Leonard, 68, wonders whether he will have enough money to sustain his lifestyle when he retires from work.Kayla Isomura/The Globe and Mail
At age 68, Leonard is planning to work a few more years in his $83,000-a-year transportation job, but he’s wondering whether he can afford to retire at 75. He has some savings, a home in Vancouver with a mortgage and a second property that he rents out to a relative to cover costs.
Leonard is single again with three adult children. By his own account, he lives modestly. “I don’t buy clothes unless I need them,” Leonard writes in an e-mail. “As to the groceries, I don’t spend that much – sometimes $200 a month and sometimes more,” he adds. Because he travels often for work, some of his expenses, including meals, are covered by his employer.
“I want to keep working while I am still healthy and have the ability to earn an income to offset any personal expenses,” Leonard writes. “I’d like to purchase a new vehicle that’s reliable and easy on fuel.” He plans to downsize to a small bungalow or apartment before he retires but is open to other options such as renting.
“When I retire I would like to spend three to five months somewhere that has a low cost of living and the weather is pleasant,” Leonard adds. He wonders whether he will have enough money to sustain his lifestyle when he retires from work. His retirement spending goal is $60,000 a year after tax. “Will there be any monies left over to provide any assistance to my children when I pass?”
We asked Anita Bruinsma, founder of Clarity Personal Finance of Toronto, to look into Leonard’s situation. Ms. Bruinsma holds the chartered financial analyst (CFA) designation.
What the Expert Says
Based on how little Leonard spends now, a retirement budget of $60,000 a year “may be a little more than he will need,” Ms. Bruinsma says. Accounting for more spending on groceries, clothing and eating out, plus $10,000 a year for travel, and he would need about $47,000 a year when he retires. Her projection assumes he sells his house and downsizes, eliminating his mortgage payments. At Leonard’s request the planner has based her forecast on Leonard’s $60,000 a year target.
Leonard would like to buy a less-expensive residence before he retires but he isn’t sure he will be able to find something at the $600,000 price level that would allow him to avoid having a mortgage, the planner says. He could consider buying something more expensive that can generate rental income or not buying anything at all and renting, especially if his health declines, she says. Leonard also has a rental property that he intends to pass on to his children.
In the short term, Leonard would like to buy a new car for $30,000 and continue to pay down his mortgage.
“If Leonard works until 75, builds his savings further and downsizes to a $600,000 condo, he will have enough in his savings accounts to live on $60,000 a year of after-tax income, adjusted for 2.5 per cent inflation, until age 95,” Ms. Bruinsma says. “Although his savings will be mostly depleted at the end of his life, he will leave his condo, which could be worth $1.3-million when he’s 95, assuming a 3-per-cent annual price increase.
If Leonard finds himself short of money near the end of his life because of lower-than-planned investment returns (estimated to be 5 per cent per year), unexpected expenses or some other reason, he could access the equity in his home with a reverse mortgage, the planner says. Or Leonard could sell his home before age 95 and use the proceeds to pay rent for the rest of his life, still leaving an inheritance for his children.
It is possible that Leonard won’t buy another home when he retires but will rent instead, Ms. Bruinsma says. In this case, if he sells his home in the year he retires, the proceeds would be enough to fund his rental costs until age 95, assuming rent of $2,800 a month in today’s dollars, rising with inflation.
In addition, if he chooses to rent, his other expenses would drop by about $5,800 a year since his ownership-related expenses such as property taxes, repairs and maintenance and utilities would decline. “This would ease his cash flow requirements and allow a margin of safety with respect to making his savings last to age 95,” the planner says. In this case, Leonard would have funds left in his accounts, leaving an estate for his children of around $600,000.
“Since Leonard wants to work until age 75, he can continue to save at the rate he is today,” Ms. Bruinsma says. He will no longer be able to contribute to his retirement savings accounts past age 71, but he can continue to contribute to his tax-free savings account and his non-registered account, she says.
Leonard’s retirement income will come from Canada Pension Plan and Old Age Security benefits plus his savings. He is planning to defer CPP and OAS until age 71, “which makes sense since he plans on continuing to work until 75.”
Leonard’s locked-in retirement account from a previous employer will need to be transferred to a life income fund in the year he turns 71 and he will need to start withdrawing from it the following year, the planner says. Leonard will also need to convert his RRSP to a registered retirement income fund at 71 and start withdrawing at age 72. These withdrawals plus his employment income will increase his tax rate, but the employment income will allow him to build his savings for a more comfortable retirement.
In his early retirement years when he is collecting CPP and OAS and receiving mandatory withdrawals from his RRIF and LIF, Leonard can withdraw from his non-registered account to bring his after-tax income up to the $60,000 a year level he requires, the planner says. “Once his non-registered account is depleted – after about four years – he will start withdrawing from his TFSA.” At age 90, his TFSA will be depleted but he will have funds in his RRIF to draw on, ensuring he will have adequate income all the way to age 95, she says.
Leonard has several options with respect to his home, Ms. Bruinsma says. He could remain where he is and continue paying the mortgage, but he would have to reduce his travel budget by about $3,500 per year from the $10,000 he would otherwise spend.
If Leonard downsizes to a smaller home to be mortgage-free, he will need almost all of the equity in his current home to buy a new one, which may limit the housing options in his geographic area, the planner says. If he sells his home and rents, the proceeds from the sale will be enough to cover his rent expense until age 95.
Client Situation
The Person: Leonard
The Problem: Can he retire at 75 and maintain his current standard of living, while leaving an inheritance for his children?
The Plan: Keep working and building savings; retire in six years; sell current home and downsize to something less expensive; maintain modest lifestyle with an allowance for travel.
The Payoff: A comfortable retirement and an inheritance for his children.
Monthly net income: $5,395.
Assets: Bank account $22,000; locked-in retirement account $178,850; TFSA $79,720; RRSP $341,165; defined contribution pension $1,000; residence $906,000; rental property $535,000. Total $2.06-million.
Monthly outlays: Mortgage $1,390; condo fee $480; property tax $150; home insurance $240; electricity $65; heating $110; security $25; transportation $605; groceries $200; gifts $50; vacation, travel $50; dining out $50; subscriptions $20; health care $70; health, dental $30; life insurance $200; communications $170; RRSP $1,200; TFSA$90; pension plan contributions $200. Total: $5,395.
Liabilities: Residence mortgage $309,425; mortgage rental $373,125; line of credit $50,000. Total: $732,550.
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