When they get up on a January morning, climb into their icy vehicles for the half-hour drive over snowy roads to work, Liz and Ted must wish they could just stay home by the wood stove.
It's even harder, perhaps, to go to work in the spring, when the air is fresh and sweet, or in the fall, when the last of the crops must be brought in before an early frost.
So, it's no wonder that despite their plum jobs in the education sector and good salaries, Liz and Ted can hardly wait to hang up their hats and spend the rest of their days working their hobby farm – with a little travel during the coldest months.
She's 54. He's 58. Their two children, both in their mid-20s, are out on their own. Their goal: For each to retire at age 60 and "enjoy the hobby farm," Liz writes in an e-mail. Their $250,000 property is mortgage-free.
Together, they bring in about $163,000 before tax, so they'd be giving up a lot. Ted has a defined contribution pension plan, while Liz has a defined-benefit pension plan. Can they do it?
We asked Kurt Rosentreter, a senior financial adviser and financial planner at Manulife Securities Inc. in Toronto, to look at Liz and Ted's situation.
What the expert says
Liz and Ted are in good shape financially to achieve their goal "mostly because they expect to live a simple life with a lower cost of living," Mr. Rosentreter says. "What a refreshing change from the city folks who dread the prospect of living off three times as much."
Their core lifestyle spending – excluding savings – is $2,880 a month, or just shy of $35,000 a year. The hobby farm brings in about $5,000 a year, while their combined savings total an impressive $42,000 a year, not including Liz's contribution to her DB pension plan.
In drawing up his forecast, Mr. Rosentreter added another $5,000 a year to their spending to cover such things as vehicle replacement, health care and home maintenance. These are items the couple did not address in their monthly disbursements.
"So they need about $50,000 a year pretax to produce the core lifestyle they talk about, one with a little vacation money and a fairly basic lifestyle on their hobby farm."
When Ted retires in a year or two Liz will still be working, so he can put off collecting CPP benefits until age 65, at which point he will get about $12,000 a year. When Liz retires in five years or so, her pension will pay $14,520 a year, indexed to inflation provided the plan can afford it. That includes a bridge benefit of about $3,000, so her pension income will drop to about $11,520 at age 65. If she decides to take CPP benefits at age 60, she will get about $5,125 a year. (She would get about $7,320 if she waited until she was 65.)
As each turns 65, Old Age Security benefits will kick in, "narrowing their need for money from their investments, including Ted's defined contribution pension plan, … to reach their spending goal," Mr. Rosentreter says.
Their current savings total $450,120, and they are saving another $42,000 a year. If they continue to save at this rate for the next five years and their investments generate an average return of 4 per cent a year, their portfolio would rise to $775,000 by the time they are ready to quit work.
If, starting at age 60, they draw out 4 per cent of their portfolio a year to supplement their pensions ($31,000 a year pretax), the investment income alone should be adequate to meet their lifestyle needs, the planner says. Their capital would be left intact for their old age, or for their children.
Their plan is not without risk. Financial markets could turn negative over the next five years, so they may not achieve a 4-per-cent return. If they want a more comfortable cushion, Liz could consider deferring CPP to age 65 or even working past age 60.
"This is one of the last of the golden pension plans, where every year she stays in the plan the pension grows rapidly, so a few more years of employment could add a lot to her retirement income."
The people: Liz, 54, and Ted, 58.
The problem: Retiring early to work their farm.
The plan: Continue saving and investing, targeting a 4-per-cent annual return. Defer CPP to age 65. Liz might want to work longer to build pension.
The payoff: Freedom.
Monthly net income: $10,310
Assets: Residence $250,000; his DC pension plan $94,120; estimated present value of her DB pension plan $30,865; cash $14,000; her TFSA $33,000; his TFSA $5,000; her RRSP $254,770; his RRSP $64,000. Total: $745,755.
Monthly disbursements: Property tax $145; insurance $115; hydro $260; heating $150; fuel $300; car insurance $290; maintenance, parking $50; groceries $600; clothing $50; charitable $95; travel $450; club membership $35; dining out $50; pets $125; subscriptions $25; disability insurance $30; phone, TV $110; her RRSP $1,800; her TFSA $835; her pension plan $1,100; his RRSP $350; his TFSA $85; his DC pension plan $435. Total: $7,485. Surplus: $2,825 goes to saving and larger expenses.
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