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By Julie Cazzin with Allan Norman
Q: My wife Helen and I are 48 years old. We would like to stop working at age 55. Is this attainable for us? We owe $525,000 on our mortgage and our home is valued at $1.1 million. We currently pay a mortgage of $1,845 biweekly at an interest rate of 2.99 per cent with a 30-year amortization schedule. We hope to pay off the home within seven years and are making extra payments of $30,000 per year. We plan to live in this home and potentially sell it if we cannot live there anymore because of illness or aging.
Right now, we have $600,000 ($300,000 each) in registered retirement savings plans (RRSPs), $50,000 combined in tax-free savings accounts (TFSAs) and $100,000 in bank shares in a non-registered account. We both have a defined-benefit pension plan, but will lose quite a bit if we retire early. For example, if we retire at age 55, our pensions will pay $15,000 per year each. The pension is not indexed to inflation and there is no bridge benefit. We have both worked full time in Canada since we were 22 and are eligible for Canada Pension Plan (CPP) and Old Age Security (OAS). If we want a post-tax income of $5,000 per month in retirement, can we retire by 55? — Pascal
FP Answers: Pascal, a back-of-the-napkin calculation shows you can retire at age 55 with an after-tax income of $60,000 per year. At age 55, you’ll have a pension income of $30,000 per year and your estimated combined CPP and OAS at age 65 will add another $37,000 per year, bringing your total taxable income to $67,000 per year. The after-tax amount is going to be pretty close to your $60,000, so your retirement savings will just have to make up the income gap between age 55 to 65 and your shrinking pension due to no indexing.
With $600,000 in your RRSPs, if you each drew $20,000 for 10 years from age 55 to 65, you’d have $200,000 in your RRSPs even if the investments made no interest. So, yes, based on the numbers provided, you can retire at age 55.
As a matter of fact, when I model this using inflation at three per cent and an investment return of six per cent, you’ll have an estate value at age 100 of $16.4 million, equivalent to $3.5 million dollars today. What are your thoughts?
This is where the real planning starts because we must do some lifestyle planning as well as financial and investment planning. People don’t want a retirement income; they want a retirement lifestyle.
How did you come up with a retirement income need of $60,000 per year? I’m going to assume you looked at what you’re spending on debt payments and RRSP and pension contributions and estimated $60,000 was left, so that is what you need. I’m not going to let you get away with that quite so easily. As a planner, I want to gently challenge your assumptions and get you thinking about this a little more deeply.
You’re making mortgage payments of about $78,000 per year, and I’ll assume you need $60,000 to live. Add the two together and you need an after-tax annual income of about $140,000. You may also be contributing money to your work pensions. With $600,000 in RRSPs, I’m sure you’re still making contributions, which may be limited to $10,000 per year, depending on income and pension adjustments.
Based on those expenses, you both need a minimum employment income of about $120,000 today, and with that income you should have about $65,000 for lifestyle expenses. In reality, I expect your incomes are higher and your current lifestyle expenses are higher than $65,000. Have you considered future vehicle purchases or home renovations? I’ll assume you don’t have children. Are you confident a $60,000 lifestyle is the lifestyle you want?
Financial planning is about discovering what’s possible, which includes lifestyle choices and planning efficiencies. For example, assuming an after-inflation return of three per cent on your investments, rather than spending $60,000 per year in retirement, you could spend $78,000 indexed at three per cent to age 100. At age 100, you will have a house worth $8.5 million, about the equivalent of $1.9 million in today’s dollars if we assume it appreciates at one per cent above the rate of inflation.
Is that what you want? Spending an equal amount of money each year from age 55 to age 100, and leaving a $2-million estate, in today’s dollars, to someone or a charity? My suggestion is to have a serious play session with some modelling software to get a feel for the type of future lifestyle that is possible for you and Helen.
There are unforeseen events that also must be considered. For example, what might throw a wrench into your plans are mortgage rate increases. Your mortgage may not be paid off as fast as you would like, and this may delay your retirement.
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I can see you’re working hard, you’re financially disciplined and you’re setting yourselves up for a great future full of options. Be sure to also invest in some fun along the way. You never know what the future holds, and you want to have enjoyable activities to fill your time once retired.
Allan Norman provides fee-only certified financial planning services through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Investment Industry Regulatory Organization of Canada. Allan can be reached at [email protected].