Living well below their means has paid off for Ellie and Evan, a single-income couple with two teenagers and a strong desire for Evan to retire from work early.Rafal Gerszak/The Globe and Mail
Living well below their means has paid off for Ellie and Evan, a single-income couple with two teenagers and a strong desire for Evan to retire from work early. He is 50, she is 49.
Helping their plans are their suburban Vancouver house, which has risen substantially in value, Evan’s two defined benefit pension plans, one from a previous employer, and $11,000 in rental income from a lower-level apartment. Evan earns about $106,500 a year.
“We have saved hard for many years,” Ellie writes in an e-mail. “My husband is the only breadwinner in our family.” Their younger child is in high school and the older one is in university, she adds. They have substantial savings and investments and a mortgage-free house worth about $1,150,000. Their only debt is a $130,000 investment loan, which will be paid off by the time Evan retires.
Evan plans to retire in four and a half years, at the age of 55. The couple’s retirement spending goal is $75,000 a year after tax, far more than the $46,700 a year they are spending now, excluding savings and the loan repayment. After Evan retires, they plan to use the extra money to travel, go kayaking and take plenty of short trips.
We asked Keith Copping, a fee-only financial planner and portfolio manager at Macdonald, Shymko & Co. Ltd. in Vancouver, to look at Ellie and Evan’s situation.
What the expert says
Ellie and Evan can proceed as planned with a “solid margin of safety,” Mr. Copping says. After paying off their mortgage nearly 20 years ago, they kept their frugal spending habits, he notes. This enabled them to save a substantial sum relative to their income for their next goal, Evan’s early retirement.
They have built up a combined portfolio of more than $1.2-million, invested almost entirely in stocks and stock funds. This does not include the registered education savings plan (RESP) for their children. They are comfortable with this high-risk strategy because of Evan’s defined benefit pension plans, which serve as a fixed-income component, Mr. Copping notes.
In drawing up his forecast, the planner makes a number of assumptions, including a 2-per-cent inflation rate, a rate of return on investments of 5 per cent, and that they begin collecting Old Age Security benefits at the age of 65 and Canada Pension Plan (CPP) benefits at the age of 70.
He assumes they stay in their current house, the value of which is not included in their retirement assets.
Evan plans to start taking the smaller of his two pensions at age 55 and the other at age 60. The smaller plan will pay $16,820 a year plus a bridge benefit of $3,280 from ages 55 to 65. The larger will pay $27,934 a year plus a bridge benefit of $5,121 from ages 60 to 65. Ellie is already making early registered retirement income funds (RRIF) withdrawals of $12,300 a year.
If they wanted to, Evan and Ellie could potentially increase their retirement spending to $99,000 a year after tax, Mr. Copping concludes.
However, return on investments and inflation could alter this forecast.
“If average returns were one percentage point lower, or 4 per cent a year, the most they could spend would be $91,000 a year, which is still okay,” Mr Copping says. “Alternatively, if we assume average inflation is one percentage point higher, or 3 per cent a year, this has a bigger impact over the 40-year-plus time horizon,” he adds. The most they could spend in that situation would be $81,000 a year – still above their target.
One factor to consider with early retirement is that funding for a long retirement period is not the only financial pressure, Mr. Copping says. With their children in their early to mid-20s by the time Evan retires, they may still be incurring significant education, living and other expenses for the children for several years. Ellie said that later on, if their own retirement situation is in good shape, they may wish to help the children with a down payment on a home, he adds.
Evan can split the income from his pension plans with Ellie even before he is age 65, the planner notes. This will help reduce their tax bill. “Once they reach 65, they can also split the income from their registered retirement income funds [RRIFs], but not from their RRSP withdrawals,” Mr. Copping says. Splitting the pension income will help minimize any clawback of Old Age Security benefits later, he notes.
Delaying CPP benefits to age 70 is “a reasonable strategy for their situation, where they have other assets to cover the early years of retirement,” the planner says. “Delaying CPP from age 65 to age 70 provides an increase of 42 per cent to the annual CPP benefits, providing added financial security later in life,” he says.
Finally, while Evan and Ellie seem to be comfortable with their high stock exposure, they should consider lowering it in the RESP, Mr. Copping says. “The time horizon is now short so they should lock in some of the equity gains and switch to conservative, fixed-income assets to preserve the education funds.”
Client Situation
The people: Evan, 50, Ellie, 49, and their two children.
The problem: Can Evan retire at age 55 with a spending target of $75,000 a year?
The plan: Evan retires early and they split pension income in retirement to reduce tax.
The payoff: more money than they seem to need without having to touch the value of their house.
Monthly net income (all sources): $11,215.
Assets: Cash $2,000; his unregistered account $215,600; hers $502,800; her RRIF $48,600; his TFSA $85,300; hers $87,800; his RRSP $112,500; hers $184,300; commuted value of his first DB pension plan $185,700; commuted value of his second pension plan $386,800; RESP $158,900; residence $1,154,000. Total assets: $3.1-million.
Monthly outlays: property tax $365; home insurance $115; utilities $160; maintenance, household items $75; car insurance $320; other transportation $345; groceries $715; clothing $100; investment loan payment $2,910; gifts, charity $125; vacation, travel $835; club memberships $95; dining out, entertainment $240; sports, hobbies $85; university expenses $190; phones, TV, internet $130; RRSPs $440; TFSAs $915; pension plan contributions $595. Total: $8,755.
Liabilities: investment loans $132,400.
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