Alice and Ferdinand want to know if ‘Freedom 55’ is possible for them.Chad Hipolito/The Globe and Mail
With a family income of more than $300,000 a year and government pensions, Ferdinand and Alice are wondering if they are close enough to achieving financial freedom to retire in five years.
Ferdinand is 51 and Alice is 50. They have two children, 11 and 14, and a house in British Columbia with a small mortgage.
“We are wanting to examine whether ‘Freedom 55’ is a realistic option for us, or will we need to keep working longer to earn enough to be comfortable in retirement,” Ferdinand writes in an e-mail.
Their short-term goals are to travel with their children and pay off their mortgage and car loan. They’d also like some advice on how to draw down their savings after they are no longer working.
Their retirement spending goal is $120,000 a year after tax, rising in line with inflation.
Can Luther, 52, and Bethany, 49, retire in a few years and still leave a big inheritance?
We asked Chris Tringham, a portfolio manager and certified financial planner at Park Place Financial in Kingston, Ont., to look at Ferdinand and Alice’s situation. Mr. Tringham also holds the chartered financial analyst designation.
What the expert says
Ferdinand and Alice are in a fortunate position because they have been working for provincial and federal governments for many years and have paid into defined benefit pension plans, Mr. Tringham says.
Ferdinand is expected to have pension income of $69,155 a year at 56, while Alice is estimated to have pension income of $63,322 a year at 55.
Even so, their spending goals “may be slightly elevated for the resources that they have,” the planner says.
With a 27-year age gap, how can Sydney retire early to spend time with his partner?
Here’s how the numbers break down. In five years, during their first year of retirement, their combined pension income, with indexing, will be $132,477 a year. To achieve their spending target, they will have to withdraw $23,100 a year from their registered accounts. Income tax is projected to be $25,300.
“The net amount of $130,277 is equal to the inflation-adjusted spending target they have of $120,000 a year,” the planner says.
In his forecast, he assumed the couple’s spending falls to $96,000 a year at age 75.
“The projections show that they are just able to meet their spending goal with the pensions and retirement accounts that they currently have,” Mr. Tringham says. “There is no buffer for emergencies or gifts for their children.”
“In order to make their early retirement more comfortable, I would recommend that they begin adding funds to their tax-free savings accounts as soon as possible.” When their mortgage is paid off in 2.5 years, they should direct the money that had been going to the mortgage to their TFSAs.
Their current mortgage payments of $982 every two weeks, if invested in a growth portfolio in their TFSAs, will provide them with a tax-free source of income in retirement and additional funds for unforeseen expenses.
Their TFSA balances are likely to be about $100,000 each at retirement if they direct all mortgage payment amounts toward these accounts, Mr. Tringham says.
“If Ferdinand and Alice are flexible in retirement and willing to spend only the income from their pensions, then early retirement is completely doable,” Mr. Tringham says. “The only issues arise if they want to spend more or give more to their children.”
Alice and Ferdinand also asked when to draw down their various assets. The defined benefit pensions are eligible for unreduced benefits at 55, based on their contribution period and their average salaries, the planner says. With the pensions, they will have to decide what guaranteed payment period and survivor benefit to choose.
“Given the significant pensions available to both Ferdinand and Alice, I recommend that they choose a 60 per cent survivor benefit rather than the 100 per cent option,” he says. This will result in a higher payment when they retire. Because each has their own pension, there is no need to protect 100 per cent of the pension if either of them died.
Their pensions pay a bridge amount, which is designed to fill the gap between their early retirement and when Canada Pension Plan benefits begin at 65. “This bridge benefit ends at age 65, so they will need to either increase withdrawals from their registered accounts, or begin drawing CPP benefits.”
Based on the family history they provided, “I would recommend that they begin the CPP benefits at age 65.”
Ferdinand and Alice have focused on paying down their mortgage, which is scheduled to be completely paid off in 2.5 to three years. This strategy has meant that they have not been contributing to their TFSAs. Their TFSA room is currently $109,000 for Alice and $105,000 for Ferdinand. Redirecting the mortgage money would allow them to save a total of $214,000 in these accounts.
“I would strongly suggest that after their mortgage is paid off, they should direct this extra cash flow toward their TFSAs.
How can Mandy, 64, and Syed, 65, make the most of their hard-earned savings in retirement?
“One final recommendation I would make is that their TFSAs be invested fairly aggressively in mostly stocks and stock funds,” the planner says. “Because they have such large defined benefit pensions, they can take on more investment risk in their TFSAs, and would benefit from more tax-free growth than they would get from a conservative asset mix.”
In preparing his forecast, the planner assumed a life expectancy of 90 for both Ferdinand and Alice. He also assumed they both start receiving CPP and Old Age Security benefits at 65.
Their long-term portfolio return is estimated at 6 per cent, based on a portfolio that is about 60 per cent stocks and stock funds, including non-conventional assets, and 40 per cent fixed income. This return assumes fixed income returns of 4 per cent and equity returns of 7 per cent. The inflation rate is estimated to be 2.1 per cent.
Client situation
(Income, expenses, assets and liabilities provided by the applicants.)
The people: Ferdinand, 51, Alice, 50, and their two children.
The problem: Can they afford to retire in five years and still meet their spending goal?
The plan: When the mortgage is paid off, direct the money to their TFSAs and invest fairly aggressively. Begin collecting government benefits at 65.
The payoff: Early retirement but not a lot of money to spare.
Monthly after-tax income: $15,910.
Assets: Bank account $23,000; his TFSA $2,900; his RRSP $110,000; her RRSP $500; registered education savings plan $81,455; residence $1,100,000. Total: $1.3-million.
Commuted value of his DB pension (from pension statement) $626,425; commuted value of her DB pension $640,125.
Monthly outlays: Mortgage $2,000; property tax $515; water, sewer, garbage $110; home insurance $480; electricity $100; heating (heat pump) zero; maintenance, garden $250; transportation $1,295; groceries $1,600; children’s expense $500; clothing $600; car loan $810; gifts, charity $200; vacation, other discretionary $450; dining, drinks, entertainment $1,430; personal care $300; sports, hobbies $300; subscriptions $100; other personal $250; health care $400; communications $195; RRSPs $1,250; registered education savings plan $125; TFSAs $200; pension plan contributions $2,410. Total: $15,870.
Liabilities: Mortgage $71,000 at 4.4 per cent; car loan $36,710 at 1.99 per cent; federal green home loan $34
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Some details may be changed to protect the privacy of the people profiled.