Alexandra has a defined contribution pension plan at work valued at about $475,000. She admits she has a 'huge anxiety' over the idea of parting with her savings and would prefer to watch them grow.Michael Bell/The Globe and Mail
At just 58, Alexandra is ready, psychologically, to end her career in the public service and retire from her $102,000-a-year job. She’s hoping she might be ready financially, as well.
“I have no debt and live beneath my means,” Alexandra writes in an e-mail. “Something I learned after finding myself as a single parent at age 30.” With two small children, she went back to university and “reinvented myself to support them,” she adds. “I have paid off my mortgage and am ready to rest from a long, stressful career and some challenging years.”
With basic living expenses of less than $3,000 a month, Alexandra manages her money carefully. “I allow myself $4,000 at the beginning of each month for expenses and discretionary spending – fun and splurge shopping,” she writes. “I normally don’t spend all that and transfer what I don’t spend into savings” along with the rest of her paycheque.
Her children, now in their 20s, are both financially independent.
Alexandra has a defined contribution pension plan at work valued at about $475,000. She admits she has a “huge anxiety” over the idea of parting with her savings and would prefer to watch them grow. “But alas, I am very tired and need the peace and tranquility that retirement will bring,” she writes.
“Is it worth sticking it out a couple of years more, or can I please finally retire?” she asks. “If I do retire now, how long will my money last?” Her retirement spending goal – leaving herself wiggle room like she does now – is $48,000 a year after tax.
We asked Steve Bridge, a certified financial planner at Money Coaches Canada, to look at Alexandra’s situation.
What the Expert Says
Alexandra’s seemingly simple – and reasonable – questions involve many factors, Mr. Bridge says in his report. “I will start with the second question, how long will my money last, to which the answer is, age 77,” the planner says. This is based on stopping work completely at the end of 2024, spending $48,000 after-tax per year starting in 2025, and starting Canada Pension Plan and Old Age Security benefits at age 65, as she has indicated she would like to do, Mr. Bridge says.
From age 77 onward, she would still have her CPP and OAS benefits but would run out of liquid savings.
Alternatively, delaying CPP and OAS to age 70 would result in running out of money sooner – age 74 – but would provide a higher CPP and OAS benefit for the rest of her life.
“To answer Alexandra’s first question, yes, it is worth continuing to work longer,” the planner says. Alexandra’s job is quite stressful, so she may want to consider a more enjoyable role elsewhere or going to part-time with her current employer, he says.
To reach her spending goal, which includes a good-sized buffer, Alexandra could work 10 more years, either part-time or at a less stressful job, making $40,000 annually, and start her CPP and OAS at age 70. This would allow her to spend $48,000 a year from age 60 to age 95, the planner says.
“If this does not appeal, another way she could achieve her spending goal is to stay in her current role and salary until age 64, saving at least $15,000 per year in her RRSP until then.” Alexandra can look at bringing her home into the equation at some point in the future. Options include borrowing from her home in the form of a reverse mortgage or home equity line of credit (HELOC), selling the home and renting, or selling and moving to a smaller place or even a retirement community.
“Alexandra will have to decide what is best for her financially and emotionally,” Mr. Bridge says. She may be debt-averse or not be keen on renting, or she may want to keep the value of her home as an inheritance for her two children. If she is open to accessing equity in her home, it would change the numbers in her favour.
Regarding life expectancy, Alexandra notes that her family is not long-lived, and she expects she won’t live past 85. “This makes planning tricky because spending based on that assumption differs from spending as if she will live to age 95,” he says. Alexandra eats healthily and stays active, so she may be the exception in her family. “As with all things money, the decision is Alexandra’s on how she wants to approach this, but to be safe, my calculations are based on her living to age 95.”
Alexandra works with an investment adviser and saves to her RRSP and TFSA every month. She has been prioritizing her TFSA over her RRSP, even though she will be in a much lower tax bracket in retirement than she is now. “I suggest channelling all available savings to her RRSP for 2024 and forgetting the TFSA,” Mr. Bridge says. “Based on her current income and cash flow, I have assumed a $15,000 RRSP contribution for 2024 and nothing to her TFSA. If there is a surplus left over on top of this, prioritize the RRSP.”
Even though Alexandra has indicated she intends to take her CPP and OAS at 65, she may want to consider waiting until age 70. This will provide her with a higher guaranteed income – 42 per cent more than if she takes CPP at 65 – for life, and it is fully indexed to inflation. The same goes for OAS. Delaying to age 70 means she will receive more for life – 36 per cent more vs. age 65 – and it is also fully indexed to inflation. “For anyone concerned about running out of money, it is worth strongly considering, especially those without a defined benefit pension.”
A couple of other considerations are that even though her CPP benefit estimate statement says she will receive about 80 per cent of the maximum, taking this number with a grain of salt is advised. If she stops working completely at age 59, she will have six years of no income, which could mean receiving less than what is on her estimate statement, depending on what she has contributed so far.
On the flip side, the estimate doesn’t consider any no-income or low-income years she may have had when raising her children when they were under age seven. These child-rearing years do not count against you when applying for CPP, but you must indicate this when you apply, the planner says. Alexandra may want to download her Statement of Contributions from her My Service Canada account and either use a CPP calculator or hire someone to do an accurate calculation for her.
If Alexandra is truly done with work at the end of 2024 and sticks to the idea of taking CPP and OAS at 65, she will have about $37,900 a year to spend after tax until age 95, Mr. Bridge says. “This leaves the full value of her home for her children.”
Delaying CPP and OAS to age 70 would give her $2,000 more a year in after-tax spending room – or $39,900 – for life from age 60 onward.
The planner has assumed a 4.5-per-cent average annual rate of return on her investments based on an asset allocation of 10 per cent cash, 40 per cent fixed income, and 50 per cent equities. “She may want to check the fees on her investments and compare the performance over the medium to long term against the relevant benchmark; i.e., her Canadian funds against the Toronto composite index.”
Client Situation
The People: Alexandra, 58, and her children, 25 and 28.
The Problem: Can she afford to retire early and if she does, how long will her savings last?
The Plan: Consider working longer, or part time, if she wants the buffer in her retirement spending target. Consider postponing government benefits to age 70. If she is willing to get by on less, she can retire at year end.
The Payoff: A clear-eyed understanding of her options.
Monthly net income: $6,020.
Assets: Savings account $30,520; tax-free savings account $75,755; RRSP $29,740; defined contribution pension plan $473,695; residence $285,000. Total: $894,710.
Monthly outlays: Property tax $300; water, sewer, garbage $140; home insurance $120; electricity $130; heating $75; security $35; maintenance $50; transportation $165; grocery store $700; clothing $15; gifts, charity $25; vacation, travel $200; other discretionary $50; dining, drinks, entertainment $110; personal care $10; pets $100; health care covered at work; phones, TV, internet $210; RRSP $250; TFSA $500; pension plan contributions $425. Total: $3,610.
Liabilities: None.
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Some details may be changed to protect the privacy of the persons profiled.