This smalltown B.C. couple just wants to see all three of their children through to university before they cash out and retire.Aaron Hemens/The Globe and Mail
Gabriel and Ivy have well-paying professional jobs, three children and a mortgage-free house in small-town British Columbia. Gabriel works in health care, Ivy in education. They are both age 54 and earn a combined $182,785 a year.
“We are very frugal,” Ivy writes in an e-mail. “We do all our own home repairs, shop at thrift stores and rarely eat out.”
Short term, they want to “get the kids through bachelor’s degrees” – one has already finished university – and buy an electric car. They have about $144,000 in a registered education savings plan for tuition.
Both Ivy and Gabriel have defined benefit pension plans that will pay a combined $61,550 a year at age 65, indexed to inflation. That’s when their bridge, or early retirement, benefits end and they begin drawing Canada Pension Plan and Old Age Security benefits. Their initial pensions in 2027, the first year they are both fully retired, will total $67,884 a year, including the bridge.
“Can we afford to retire at age 57?” Ivy asks. “If not, what age would be appropriate?”
Their retirement spending target is $65,000 a year plus $15,000 a year for travel.
We asked Ian Black, a financial planner at Macdonald, Shymko & Co. Ltd. of Vancouver, to look at Gabriel and Ivy’s situation. Mr. Black holds the advanced registered financial planner (RFP) designation as well as the trust and estate practitioner (TEP) designation.
What the Expert Says
“Yes, they can afford to retire at age 57,” Mr. Black says. Gabriel and Ivy could afford to retire now, although waiting until each attains age 57 reduces the penalty they would pay for starting their pensions early, the planner says.
As well, there is a considerable safety margin in their target spending of $80,000 a year. In fact, $95,550 a year would be sustainable, although this would eliminate any safety margin, he says.
“Ivy and Gabriel have earned two defined-benefit pensions, an unusual accomplishment in this era,” the planner says. Looking at the budget/cash flow information they provided, they appear to be spending only about $58,000 a year after tax, so they are targeting retirement spending that is almost 40 per cent higher than their current outlay.
Of their three children, one is independent and the other two are finishing school within four years. There is sufficient education funding, separate from the assets in this Financial Facelift, to complete their education, Mr. Black says. “The couple has not expressed any particular goal for leaving a legacy.”
In addition to their work pensions, Gabriel and Ivy have accumulated assets of about $600,000 available for retirement funding at age 57, including tax-free savings accounts (TFSAs), registered retirement savings plans (RRSPs) and some non-registered investments. They can draw on those assets, as well as the bridge benefit of their pensions, to fund their spending between the ages of 57 and 65, Mr. Black says. “Thus we would recommend they wait until that age (65) to start their Canada Pension Plan benefits. They would also start Old Age Security benefits at that time.
“This will add seven additional zero-contribution years to their CPP calculations, but this is more than offset by the elimination of the 36-per-cent early-commencement penalty they would otherwise experience were they to start [CPP] at age 60,” the planner says.
As for their pension options, Mr. Black suggests that Ivy choose single life with a 10-year guarantee because her pension is smaller and the loss of it were she to pass away would have less financial impact. He suggests the joint life option for Gabriel because his pension is larger, would leave a significant hole in Ivy’s finances were he to pass away and life expectancy is longer for women than for men in retirement.
“In our projections, if they remain mindful of their various sources of income, and the timing in which each becomes available, the Old Age Security clawback need never be an issue for them,” the planner says.
Certain assumptions go into the forecast. The non-registered accounts are 100 per cent in guaranteed investment certificates with an estimated rate of return of 3.5 per cent a year. The RRSPs and TFSAs are in balanced mutual funds with an estimated return on investment of 4.75 per cent. Inflation averages 3 per cent a year while their pensions rise by 1.5 per cent a year. Ivy gets 65 per cent of the maximum CPP benefit and Gabriel gets 69.5 per cent. They live to age 95.
“We assume they stay in their home throughout retirement, and that it forms an asset of their estate,” Mr. Black says.
Next, the planner looks at the couple’s retirement cash flow.
In 2027, the first year they are both fully retired all year, neither is collecting CPP or OAS yet, but they are getting the bridge benefit: Their combined pensions total $67,884 a year, with the remainder of their target income coming from withdrawals from their non-registered portfolio.
In 2035, the bridge benefits end, they are both collecting CPP and OAS and their non-registered assets are exhausted. Their pension income totals $61,550 a year, their combined CPP $33,888, their OAS $23,528 and the withdrawals from their TFSAs $27,673.
In 2041, their RRSPs have been converted to registered retirement income funds (RRIFs) and they are making mandatory withdrawals. Their income breaks down as follows: pensions $67,302 a year, CPP $38,371, OAS $28,092, RRIF withdrawals $47,877 and TFSA withdrawals $2,648.
“Of note, their retirement income goal of $80,000 per year is substantially higher than their current level of consumption,” Mr. Black says, which is unusual. Current consumption excludes savings, payroll deductions and income taxes.
“To their credit, Gabriel and Ivy have updated their wills and other estate planning documents in January, 2023,” Mr. Black says.
For investments in their self-managed accounts (non-registered investment account, TFSAs and RRSPs), the planner suggests holding low-cost exchange-traded funds. In recent years, it has become much easier to gain exposure to a diversified portfolio of equities and fixed income using all-in-one exchange-traded funds from iShares or Vanguard, such as VBAL or XGRO, he says. Such funds are designed for investors who want to build an ETF portfolio with a single trade. This takes the fear factor of making a wrong decision out of their hands – these investments rebalance automatically to a predetermined asset allocation.
Client Situation
The People: Gabriel and Ivy, both age 54, and their three children, ages 19, 20 and 24.
The Problem: Can they afford to retire at age 57?
The Plan: Retire at 57, drawing first on their pensions and non-registered savings, then adding CPP and OAS at age 65 and finally RRIF withdrawals starting in the year they turn age 72.
The Payoff: Never having to worry about money
Monthly net income: $11,865.
Assets: GICs $105,385; her TFSA $87,790; his TFSA $107,225; her RRSP $232,700; his RRSP $74,565; registered education savings plan $144,000; estimated present value of her DB pension about $300,000; estimated present value of his DB pension about $750,000; residence $1,043,000. Total: $2.8-million.
Monthly outlays: Property tax $210; water, sewer, garbage $115; home insurance $150; electricity $135; heating $140; maintenance, garden $150; transportation $730; groceries $700; clothing $200; gifts, charity $420; vacation, travel $600; other discretionary $400; personal care $115; dining out $200; pets $15; sports, hobbies $200; health care $95; communication $250; RRSPs $665; TFSAs $200; pension plan contributions $1,675. Total: $7,365. Surplus of $4,505 goes to savings, big-ticket items, children’s expenses.
Liabilities: None.
Want a free financial facelift? E-mail finfacelift@gmail.com.
Some details may be changed to protect the privacy of the persons profiled.
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