EARLY RETIREMENT TEMPTS THIS COUPLE
A couple in Saskatchewan we’ll call Bruce, 52, and Carla, 51, have turned their attention to retirement. Bruce, a civil servant, has put three decades into his job as an administrator. Carla works for a retail business in account management. Together, they bring home $9,550 a month, which pays for a good life. They have a house and two-acre spread worth $825,000, a small fleet of vehicles — a tractor, ATV and three cars — and almost half a million dollars of financial assets. Their two children are grown and gone.
“I am at a point in my life that I would like a slower pace without constant challenges,” Bruce says. “I would like to retire at the end of 2016. Is that financially possible?”
Family Finance asked financial planner Rod Tyler, head of the Tyler Group in Regina to work with Bruce and Carla. “Retirement on present savings and Bruce’s job pension will work only if he and Carla conserve money and postpone spending $70,000 on new cars and as much as $60,000 on a house renovation,” Tyler says.
Retirement at 52 stretches the customary timeline for quitting work. Bruce and Carla feel that they have put in their time, but retiring so far in advance of eligibility for Canada Pension Plan benefits, which they cannot tap before 60, and Old Age Security benefits, which have to wait to 65, means they have to cover the time with their own pensions and investment returns.
BUILDING RETIREMENT INCOME
Bruce has 30 years of employment with the provincial civil service and can take retirement with a full pension, including a bridge to age 65. Their paidup house is their anchor and gives them choices about how to finance their retirement. The cost is now just utilities, taxes and repairs. Their capital is tied up but, given the tendency of property to appreciate, it’s also an investment with the potential to provide significant gains if they sell.
Bruce and Carla bought their home for $360,000 in 2006 with a $100,000 down payment and financed the rest with a mortgage, which they finished paying off in 2014. Market appreciation and some improvements account for the massive gain in its value to $825,000.
At the end of 2016, Bruce will have his $80,600 annual company pension. After 25 per cent average tax, he would have $5,040 to spend each month. They would be $1,500 a month, or $18,000 a year, short of present allocations less savings, but their financial assets could make up the difference provided that they don’t erode capital by spending $130,000 on new cars and a house reno.
Bruce and Carla have financial assets of $489,000. If they can obtain a three per cent annual return after inflation, that sum would provide $14,670 a year in 2016 pre-tax dollars indefinitely. If annuitized with a three per cent return to pay out all capital and interest for 43 years to Bruce’s age 95, their assets would generate $20,400 a year before tax. But annuity returns are just theoretical and not indexed. Moreover, government bonds, the core of annuities, pay much less these days. Waiting for higher interest rates and shortening the period of exposure to inflation would be the safe thing to do, Tyler says.
BRIDGING THE YEARS TO AGE 65
They could use a strategy of starting CPP early, with a 7.2 per cent cut in benefits for each person for every year they take ben- efits before age 65, but that would mean a long wait — into their 80s — to get back what they have given up. Better to work with the company pension and dip into private savings to cover the spending gap to 65 than spending two life incomes — which is what CPP provides.
At 65, Bruce loses his $6,900 bridge. His pension will then be $73,700 when his CPP of $12,192 a year (about 93 per cent of the annual 2016 maximum of $13,110) starts. When Carla is 65, she will have her annual company pension of $2,880 and CPP benefits of about 88 per cent of the maximum, or $11,563 a year. Both will be entitled to OAS benefits at age 65, currently worth $6,846 a year each. The various pensions will add up to $114,027 at 65. If they split eligible pension benefits, they will have individual pension incomes totalling about $57,000. After 20 per cent average tax, they would have $7,600 a month to spend. Their present allocations without savings would be covered.
Bruce and Carla have a diversified portfolio of mutual funds, including holdings in Canadian and U.S. stocks, global stocks and bonds via a large position in a balanced portfolio with about 50 per cent bonds, Tyler notes. Typically, retirees migrate assets from equities to bonds, though with very low prevailing interest rates on government bonds, they would do well to take some investment risk in high-grade corporate bonds with maturities of no more than 10 years.
MANAGING EXPENSES AND SAVINGS
The couple cannot control future returns on capital, but they can control their cost of living. If they spend $130,000 now, as they are considering, their financial assets would drop to $359,000.
Their potential annuitized annual return would decline to $15,000, or $1,250 a month. To make up the difference, they would have to do part-time work. That would not be the retirement they want. Their choice is thus to delay some spending for as much as a decade or to impair the life of leisure they seek in retirement.
If they delay retirement by 10 years, to Bruce’s age 62, they could save as much as $36,000 a year based on their current spending and allocations. With compounding, their financial assets would grow to about $1.1 million and the potential annuitized return based on higher interest rates 10 years from now and running for 34 years from Bruce’s age 62 to Carla’s age 95 would rise to $50,500 a year, though inflation would affect purchasing power.
With Bruce’s $80,600 pension, they would have about $131,000 a year before tax to age 65. With splits of eligible pension income they could pay 20 per cent average income tax and have $8,740 a month to spend.
That would allow the house reno and a new car and leave ample money to continue their present level of spending.
At 65, Bruce would lose his bridge, but Carla’s job pension and their government pensions would boost total income by $40,327. Their permanent annual income when both are 65 would be $164,427.
With splits of eligible pensions and payment of income tax at an average rate of 20 per cent after the 15 per cent OAS clawback of individual income over $72,809, they would have about $10,700 a month to spend. They could afford the retirement they want without scrimping.
“Retirement at 52 is possible, but not wise,” Tyler says.