David and Ruth were cruising toward a comfortable retirement when David unexpectedly got "packaged off" by his employer of 25 years. That was in 2014. David is 52, Ruth is 50. They have two children, ages 22 and 24.
David soon found work with a company expanding into the Canadian market. His salary dropped from $93,000 a year to $52,000; he has no pension, benefits or stock purchase plan.
Still, he likes the job.
"I am very much enjoying working for a small company," David writes in an e-mail. But with the reduced income and the fact the pension from his previous employer is no longer growing, he wonders whether he and Ruth are still on track for early retirement. Fortunately, Ruth earns $92,300 a year working for the government and has full benefits, including a defined benefit pension plan.
"We think our retirement is about 10 years out," David writes. Like so many Canadians, they can hardly wait. They intend to continue living in their Alberta community, "remaining part of our children's and grandchildren's (if any) lives," he writes. They'd like to give each child $15,000 to help with their wedding costs.
"We'd probably keep our house until the stairs become a problem," he adds. They also want to hang onto their lakefront cabin for many years to come. "We don't want to be snowbirds, but maybe get away for a couple of weeks at a time once or twice each winter," David writes. "Summers we'd spend at the cabin."
We asked Marc Henein, an investment adviser at Scotia Wealth Management in Mississauga, to look at David and Ruth's situation. Mr. Henein also holds the certified financial planner (CFP) designation.
What the expert says
After income tax, Canada Pension Plan and employment insurance contributions, David and Ruth are bringing in about $7,400 a month, Mr. Henein says. Their lifestyle expenses total $5,540 a month, leaving them with a monthly cash flow surplus of $1,860.
"With no liabilities, they are in a good financial position," Mr. Henein says.
When they retire, they will be relying on their defined benefit pension plans for the major portion of their income. They are wondering whether they can quit work – David at age 62 and Ruth at 60 – and still maintain their lifestyle. David's pension is now a static figure because he no longer works for his long-time employer, the adviser says.
David would begin receiving an unreduced pension at age 55. If he does not choose a survivor benefit for Ruth, he would get $3,627 a month. Mr. Henein suggests David opt for the survivor's benefit. He would get less – $3,445 a month – but if he died, Ruth would get 66.66 per cent of his pension for the rest of her life.
"The cost for this would be about $182 a month," Mr. Henein says. "This is a small price to pay for a large amount of protection."
If they retire early as planned, David and Ruth will have to draw on their RRSPs to the tune of about $12,000 a year to supplement their monthly income (David's pension) until they begin collecting Canada Pension Plan and Old Age Security benefits at age 65, the adviser says. This will run down their savings by about 3.8 per cent. "This is manageable and does not affect their long-term retirement," he says.
As an alternative, Mr. Henein looks at how the couple would fare if they worked to age 65. David's pension will be $3,445 a month (starting at age 55), Ruth's pension will be about $1,370 a month. Their combined CPP and OAS payments will be about $3,000 a month, bringing their combined before-tax income to $7,815 a month.
"All of this income can be split, so their income will be about $47,000 each annually," Mr. Henein says. In Alberta, this would put them in a 25 per cent tax bracket, so after tax they would have $2,900 a month each, he adds.
"Seeing as their retirement goal is about $5,539 a month, they will be able to fund their retirement spending with a combination of their pensions, CPP and OAS."
In addition to the pensions, David and Ruth have a total of $321,000 in their registered retirement savings plans (RRSPs), $72,000 in their tax-free savings accounts (TFSAs) and $58,000 in their non-registered account. The RRSPs will fund the "extras" in retirement, the adviser says.
They want to give each child $15,000 toward wedding costs. They're aiming for a travel budget of $8,000 a year. "These expenses can be drawn from their RRSPs."
Mr. Henein suggests funding future TFSA contributions from their non-registered account ($58,000) and catching up with unused TFSA contribution room. This is worth doing because David is in a lower tax bracket now. If he has capital gains tax to pay on the transfer of stock, it will be much lower as well, the adviser says. They might incur capital gains tax if the transfer is viewed by the Canada Revenue Agency as a deemed disposition. Because of this, they should review the situation each year to see if the TFSA contribution is still worthwhile from a tax perspective, he says.
Ruth and David's shorter-term goals include some home repairs totalling $40,000 and a trip to Europe over the next one to three years, the adviser notes. "I would suggest the $1,800 a month of surplus cash flow be put into a savings account and then used to fund these expenses on an as-needed basis," he says.
"Over all, the couple is well positioned for retirement," Mr. Henein says. "Their case speaks to the power of both spouses having a defined benefit pension plan through their employers," he adds. "Unfortunately, this is becoming increasingly rare."
Thanks to their pensions, David and Ruth do not need to take an undue amount of risk in their retirement savings. He recommends a conservative, balanced portfolio using low-cost funds. Such a portfolio will likely grow faster than inflation without posing unnecessary risks.
David, 52, Ruth, 50, and their two children.
Can they still retire early even though David now has a much lower-paying job with no pension?
Take full advantage of TFSAs and retire as planned.
Time to enjoy long, lazy summers at the cabin with their children and perhaps eventually, their grandchildren.
Monthly net income:
Bank accounts $22,000; stocks (mainly stock in his former employer) $58,000; his TFSA $36,000; her TFSA $36,000; his RRSP $170,000; her RRSPs (including LIRA from previous employer) $151,000; estim. present value of his DB plan $750,000; estim. present value of her DB plan $250,000; home $470,000; cabin $125,000. Total: $2,068,000
Property tax (home and cabin) $368; utilities $340; insurance $165; heat $160; maintenance $100; garden $20; vehicle insurance $455; fuel $300; other transportation $215; grocery store $750; clothing $200; gifts, charitable $200; vacation, travel $400; other discretionary $100; dining, drinks, entertainment $400; grooming $100; club $30; sports, hobbies $75; subscriptions $30; dentists, drugs $65; life insurance $207; telecom, Internet, TV $260; RRSPs $300; TFSAs zero; miscellaneous $300. Total: $5,540
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