Chelsea and Chandler.Rafal Gerszak/The Globe and Mail
For Chelsea and Chandler, their high-level technology careers have been rewarding financially but less so, it seems, personally. That’s why, in their early 40s, they want to walk away from a combined salary of $470,000 a year to do something different and spend more time with their family. In their new careers, they’d be making a combined $75,000 a year to start.
He is 41, she is 42. Their three children are 9, 12 and 15. Chandler and Chelsea’s longer-term goals include helping their children with their higher education and retiring fully when he is 50 and she is 51 with a spending target in line with the $100,000 a year they are spending now.
They’ve been good savers, amassing an investment portfolio of roughly $2-million. Their $2-million house is mortgage-free. They’ve also done well in the market, earning a rate of return of 9 per cent last year.
“Can we afford to walk away from our high-paying jobs now, earn substantially less, yet maintain our current lifestyle, then retire early?” Chandler asks in an e-mail.
We asked Ian Calvert, a financial planner and portfolio manager at HighView Financial Group in Toronto, to look at Chelsea and Chandler’s situation.
What the expert says
If they quit their jobs now, Chelsea and Chandler would go from having surplus cash flow to relying on their savings to supplement their substantially lower incomes, Mr. Calvert says. “As well, they would be missing what are the peak earning years in their 40s and 50s, plus further contributions to the Canada Pension Plan” after they have taken early retirement, he says. So their CPP benefits would be “considerably reduced.”
“Chandler mentioned that they earned 9 per cent on their investments last year,” Mr. Calvert says. “Making early-retirement decisions is easier during a bull market.” Strong markets can lead to a degree of overconfidence about their future portfolio returns, the planner says. Looking ahead, “even an all-stock portfolio could fall well short of Chandler’s past returns,” the planner says. “There is no doubt about it. Starting retirement this early is a big risk.”
As well, they likely have accumulated most of their savings in the past 10 years, Mr. Calvert says. “This means they haven’t lived through a bear market with anything close to $2-million” at stake. “Nor have they lived through the emotional swings of watching their portfolio shrink at precisely the time their regular withdrawals are eating into their capital,” the planner says.
“Living through a bear market during their accumulation years is tough enough, but doing it without any other source of cash flow while drawing down your sinking portfolio is another matter entirely.” Investors are often much less confident when this happens, he adds.
“The other risk to consider is their ability to re-enter the work force if there is a sudden change to their financial plan,” Mr. Calvert says. “With Chandler working in information technology, keeping his skills up-to-date and employable should be a major consideration.”
With income of $75,000 a year gross and spending of $100,000, they’d have to draw about $45,000 a year from their savings to meet their needs and cover income taxes, the planner says. This number would rise over the years in line with inflation.
While they are working, they should draw this money from their non-registered savings, Mr. Calvert says. Then, when they retire, they should adopt a strategy that includes withdrawing taxable income from their registered retirement savings plans and/or registered retirement income funds, as well as from their non-registered savings.
“The goal is to start early and begin a meltdown strategy of the registered retirement savings as soon as they stop reporting other taxable income.”
If their salary falls to about $35,000 each, they should stop contributing to their RRSPs because the deductions would add little value, the planner says. They should continue making contributions to their tax-free savings accounts, transferring funds from their non-registered portfolio if need be.
In drawing up his forecast, Mr. Calvert assumed an average rate of return on investments of 5 per cent a year. “Based on this assumption, they would still have close to $900,000 when he is 90 and she is 91, plus their primary residence.” That 5-per-cent return is by no means guaranteed, he adds. If they earned 3.5 per cent, in contrast, their investments would be depleted when he was 76 and she was 77 unless they downsized their house.
“By substantially increasing the retirement phase of their lives, their retirement security hangs solely on the performance of their portfolio,” Mr. Calvert says.
To reduce the longevity risk – that is, the risk of outliving their savings – Chelsea and Chandler have a few options, the planner says. With their “incredible” savings ability, they could add a big buffer by working five more years. Second, they could trim their retirement-spending goal, perhaps front-loading their travel plans to the years when they are still working, albeit at a lower salary. Finally, they could sell their house at some point in the future and buy a less expensive place, adding half the net sale proceeds to their portfolio.
Client situation
The people: Chandler, 41, Chelsea, 42, and their three children
The problem: Can they afford to take a big drop in income without jeopardizing their retirement plans?
The plan: Guard against being overly confident about investing. Consider working longer, trimming their retirement-spending target or downsizing their house in future.
The payoff: Achieving their goals with minimal risk and the stress it could cause.
Monthly net income: $25,000
Assets: Bank $20,000; GICs $50,000; stocks $720,000; mutual funds $130,000; his TFSA $89,000; her TFSA $75,000; his RRSP $400,000; her RRSP $405,000; market value of her defined contribution pension $140,000; RESP $160,000; residence $2-million. Total: $4.2-million
Monthly outlays: Property tax $750; home insurance $150; utilities $270; maintenance $400; garden $50; car insurance $300; fuel $400; other transportation $260; groceries $1,500; child care $300; clothing $400; charity $600; vacation, travel $1,200; dining, drinks, entertainment $700; grooming $150; pets $20; sports, hobbies $100; subscriptions $30; other personal $400; health care $110; phones, internet $160; RRSPs $5,000; RESP $600; TFSA $800. Total: $14,650
Liabilities: None
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Some details may be changed to protect the privacy of the persons profiled.
