually – or, if we want to compare apples to apples – to get the same amount of income as in the previous example, she’d only need to withdraw $3,965 from her own savings – $5,170 less than if she were withdrawing from a RRIF instead of a TFSA.
The math works for Rory and Amy too, just not as dramatically. Following the same strategy as Rose would allow them to withdraw $3,484 a year less and have the same income as they would if they were withdrawing from RRIFs.
Now, as with any kind of financial advice, this might not apply to you. In fact, if you’re reading a personal finance blog, it might not even be news to you. But it’s worth sitting down and doing the math as it applies to your own situation, and worth telling your friends about.
RRSPs aren’t the only answer for retirement savings, and – in some, particularly for singles – they might even be the wrong answer.
*This is the point at which – if I were a more dramatic woman, that is – I would be shouting “GET THEE TO AN ANNUITY!”
Sandi Martin is an ex-banker who left the dark side to start Spring Personal Finance, a one woman fee only financial planning practice based in Gravenhurst, Ontario. She and her husband have three kids under five, none of whom are learning the words to “Fidelity Fiduciary Bank” quickly enough. She takes her clients seriously, but not much else.