National Post (National Edition)
PENSION POINTERS
How to decide when the time is right for
early retirement.
Betty-Anne asks My husband will be 62 in June — he will have a government pension (he worked 17 years) but no savings due to a divorce three years ago — he is working in a very stressful job and we are thinking of early retirement. I am already retired at age 65 and I am collecting CPP and OAS. Will there be a substantial difference in his income when he retires?
Jason Heath responds Let’s look at the facts for BettyAnne and her husband. He’ll have a government pension, which typically replaces 2% of earnings times years of service, so call it 2 x 17 = 34% of earnings in his case.
That’s certainly a big drop in his income, but if you add in Canada Pension Plan (CPP), these payments typically replace 25% of the “average industrial wage” in Canada (big asterisk here, as it might replace very little for a high-income earner or for anyone who missed years of contributions).
Old Age Security (OAS) can be reduced based on certain factors, but is typically about half the amount of the maximum CPP pension. So it might bump up Betty-Anne’s husband’s income replacement by another 12.5%.
We’re up to about 71.5% income replacement — once again, with big asterisks. This is a real back of the napkin calculation. But we’re getting closer to replacing his income.
Betty-Anne’s husband’s expenses will likely be lower in retirement. Right off the bat, he’ ll see declines in explicit expenses like union dues, pension contributions and CPP/ EI contributions and implicit expenses like clothing, transportation and the office 6/49 pool. Pension contributions for a government employee can be 10% or more and CPP and EI up to another 7%, let alone some of these other costs, which might eat up an additional 5-10% of her husband’s current income.
So we’ve now seen about 71.5% income replacement and 20%+ expense reduction. What about taxes? Tax credits for things like pension income, being age 65 or older, splitting certain types of income with your spouse, etc., all start to make Mr. BettyAnne’s after-tax, after-expense net income look pretty close to 100% based on our back of the napkin calculations and an asterisk-filled exercise.
I’m by no means telling Betty-Anne that her husband should up and leave his job without further consideration or planning, but I think this is less a financial decision than it may otherwise appear. Based on what I see, his postretirement cash flow might not be that far off his pre-retirement cash flow. Depending on their intention to pool their finances, the potential of drawing on home equity if needed and a plan to implement a bit of budgeting, I think this could be financially manageable.
A formal retirement projection would determine more accurately the personal path that they are on.
But a retirement plan typically focuses on the financial side of the equation. My question to Betty-Anne and her husband is that even if a few more years of work is required to increase the odds of outliving their money under a notional scenario, does it really matter if stress shortens his lifespan in the interim, perhaps to the point where he doesn’t even make it to retirement?