If she retires early, Gwen will be leaving behind a senior management job that pays more than $132,000 a year, plus a bonus.Carlos Osorio/The Globe and Mail
Gwen is 54 years old and single with no dependents. She has a mortgage-free house in the Hamilton area, a defined-benefit pension plan that will pay $39,700 a year, not indexed, and nearly $1.5-million in savings.
She’s wondering if she can afford to retire in three years at 57 and maintain her existing lifestyle. She is spending about $41,000 a year.
If she retires early, Gwen will be leaving behind a senior management job that pays more than $132,000 a year, plus a bonus. In the meantime, she is losing the benefit of a company car, so she is planning to buy an electric vehicle for $50,000. She wonders if she should pay cash or take out a line of credit.
Her main goal seems to be to travel to warmer climes in the winter months.
“Am I saving enough to comfortably retire at age 57?” Gwen asks. Her retirement spending goal is $6,500 a month, or $78,000 a year, after tax, rising in line with inflation.
We asked Warren MacKenzie, an independent Nova Scotia-based financial planner, to look at Gwen’s situation. Mr. MacKenzie holds the chartered professional accountant designation.
What the expert says
“From a financial point of view, Gwen can definitely afford to retire at 57,” Mr. MacKenzie says. Whether she should depends on how she plans to spend her time during what might be a 30- to 40-year retirement.
To better understand her situation, Gwen needs a financial plan that is based on reasonable and conservative financial assumptions.
So far, she has focused most of her attention on accumulating enough to be able to retire, the planner says. “After 30 years of saving, it may be difficult for her to switch gears and start to spend more.”
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In his projections, Mr. MacKenzie assumes Gwen will spend $80,000 a year after tax, rising in line with inflation.
“Because she is in good health and has sufficient assets to maintain her desired lifestyle, it is recommended that she delay the start of Canada Pension Plan and Old Age Security benefits to age 70,” the planner says. By doing so her CPP will be 42 per cent higher than if she had taken it at 65 and her OAS 36 per cent higher.
“To be conservative, it is assumed she will sell her house by age 80 and will then move into a top-notch retirement home, which would cost $100,000 a year in today’s dollars,” he says.
Because Gwen has no desire to leave a large estate, she might consider giving some money to charity each year. The projections show that if she spends $80,000 a year, plus an additional $12,000 a year for charitable donations, she is still on track to leave an estate of close to $1-million in dollars with today’s purchasing power, Mr. MacKenzie says. That assumes a rate of return on investments of 5 per cent a year and an inflation rate of 2 per cent.
The $50,000 that Gwen plans to spend to buy an electric vehicle should come from her non-registered account.
In her first year of retirement, the cash receipts will come from her pension of $39,700, an RRSP withdrawal of $15,000 and $53,300 from her non-registered account, for a total of $108,000. Cash outflow will be about $86,000 for lifestyle spending, charitable donations of $13,000 and about $6,000 for income tax, for a total of $105,000.
At age 71, after she starts to collect CPP and OAS, Gwen’s cash flow will consist of her pension $39,700, CPP $36,000, OAS $17,700, RRIF withdrawal $27,600 and non-registered withdrawals of $27,000, for a total of $148,000. She will spend $114,000 on lifestyle spending, donations of $17,000 and $17,000 for income tax, for a total of $148,000.
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Gwen holds mutual funds and managed funds. With about 85 per cent in stock funds, she is exposed to more risk than is necessary to achieve her goals, Mr. MacKenzie says. She can achieve her goals with an annual return of 5 per cent. Her existing portfolio is designed to earn about 10 per cent.
“The markets are close to their record highs, so it makes no sense for her to be taking more risk than is necessary to achieve her goals,” the planner says. Instead, she should move to a goals-based asset mix.
Some of Gwen’s investments have underperformed the relevant benchmark, the planner says. “She should consider asking three different investment firms for proposals for a simplified and lower-risk investment strategy,” he says.
In the future, if a time comes when she worries about managing her money, she could consider investing in a life annuity. With a life annuity, the return is guaranteed for life and no further investment decisions would be required.
After Gwen retires and before she starts CPP and OAS, she will be in a lower tax bracket than will be the case after she begins to collect government benefits at 70 and mandatory minimum RRIF withdrawals at 72.
To take advantage of the lower income tax bracket, she should take some RRSP funds into income each year. By having some of her RRSP income taxed at lower rates, she will minimize income tax and reduce any potential OAS clawback.
Income tax will also be reduced if each year she starts to donate some of her surplus capital to her favourite charity.
It will be important for Gwen to have her financial plan updated annually, particularly if there is a major change in assumptions.
Herman, 60, has a net worth of more than $3-million. How much can he spend each year in retirement?
Client situation
The person: Gwen, 54.
The problem: Can she retire in three years and maintain her standard of living?
The plan: Go ahead and retire. Seek more accountability in her investments. Postpone government benefits to age 70. Feel free to spend a little more.
Monthly after-tax income: $9,500.
Assets: Cash $15,000; deferred profit-sharing plan $116,000; other work plan $43,120; non-registered portfolio, mainly mutual funds $462,000; TFSA $195,500; RRSP $661,000; residence $900,000. Total: $2,392,620.
Estimated present value of her defined-benefit pension: $750,000. This is what someone with no pension would have to save to generate the same retirement income.
Monthly outlays: Property tax $645; water, sewer, garbage $200; home insurance $150; electricity $155; heating $110; maintenance, garden $150; transportation $0 (has company car but that is about to change); groceries $400; clothing $120; gifts, charity $130; vacation, travel $445; dining, drinks, entertainment $310; personal care $225; club membership $30; golf $100; sports, hobbies $100; subscriptions $55; drugstore $30; communications $160. Total: $3,515. Surplus goes to RRSP, TFSA, non-registered investments and high-interest savings account.
Liabilities: None.
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