Value of advice: when it comes to changing careers
If you could choose an entirely different career path (other than education), what would it be?
For Erika, a teacher who was fast approaching retirement, the answer to that question was easy—pursue a second career in real estate.
But would the transition to her new newly found professional passion be just as simple?
After all, Erika’s plan was to retire early, as in before reaching her 85-factor. So, naturally, there were plenty of financial considerations to make. Yet not the ones you’d probably be expecting.
Educators Senior Financial Advisor Ed Gougeon goes on to explain.
“When you’re so close to reaching that magic number (85/90-factor), deciding to retire early and take a reduced pension is by no means something to be taken lightly,” says Ed. “However, Erika approached her second career in a way that only an education member could; she took it for a test run first while taking a 3 over 4. It was during that time Erika was able to grow her client base substantially, which helped solidify her decision (to retire early). But as we chatted and I got a better sense of the full scope of her financial situation, I soon realized that having enough money in retirement wasn’t going to be the problem facing Erika and her family. The challenge was going to be the potential tax liabilities down the road.”
This is where the real benefit of educator-specific advice comes into play.
“Erika is such a hard worker and over the years had built up quite a sizeable nest egg,” continues Ed. “So, she didn’t need my financial planning expertise for the purposes of living comfortably. What she did need, however, was someone to identify any strategies that were perhaps missed elsewhere. Strategies that would minimize Erika (and eventually her next of kin) from taking a giant tax hit.”
One missed strategy Ed uncovered—Erika and her husband were not taking advantage of TFSAs.
“Although they had regularly contributed to RRSPs, neither Erika nor her husband had even considered TFSAs,” says Ed. “This is a big miss for many education members—particularly when both spouses are set to receive a defined pension benefit upon retirement, which was the case with Erika and her husband. So, I laid out the idea that their RRSPs, in the context of the pensions they were both going to be receiving, only served as vessels that would eventually result in the clawing back of other pools of money they’ve earned or contributed to over the years.”
Plus there was also the matter of Erika’s post education career in real estate to factor in.
“Erika is going to have a tax liability built up in the form of a registered asset that she’s going to have to draw down at age 71,” continues Ed. “This can put Erika at peril for her OAS claw back.”
To help minimize any future clawbacks, Ed recommended Erika and her husband start winding down their RRSPs.
“With their current cash flow being more than sufficient, I pitched the idea of gradually melting down their RRSPs during a time when their income was set to take a precipitous drop,” recalls Ed. “The timeframe I’m referring to is when Erika and her husband will be on bridged pensions—which is when they’ll be in their lowest marginal tax rate. With a combined $160,000 in unused TFSA contribution room, the way I looked at it is if they could get a significant amount of money growing and compounding in a Tax-Free Savings Account now, when I know they wouldn’t have to touch it (because of their capacity from a cash flow perspective), then why not draw down the tax liability (i.e., RRSP) and build up the probate-free, tax-free asset instead.”
That’s when, according to Ed, Erika had that “ah-ha” moment.
“No matter where somebody happens to be on the pay grid or how far or close they are to retirement, dollars and cents mean something to our clients,” says Ed. “In Erika’s case, I simply helped her to make sense of how to maximize the dollars she has worked so hard to build up over the years. By connecting those dots, she is now armed with a strategy that will prevent her from being broadsided by unpleasant tax surprises down the road. More importantly, Erika is now equipped with the full financial picture so she can fully embrace this next exciting chapter in her professional career.”
That strategic advice also extended to showing Erika how to maximize post-secondary education savings for her children.
“One of Erika’s children is just two years away from attending college/university and she had of course built-up RESPs and fully maximized the Canada Education Savings Grant,” continues Ed. “So, I suggested that at age 18, when her child begins their post-secondary studies, to continue growing money in a TFSA that is earmarked specifically for that child’s purpose*. That child will then have a solid financial foundation to grow from as they continue to move forward in life. Because when you think about it, aside from unconditional love, financial security is honestly the best gift any parent could possibly give a child.”
For those who might be thinking about switching careers or making any other type of big life changes, Ed has some sage words of wisdom.
“The biggest source of trepidation for anyone contemplating any type of change is the unknown. But the unknown doesn’t have to be some kind of invisible barrier preventing you from moving forward. Instead, seek out advice that always listens to your needs before any kind of solutions are offered up. Because at the end of the day, the only actionable solutions in life are the ones that are ultimately shaped by you.”
And remember you can always count on us for educator-specific financial advice along the way.
Since 1975, Educators Financial Group has been helping members to navigate many career and life changes over the years. So, regardless of where you are on the pay grid, how close you are to retirement, or if you’re already collecting pension income—we’ll make sure you’re equipped with the information you need to take that next big step with confidence.
*TFSA contribution room starts when you are over the age of 18, have a valid social insurance number, and are a Canadian resident or citizen.