Louis and Jackie are targeting retirement in the summer of 2029, when Louis is 68 and Jackie is 65.Jennifer Roberts/The Globe and Mail
At age 62, Louis is facing the prospect of looking for another job after his $75,000-a-year contract ends in a couple of months. His wife, Jackie, who is 59, has a secure job paying more than $100,000 a year. She also has an indexed defined benefit pension plan that will pay about $47,000 a year in six years.
“I would love to retire, but haven’t been able to save enough,” Louis writes in an e-mail. Jackie will be eligible to retire at age 65, but not with a full pension because she started her current career late.
“Our most significant financial asset is our house, which we paid off a couple of years ago,” Louis writes. “We really don’t have a financial plan and could definitely use some guidance.” Their daughter is 22 and they’re still supporting her through university, “but probably won’t be able to cover all four years,” he adds.
“Jackie and I are both prepared to continue working part-time into our late 60s or early 70s if finances require and our health permits,” Louis writes. “We’re also open to other means of generating income, if necessary, like renting out our Toronto house and renting in a lower-cost community.”
Can Louis retire now or should he wait until Jackie retires at 65? Their retirement spending goal is $80,000 a year after tax.
We asked Jason Heath, an advice-only financial planner at Objective Financial Partners Inc., based in Markham, Ont., to look at Louis and Jackie’s situation.
What the Expert Says
Louis and Jackie are targeting retirement in the summer of 2029, when Louis is 68 and Jackie is 65, Mr. Heath says. “Louis has a contract coming to an end in 2024 and I assumed a similar income for his next role.”
They are spending about $100,000 per year on their basic living expenses. Their daughter lives with them and that contributes to higher food, utility and miscellaneous costs that will go down when she moves out.
“They are hoping to see a 20-per-cent reduction in their spending to $80,000 per year in today’s dollars when they retire, but I am not as optimistic,” the planner says. “So, I ran projections assuming a more modest 10-per-cent decrease to $90,000 to be conservative.” He assumed an average inflation rate of 2 per cent over the next 30 years.
Jackie and Louis expect a number of extraordinary expenses in the future, Mr. Heath says. “These expenses need to be considered as someone approaches retirement to avoid understating future costs.” They are planning to buy a new car imminently for $35,000 that they hope will be their last car. They have $18,000 of home renovations planned next year but are expecting an $8,000 water-heater rebate.
“I added a recurring $5,000 renovation and repair budget every three years thereafter.” They want to take a $10,000 trip for their 25th anniversary next year. “We agreed to assume $10,000 of incremental travel costs a year during their first 10 years of retirement for an affordable two-month winter escape.”
Louis and Jackie should have some extra cash flow over the next few years to add to their RRSPs and tax-free savings accounts based on their incomes and expenses, the planner says. Jackie will not earn much new RRSP room because of her pension enrolment, but since her tax rate is slightly higher than Louis’s, they should contribute to her RRSP first, Mr. Heath says.
“They are both in a higher tax bracket now than they are projected to be in during retirement, so contributions to their RRSPs to bring their taxable incomes as low as about $55,000 seems advantageous,” he notes. “I’d advise using their non-registered savings and extra cash flow now that they’re debt-free to contribute to their RRSP accounts first and TFSA accounts second to make their savings more tax efficient.”
Their current $130,000 or so of cash and investments could grow to more than $300,000 by retirement with projected cumulative deposits of about $125,000 and modest 4-per-cent investment growth, Mr. Heath says. “I project this could be drawn down to zero by Louis’s age 80 and Jackie’s age 77, based on the assumptions.”
At that time, their cash flow shortfall would not be significant because of Jackie’s indexed government pension and their indexed Canada Pension Plan and Old Age Security benefits. Their expenses might be $1,500 to $2,000 per month more than their after-tax income, the planner says. They could borrow against their home value using a reverse mortgage.
“They might rack up more than $400,000 of debt against their $3-million projected home value by Louis’s age 95, assuming a 6-per-cent borrowing rate and a 3-per-cent growth rate for their home’s value.” A modest home downsizing in their seventies or eighties could replenish their investments if real life evolved the way the modelling projects, he says.
Although Louis and Jackie mention the potential of working part-time in retirement or renting out their home while living in a lower-cost community, it may not be necessary if the next six years unfold as they hope. They appear to have enough capital to fund their retirement even if they may need to use some of their home equity for that funding in their eighties or nineties.
“I tried to show them a realistic spending scenario in retirement, too, rather than assuming a dramatic decrease in spending and ignoring the unexpected expenses that retirees need to budget for in the future,” he says.
“The risks that I see for Louis and Jackie include Louis not being able to replace his current income when his contract ends, or health issues or economic conditions preventing them from working to 68 and 65, respectively,” Mr. Heath says.
If Louis were to retire now, it would limit their budget in retirement. They would need to borrow against their home value in their seventies or face with a potential earlier downsizing.
“I would be inclined to track their spending for the next year or two to make sure they are pro-actively contributing extra cash flow to their RRSP and TFSA accounts to build up their retirement savings,” the planner says.
“A retirement plan is just a point-in-time calculation that provides a snapshot of a retirees’ trajectory. Things change and they should revisit their retirement planning over time.”
Client Situation
The people: Louis, 62, Jackie, 59, and their daughter, 22.
The problem: How can they best prepare for retirement in a few years? Can Louis afford to retire now or does he have to keep working until Jackie retires at age 65?
The plan: Keep working and adding to their savings. Retire when Jackie begins collecting her pension. They may end up downsizing or taking a reverse mortgage in their later years.
The payoff: A clear understanding of what they have to do now to prepare for the retirement lifestyle they want.
Monthly net income: $11,470.
Assets: Cash and equivalents $30,370; balance of inheritance $30,000; her TFSA $50,000; his RRSP $22,345; registered education savings plan $22,150; residence $1,100,000. Total: $1.25-million.
Estimated present value of Jackie’s pension $600,000. This is what a person with no pension would have to save to generate the same cash flow.
Monthly outlays: Property tax $395; water, sewer, garbage $120; home insurance $115; electricity, heat $165; maintenance, decor $1,000; garden $60; transportation $595; groceries $2,100; clothing $510; gifts $55; charity $300; vacation, travel $400; dining, drinks, entertainment $1,425; personal care $480; club memberships $65; pets $70; books, subscriptions $95; health care $100; life insurance $55; phones, TV, internet $225; Jackie’s pension plan contributions $1,025. Total: $9,355.
Liabilities: None.
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