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There is a caveat, however. In taking the commuted value, Lydia would accept the management risk that comes with investing in stocks, bonds, ETFs or mutual funds. She may beat index numbers as we have given them or she may lose a little or a lot. However, the amount of the potential outperformance of the commuted value converted to her own capital makes the risk worthwhile, Moran says. Moreover, approximately $120,000 of the commuted value must be transferred to a Locked-in retirement (LIRA) and thus sheltered from immediate taxation. She has $61,000 in unused RRSP space. That can be used to reduce the tax problem on the taxable portion of the transfer.
In retirement at 65, Lydia will be eligible for annual Canada Pension Plan benefits of $12,700, $7,362 per year from Old Age Security, $40,825 from savings and $15,258 return from investment of her commuted value for a total, pre-tax income of $76,145 per year. She would escape the OAS clawback which begins in 2020 at $79,054. After paying 20 per cent average tax, she would have $5,075 to spend each month.
Her total income would be less than her target $6,500 per month, but her mortgage, RRSP contributions and the cost of raising three children would be history. Her expenses would decrease by $2,670 to $3,480 per month, leaving her with $1,595 additional monthly discretionary income.
Taking commuted value shifts the risk of beating or losing to inflation to Lydia. The choice is hers.
Retirement Stars: 4 **** out of 5
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