civil servant wants to take pension and run
situation On leave without pay, Ottawa woman in her early 50s can go back to work as a federal policy adviser or go it alone strategy Calculate cost of independence, plan income by life stages, build up savings but she should hold off on selling her home
In Ottawa, a woman we’ ll call Roberta, 51, wants out of the federal government where she has toiled for more than two decades as a policy adviser.
She is looking for more independence from the 9-5 and the rigidity of working for the government.
But trading the security of an indexed pension she could enlarge through the remaining years of government career for the challenge of consulting, is a tough call.
Roberta’s decision to cut and run is not entirely voluntary. When the federal budget made her job redundant, she accepted a so-called transition support measure and payment of $84,000 last year — really a layoff package — which she invested in mutual funds. Federal rules allow her to get a new job after taking additional courses to raise her skills in her field of personnel development. She is doing that and plans to go back for a year to add to her pension, then go off on her own.
“I can work in the private sector doing what I was doing for the government,” she says.
At present, she does part-time study and part-time consulting work. Her efforts bring in $2,800 a month and she gets income from renting out a basement apartment in her home for $900 a month. The total, $3,700 a month, almost balances her spending of $4,220 a month. She takes the rest out of savings.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Roberta.
“How she handles the decision whether to return to work and how long to stay is obviously personal, but she ought to weigh the cost of quitting as well,” he notes.
Roberta is prepared to downsize her house, sell her $8,000 sailboat and even part with her aging SUV to maintain her independence. There would be a cost, for in a smaller house, there would be no basement apartment to rent.
Her $475,000 home is not lavish. If she were to get another for $375,000, the $100,000 gain would reduce her mortgage and line of credit debt but not eliminate it. There are moving and other transition costs, so the gain would be less. She might save $475 a month in interest on a new mortgage, but the loss of $900 monthly rental income would cancel out the gain. For now, don’t sell, Mr. Moran advises.
Freedom from the 9 to 5 grind is appealing, but there is a lot of risk in her plan. Roberta, divorced with no children, has a $220,000 mortgage and a $15,000 line of credit, investments of $114,070 and net worth of $383,570. It’s not a lot to support what could be four or more decades of life.
Choices to make
Her consulting business, which generates $33,600 a year, would almost double the $34,645 pension income she will get for 28 years of government service to $68,245 a year. After 20% average income tax, she would have about $4,550 a month. Even without any investment income, she could support present spending of $3,320 a month net of savings.
Roberta’s RRSP portfolio at present totals approximately $114,070. If she makes neither contributions nor withdrawals, then, at age 60 it would have a value of $148,800 and at 65 it would have a value of $172,500. She also holds cash and GICs with a value of $13,500 for current expenses and house repairs.
If money invested in RRSPs were paid out so that capital is exhausted at her age 95, it would generate $6,725 from age 60 for 35 years or $8,550 a year for 30 years from age 65. If she is able to save $1,000 a month from now until age 70 and get a 3% return after inflation, then at 70, when she might end her consulting, she would have a kitty of $310,500. At 70, that sum, if paid out over the next 25 years would provide a pre-tax income of $17,300 a year.
She has $11,500 in TFSA s held in GICs as well. This money can be used as a cash reserve, essentially a taxfree, interest-bearing bank account.
If Roberta does retire at age 52 in 2015 after one more year of work, she would have a $34,645 annual public service pension including a bridge of $8,930. She could add $345 of TFSA income and consulting income of $33,600 for total, pre-tax income of $68,590.
At 65, she would lose the bridge. Her annual public service pension at 65 and thereafter would be $25,715. Her Canada Pension Plan benefits would begin at $11,112 a year. She could add investment income of $6,725, the TFSA income of $345 and consulting at $33,600 a year for total annual pre-tax income of $77,497. Her income after age and pension credits and 15% average tax would be $5,500 a month.
At 67, Roberta would be eligible to receive Old Age Security at $6,618 a year, pushing total income to $84,115. After clawback tax, which takes 15% of net taxable income over $71,592, and other taxes, she would be left with approximately $5,600 a month. It would support present spending net of savings.
If she stopped consulting at this point at 70, she would lose $33,600 before tax but be able to tap her reserve income from savings of $17,300 a year. Her income would then be $67,815 a year or $4,500 a month after tax.
Risks to the plan
Roberta’s decision to remain unemployed or perhaps underemployed in her 50s, which is the period of greatest earnings and accomplishment for many people, leaves her with the ability to survive. But thriving would depend on her consulting work. If she consults for many years and builds up savings from that work, her prospects would be very good for a secure retirement. If that income fails and she does not replace it, Roberta would have a modest retirement indeed.
“Would a retirement beginning in Roberta’s mid-50s be feasible?” Mr. Moran asks. “The consulting business would enable her to get to her mid60s with money to spare and, after that, her investment income and her OAS would keep the wolf from the door. The $12,000 yearly savings she could build up when her income exceeds spending would be the difference between genteel poverty and a pleasant way of life.”