Retiring with no pension safety net
Couple with no company pensions have questions about their impending retirement and what sort of lifestyle they can afford with limited savings Forget about early retirement, sell cottage and second car, trim entertainment expenses and save as much as pos
IBY ANDREW ALLENTUCK n Saskatchewan, a couple we’ ll call Norman, who is 59, and Barbara, who is 58, have built a comfortable life. Norman’s work in the transportation industry pays him a gross annual income of $110,400. Barbara earns $43,400 before tax working for a wholesale consumer products company.
They take home $8,000 a month after tax. Neither has a company pension plan. Their three children, all in their thirties, have independent lives and families of their own. Now Nor-
Family Finance asked Adrian Mastracci, a financial planner and portfolio manager who heads KCM Wealth Management Inc. in Vancouver, to work with Norman and Barbara.
“The questions the couple raise are central to a financially viable retirement,” he explains. “With $438,000 in financial assets and no debt other than a modest line of credit they will soon have paid off, their problem is estimating income at the ages they are considering shutting the doors to their careers. At present, they have the capacity to save $24,000 a year. Their line of credit paydown will end soon, then probably be spent elsewhere. Their core question is when can they retire and have enough money to maintain their way of life?”
Assuming that Norman and Barbara do quit their jobs and leave their $8,000 monthly income behind, they will be dependent on cash flowing from their investments. They have a diversified collection of 19 mutual funds with substantial fixed income components, growth funds, balanced funds and a real estate fund.
The portfolio can generate 4% annually, $17,520, before tax and inflation adjustments, Mr. Mastracci notes. That income would not support their target retirement spending of $5,000 a month net of all savings.
If they choose to retire in three years, as they wish, they would have at most their present registered assets plus 36 months of savings at $2,000 a month, all growing at an estimated 4%. That works out to $570,000, the annual income from which at 4% before tax would be $22,800 or $1,900 a month. To fill the gap, Norman and Barbara would have to draw Canada Pension Plan at ages 62 and 61 and pay penalties of about 22% of the age 65 pension and 29% of their age 65 pensions, respectively.
Their age 65 annual CPP benefits are $9,384 and $10,908, respectively. Norman would therefore receive $7,320 a year. Barbara would get $7,745 a year. man and Barbara are trying to plan a retirement that would see them travel in the U.S. until their money runs out.
Norman puts the dilemma succinctly: “If we retire in three years, as we would like, do we have enough money to support spending of $60,000 per year after tax for 15 to 20 years? And if we do, when do we get the money out of our investments and into our bank accounts? Should we take CPP in three years when we stop working or wait to 65?” They would have annual pre-tax income of $37,865 or $2,840 a month after 10% average tax. That is still not enough to support present spending net of savings.
Norman and Barbara may sell their $150,000 cottage. If they realize $140,000 after sprucing up the house and paying selling costs, then invest that capital and get 4% a year before tax for three years, they would have $157,500. That money, still earning 4% a year before inflation, would generate $6,300 per year.
Added to other income, they would still not have enough income to match current spending net of savings.
If they work to age 65, they will have a much less strained retirement. Six more years of savings at $24,000 a year plus income from existing registered savings and $140,000 from sale of the cottage would push their financial assets to about $897,000. That would produce $35,900 a year in pre-tax income based on a 4% return.
They would have full CPP income which, combined, would be $20,300 a year. Old Age Security at $6,600 per person would boost total pre-tax income to about $69,400 a year before tax. After pension splitting and paying taxes at an average rate of 12%, they would have $5,090 a month to spend. If they sold one car, eliminated cottage expenses and trimmed restaurant spending or entertainment, their retirement budget would be balanced.
“This is a case where patience and prudence will pay handsomely,” Mr. Mastracci says. “The couple really can’t afford to retire next year when Norman is 60. But six years later, when he is 65, with sale of their cottage, and perhaps a reshaping of investments to cut management fees, they can have doubled their financial assets and set up an income sufficient to sustain their retirement.”