Handling big changes at retirement

– She will be receiving a severance at the end of her term of employment which will coincide with her retirement date. What is the best way for her to manage this lump sum from a tax and future retirement income perspective?

–  Should she sell  her condo and move to Quebec? Keep her condo and rent in Quebec? What are the pros/cons financially of retiring in Quebec vs. Ontario from a benefits and tax perspective?

– How can she set herself up for a stress-free retirement?

 Any advice would be appreciated.

– Kevin

You’ve asked some tough questions here, Kevin, so I’ll try to keep my advice succinct. First, the severance may create a big tax liability because it’s taxable income just like regular salary or a bonus. When it’s added to her other income for the year, it may push your mother into a higher tax bracket.

Your mother can mitigate some of this tax by having the severance go into her RRSP, to the extent that she has RRSP room. If she has worked for her employer since prior to 1996, there may be special “eligible retiring allowance” rules that allow extra contributions to her RRSP beyond her regular RRSP room.

She might also consider asking for part or all of her severance to be paid in 2016. This may result in less combined tax payable for 2015 and 2016; may create more RRSP room; and may allow more contributions to the Canada Pension Plan or to her company pension, if she has one.

The whole Ontario-Quebec issue should probably first begin with a consideration of your mother’s lifestyle, Kevin, before your mother’s finances. What does your mother want? How does she want to live her retirement?

As far as whether to keep or sell her condo if she moves back to Quebec, can she earn a better “return” on her condo when considering the net rental income and a modest assumption for growth? How does this compare to the potential return on her investments, given her actual historic returns and her future risk tolerance?

I find rental real estate is generally comparable to a balanced investment portfolio, but every property is different. Investments are liquid, while real estate can’t always be easily “accessed” or sold, so that’s certainly a drawback of keeping the property.

Renting in Quebec may be an option, but it comes at a cost. Landlords don’t always take care of their properties. And if your mother wants security, ownership will trump renting because your mother may not be able to rent the same property forever.

From a tax perspective, your mother will generally pay more income tax in Quebec than Ontario. The average tax rate on $25,000 of taxable income is about 2.5% more; on $50,000 of taxable income is about 5% more; and on $75,000 of income is about 6% more. Her government pensions like CPP and OAS will be the same no matter where she retires. In theory, health care benefits should be comparable, but health care access and quality is often regional, even in the same province.

Setting up a stress-free retirement should really start with what’s best from a day-to-day perspective. And often that’s being close to friends and family. Having a rental condo in Ontario and renting in Quebec may not be the best option from a stress perspective given the stress of managing a tenant and of simultaneously being a tenant. And financially, stress may depend on a number of factors. Your mother should build a retirement plan to assess her retirement budget so that she can ensure her money outlasts her. Ideally, this will include an investment plan that does not require her to take on more risk than she is comfortable with because nothing is worse than not sleeping at night because you’re worried about your investments.

It’s noble that you’re trying to help your mother figure this all out, Kevin. And thanks for considering my financial advice. However, I really think she needs to start with lifestyle advice and considerations and then consider the financial factors as a secondary exercise.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.