Mary is 46 and single again. Her son is 13. They live in a rental apartment in British Columbia.Tijana Martin/The Globe and Mail
Mary is self-employed and planning to take on more work now that her son has reached his teens. Her goal is to save enough for the day when she leaves the work force. As an accountant, her skills are in demand.
Mary is 46 and single again. Her son is 13. They live in a rental apartment in British Columbia.
Mary grosses about $90,000 a year in business income, against which she has $25,000 in expenses. She also gets child support of $800 a month and the Canada child benefit of $506 a month.
Short term, she hopes to increase her income, save a lot and invest the money. Longer term she plans to send her son to college – she has started a registered education savings plan (RESP) – save as much as possible and invest. Her retirement spending goal is $60,000 a year after taxes, more than she is spending now, excluding savings.
“Can I ever retire as a renter?” Mary asked in an e-mail. “I would like to partly retire at age 60 but I don’t know if this is at all feasible,” she wrote. Her job is stressful. “But I do enjoy the work, so I could still do some work after age 60,” she added. “How much money will I have by then?”
We asked Justine Kelly, a personal financial planner at Modern Cents, an advice-only financial planning firm, to look at Mary’s situation.
What the Expert Says
Mary would like to stop working or reduce her workload by age 60 because of its high-stress nature. “As a check point, she would like to know how much she will have saved by age 60,” Ms. Kelly said.
Mary has focused on providing for her child and less on her retirement plans. She has some savings set aside for her retirement, but she realizes she needs to start saving more – and soon, the planner says.
Now that her child is more independent, and resources have already been allocated for his education, it is time for Mary to focus on her retirement plan, Ms. Kelly says. Being self-employed, she can earn more income by taking on more work.
“Mary has done a fantastic job at being debt-free and keeping her expenses and daily living costs low,” Ms. Kelly said. “This has helped her accomplish a respectable amount of savings as a single mother with an average income.”
Mary has also been prudent in securing a good amount of disability insurance – $4,000 a month. This is important for her because if she were no longer able to work for an extended period, her retirement plan would be completely wiped out in a short time, the planner says.
Mary is projected to receive a small pension from previous employment – about $565 per month – from age 59. This will be reduced to $424 per month at age 65, when her bridge benefit is dropped from the pension, but it is indexed to inflation. At 65 she will receive the full amount of Old Age Security and about $1,184 a month in Canada Pension Plan income, both also indexed.
Even with her small pension and government benefits, she still needs to fill a gap of about $3,680 a month before taxes to meet her income goals, the planner says.
Mary has saved about $255,000, spread out among her tax-free savings account, registered retirement savings plan, first home savings account and nonregistered accounts. That does not include the RESP. She has invested in various guaranteed income certificates, stocks and mutual funds.
She is putting $350 per month into her TFSA on a regular basis. If Mary continues with the current plan, she is projected to have about $550,000 at age 60, Ms. Kelly says.
“The challenge is that Mary requires about $1,150,000 at retirement to fund her goal of $5,000 a month in after-tax income, plus inflation.” Her projected path will leave her $600,000 short in capital. Mary still has time to make some choices that will help her achieve her goal, the planner says.
Mary could continue with the same level of income and savings while keeping her investments in a moderate-risk portfolio assumed to make a rate of return of 5.19 per cent per year, Ms. Kelly says. “With no changes to her current path, she could have a monthly after-tax income of about $3,250 plus inflation at age 60 to last her until age 95.” Alternatively, if she chose to retire later, at 65, she could achieve an after-tax income of $4,150 monthly and a projected $750,000 of capital to fund her 30 years of retirement.
Another option that better aligns with her stated goals and priorities would be to increase her workload between now and age 60 by $20,000 per year before taxes. Then she could transition to retirement by reducing her work/income from age 60 to 65, earning $40,000 per year before taxes. To reach her goal, she would need to use the additional income to invest in her RRSP, contributing $1,500 per month until age 60 while continuing to save in her TFSA.
During the years of reduced workload she can supplement her income with her TFSA savings and small pension. By age 65 she should start to collect OAS and CPP and transition her RRSP to a registered retirement income fund to generate the additional income required, the planner says.
Mary has her savings spread among GICs, stocks and some mutual funds. “A clear review of her asset allocation and investment diversification between geographic regions and sector exposure would be prudent to ensure she does not take on more risk than required,” Ms. Kelly said. Mary should aim for a portfolio designed to align with her risk tolerance and a capital growth objective. She should target an average rate of return of 5.60 per cent or higher after fees to keep pace with inflation.
Mary is a do-it-yourself investor, which helps keep her fees lower. But having a full review of her holdings by a financial professional would assist with employing these strategies.
Mary is worried that she will not be able to retire while being a renter. Fortunately, she has a relatively low rent that is likely cheaper than mortgage payments, property taxes and other potential housing fees at this time. “The reality is that if Mary wanted to purchase a property, she would need to either save significantly more than what we outlined above to reach her retirement goal or use some of the capital she has been saving towards retirement,” the planner said. This would effectively reduce her ability to reach her retirement spending goal.
Client Situation
The People: Mary, 46, and her child, 13.
The Problem: How to save enough money to retire or scale back her workload at age 60 with a spending target of $60,000 a year after taxes. How much money will she have at age 60?
The Plan: Ramp up work and savings as much as possible. Consider working to age 65 if necessary.
The Payoff: A better understanding of the trade-offs and alternatives.
Monthly Net Income: $6,000.
Assets: RRSP $32,550; LIRA $106,000; nonregistered $23,480; TFSA $76,000; FHSA $8,000; RESP $53,000; corporate account $8,000. Total: $307,030.
Monthly outlays: Rent $1,375; tenant insurance $35; electricity $85; maintenance, storage $185; transportation $350; groceries $565; clothing $100; gifts $50; vacation, travel $250; dining, drinks, entertainment $225; personal care $45; sports, hobbies $45; other personal $100; drugstore $20; health, dental insurance $90; life insurance $20; disability insurance $50; phones, TV, internet $285; RRSP $665; RESP $210; TFSA $350; Total $5,100.
Liabilities: $0.
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Some details may be changed to protect the privacy of the persons profiled.
