Paul and Patty are both 54 with “no kids and no debt.”Dario Ayala/Globe and Mail
Paul wants to retire from the working world as soon as possible because of health problems. He’ll be leaving behind a well-paying career and maybe even taking a cut in the standard of living he and his wife, Patty, have enjoyed.
Paul and Patty are both 54 with “no kids and no debt,” they say in their e-mail.
They are both self-employed, with no work pensions, and own their Montreal-area home outright. He brings in $220,000 a year as a consultant, while she averages about $8,000 a year selling her paintings. While Patty plans to continue painting, Paul wonders: “Is there a way to retire before age 60, live in our current house and enjoy a life of music-making, art, gardening and bird-watching?”
They have no desire to travel the world, traverse North America in an RV or spend winters in Arizona, they say. If they have to, they would even consider moving out of the city or abroad to Ireland or France, although they have no relatives there.
How soon before the age of 60 can Paul retire?
We asked Maryse Ouellette and Karen Hennessy, financial planners at T.E. Wealth in Montreal, to look at Paul and Patty’s situation.
What the experts say
“After having a good and long discussion with the clients, it was clear that their top priority is to retire early,” the planners say in their report, “the sooner the better, even if it means revising their lifestyle and reducing their cost of living,” they say. “Working an extra year (beyond what’s necessary) isn’t even an option.”
The reason is Paul has a severe medical condition. In drawing up their forecast, the planners agreed to assume Paul lives to the age of 80 while Patty lives to the age of 96. The mortality tables under the financial planning rules would have a couple at the age of 54 living to around 96 years old, they note.
Preretirement, Paul should contribute the maximum $26,000 to a spousal registered retirement savings plan for Patty as well as maximizing his unused RRSP contribution room of $6,000, the planners say. He should also keep contributing the maximum to his tax-free savings account if possible.
A while ago, Paul opened a registered disability savings plan (RDSP) for himself, but he was not eligible for the government grants because he was over the age of 49. Rather than contributing any further to it, the planners recommend he redirect the $12,000 a year he is contributing to his RDSP to a TFSA for Patty instead. While earned investments inside an RDSP are tax-deferred, they are taxed as income when withdrawn, the planners note. Withdrawals from a TFSA are not taxable.
How soon can Paul retire? Their calculations show that he can hang up his hat at the age of 58 with $47,600 a year after tax to spend. If they really wanted to meet their spending goal of $51,000 a year, he would have to work one more year. That would bring them very close – $50,000 a year after tax. “It will be important for them to review their retirement budget (with a view to paring their spending) should Paul prefer not to work full time until age 59,” the planners say.
The couple plan to pay off their line of credit by year end.
Once Paul is no longer working, their income will come from the Quebec Pension Plan, Old Age Security and their RRSPs, locked-in retirement accounts (LIRAs), RDSP, TFSA and non-registered investments. They will need to generate income from their investments for the short term (three to five years) to cover short-term needs, and growth for the long term (10 years or more) so as not to outlive their capital.
“Paul should start receiving QPP and RDSP income at age 60 due to his fragile health,” the planners say. “We estimate that Paul as well as Patty will need to convert their respective RRSPs to registered retirement income funds (RRIFs) and Paul’s LIRAs to life income funds (LIFs) starting at age 63."
The fiscally most efficient way to withdraw from a portfolio would be in the following order: non-registered first, then TFSAs, followed by Paul’s RDSP, his LIRAs, and their RRSPs.
Paul is planning to use some of their registered savings to buy annuities when they retire, the planners note. “If they are looking for a guaranteed income stream, this would give them peace of mind and security,” the planners say. But with interest rates still low, and Paul’s ability to manage their portfolios for the time being, “we would highly recommend delaying the option of purchasing an annuity to when they are older.”
At a later date, they would likely have more capital to convert to an annuity, perhaps from downsizing their home, and interest rates would likely be more favourable, the planners say.
In terms of estate planning, assuming all of Paul’s registered assets are rolled over to Patty without tax implications in the event of Paul’s premature death, Patty could then buy a life annuity with the capital, or a portion of it. As well, Patty is beneficiary to a $200,000 life insurance policy, which would be added security for her. The planners did not include the insurance policy in their projections.
Finally, the question of possibly living abroad. “Clearly, it would be of value to have a more in-depth look at this,” the planners say. As well as cost-of-living comparisons, they must consider the cost of relocating and selling or leasing their home, whether there are any taxation laws that would affect them in the new country, and if their government benefits would be affected.
“Proximity to health services would be a must, as would affordable medical coverage.”
Client situation
The people: Patty and Paul, both 54
The problem: Figuring out how soon Paul can quit working.
The plan: Save as much as possible, review spending and plan for Paul to retire at 58.
The payoff: A road map to financial security and time to pursue their hobbies.
Monthly net income: $9,500
Assets: Bank accounts $26,615; his TFSA $32,500; his RRSP $554,000; his LIRAs $214,000; her RRSP $9,500; RDSP $30,500; residence $600,000. Total: $1.47-million
Monthly outlays: Property tax $425; utilities $410; home insurance $170; maintenance, garden $410; transportation $240; groceries $1,185; clothing $115; gifts, charity $90; vacation, travel $55; other discretionary $175; dining, drinks, entertainment $250; personal care $10; subscriptions $55; doctors, dentists $30; health, dental insurance $330; life insurance $80; critical illness insurance $95; phones, TV, internet $290; RRSPs $2,165; TFSA $460; RDSP $1,000. Total: $8,040
Liabilities: Line of credit $21,000
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