Kid-free couple want to take a sabbatical but worry about crippling costs
15 per cent average tax, they would have $6,020 to spend each month. Their expenses with no RRSP nor TFSA contributions nor other savings and no mortgage payments would be just $4,173 per month.
At age 60, Larry can apply for Canada Pension Plan benefits. He could take CPP with a 36 per cent cut from the age 65 benefit, but given that he would not have been working after age 57, and Nancy not since age 55, they can start CPP when each is 60 at an assumed rate of $8,557 each. Thus at age 60, their combined income would be $102,100 before tax or, after 16 per cent average tax, $7,145 per month. At 65, their pensions will be reduced to $40,300 for Larry and $19,776 for Nancy. At 65, each will receive Old Age Security at $7,040 each using 2018 rates. Their total pension income will then be $91,270. After 14 per cent average tax, they would have $6,540 to spend each month.
If the couple has not tapped RRSP nor TFSA savings before Larry’s age 71 when they must start RRSP payouts the next year, their combined savings would be $786,000. If this sum were annuitized so that all income and capital is distributed by Nancy’s age 95, it would generate $45,150 per year. This would push their permanent income to $136,420 per year. After splits of eligible pension income and no inclusion of TFSA payouts, they would have $9,550 to spend each month. They would not be exposed to the Old Age Security clawback which currently starts when annual pre-tax income reaches about $75,000.
INCOME UNKNOWNS
There are several unknowns in this income projection, Nalbantoglu explains. The sabbatical year will force each to buy back a year of pension non-contribution. As well, though we have assumed a real three per cent annual pre-tax return on all financial assets, the actual rate could vary substantially in the four decades between retirement when Nancy is 55 and the termination of her annuitized cash flow from financial assets 40 years later. Even if their financial assets are depleted when Nancy is 95, pension plan income, CPP and OAS benefits would continue to flow.
Their plan to take a sabbatical year financed by four years of company salary banking, dedicated savings and frugal spending should make their plan work. “Given the diverse sources of retirement income, the plan should carry them through their sabbatical to early retirement and old age,” Ms. Nalbantoglu concludes.