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Lifestyle | What to do with his job and his retirement plan?

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The desire to start a business can happen at any age. When this desire arises after many years in the labor market, however, important decisions must be made regarding one’s job and pension plan.

The situation

Danielle*, 54, has been employed in the public service for about 30 years. She has a business project and she plans to quit her job to carry it out. However, she needs an annual income until her company can pay her a salary. She wonders whether it would be more advantageous to take an early retirement which would reduce her annual pension, to resign and cash the money she has accumulated for her retirement to manage it herself, or to resign and leave this money in his retirement plan to start receiving a pension at age 65.

“In addition to my accumulated savings to launch my business, I have access to several grants and private and public lenders to get started,” says Danielle. She estimates that her company will be able to pay her $50,000 in salary in 2023 and that she will be able to recover her current salary as early as 2024.

Numbers

Annual salary: $110,000
Defined benefit pension plan: $600,000 accrued
Registered Retirement Savings Plan (RRSP): $70,000, 100% equity
Tax-Free Savings Account (TFSA): $20,000
Registered Education Savings Plan (RESP): $40,000 for her two boys
Liquid assets: $100,000 to invest in his new business
Income house: market value of $750,000 with mortgage of $320,000
Car loan: $11,000
Total monthly expenses: $4,000

Reaping the fruits of your efforts

Thanks to her salary, her modest expenses considering that she has two sons, her advantageous retirement plan that she has been accumulating for nearly 30 years, her income house and her savings, Danielle is in a good position to start a business, assesses Simon Préfontaine, financial planner at Lafond Services Financiers.

Of course, it’s always possible that his business will take longer to be profitable. “But even if it takes a few more years, she has the assets to get through it,” he says.


PHOTO HUGO-SÉBASTIEN AUBERT, LA PRESSE ARCHIVES

Simon Préfontaine, financial planner at Lafond Financial Services

Now, it remains to find what is the best strategy for Danielle to carry out her project.

From the outset, he eliminates the first solution mentioned, ie taking early retirement which would reduce his annual pension. “Danielle isn’t retiring, she’s starting a business, so she’ll be working and expects to have income next year,” he says. She also does not want to receive pensions from her pension plan. His tax rate would be far too high. »

Take your funds out of your pension plan or not?

To find the most advantageous strategy for Danielle, Simon Préfontaine looked at the annual statements of her pension plan and estimates that it will pay her about $54,000 a year from age 65 if she retires now. To have the equivalent until age 96 – as a woman, she has a 25% chance of getting there – by investing the $600,000 taken out of her retirement plan, he estimates that she would have to have an annual return of 4.25%.

“With this return, she wouldn’t have any money after 96, so if she lives longer, it would be better to keep her pension plan,” he says.

On the other hand, if she manages to make a 5% or 6% return, he estimates that it would surely be more advantageous to collect the $600,000 and invest it herself or through her financial advisor.

“Certainly she wouldn’t invest all of her assets in stocks, but maybe 75%, and she could do better than 4.25%,” he says. On the other hand, she would have to want to and be able to manage her emotions. Whether it is she or her financial advisor who manages her investments, she may see her portfolio fluctuate according to current events, whereas this would not be the case if she kept her pension plan. »

Note however: if his health is fragile, Simon Préfontaine strongly recommends that he take out this amount and invest it elsewhere so that his sons can fully benefit from it. “If she died at 67, she would have only received a pension for two years, and the estate would then receive the equivalent of eight years of benefits,” he says. The rest would benefit other employees. »

How to pay yourself a salary during the start-up?

Then you have to think about financing the first year of starting the business. While Danielle needs $4,000 net per month, Simon Préfontaine estimates that she needs a gross salary of $60,000. Then, for the second year, since she estimates she can pay herself $50,000, she needs an additional $10,000.

“She could take $50,000 from her RRSP [régime enregistré d’épargne-retraite] and $10,000 in his TFSA [compte d’épargne libre d’impôt] the first year, then another $10,000 in his TFSA the second year,” he suggests.

Another option would be to remortgage the triplex which has already accumulated $430,000 in assets. “Remortgaging or taking out a home equity line of credit could be particularly interesting avenues from a tax point of view,” says the financial planner. Also, the margin is flexible and would adapt to Danielle’s real needs. »

Before being able to make a decision, however, it will have to look at the date of its renewal, the penalties it could have to pay and what it could obtain as a margin.

If she decides to remortgage or ask for a margin, Simon Préfontaine would still advise her to get the first $16,000 of her income from her RRSP for the first year.

“As she will have no other income, this amount would be virtually tax-free,” he says. Then she could dip into her TFSAs. But this strategy is to be validated with his accountant. »

Danielle can then continue to save if she keeps the same lifestyle and returns to her current salary in two years. Then, when she has finished paying off her mortgage, the rents will be added to her income.

“She has ample means to carry out her project with her current cost of living,” says Simon Préfontaine. On the other hand, to be reassured and accompanied in her project by taking into consideration all the details of her situation, she should consult a financial planner. »

* Although the case highlighted in this section is real, the first name used is fictitious.

Are you planning a project that requires a wise use of your money? Do you have financial problems?



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