Early retirement planning for a 54-year-old single professional, Digi Mart USA News (Canada): Gwen is 54 years old, single and has no dependents. She owns a mortgage-free house in the Hamilton area, has a defined-benefit pension plan that will pay $39,700 a year, not indexed, and has nearly $1.5 million in savings.
She is wondering whether she can afford to retire at 57 and maintain her existing lifestyle, which currently costs about $41,000 a year. If she retires early, she will leave a senior management job that pays more than $132,000 a year, plus a bonus.
She is also losing the benefit of a company car and plans to buy an electric vehicle for $50,000, and she is considering whether to pay cash or take out a line of credit.
Her main goal seems to be traveling to warmer climates during the winter months. Her retirement spending goal is $6,500 a month, or $78,000 a year after tax, rising with inflation.
“Am I saving enough to comfortably retire at age 57?” Gwen asks.
Warren MacKenzie, an independent Nova Scotia-based financial planner who holds the chartered professional accountant designation, was asked to review her situation. “From a financial point of view, Gwen can definitely afford to retire at 57,” Mr.
MacKenzie says. Whether she should depends on how she plans to spend her time during what might be a 30- to 40-year retirement.
The planner says Gwen needs a financial plan based on reasonable and conservative assumptions. After 30 years of saving, he notes, “it may be difficult for her to switch gears and start to spend more.”
In his projections, Mr. MacKenzie assumes Gwen will spend $80,000 a year after tax, rising with inflation.
Because she is in good health and has sufficient assets, he recommends delaying Canada Pension Plan and Old Age Security benefits to age 70. By doing so, her CPP would be 42 per cent higher than if she took it at 65, and her OAS 36 per cent higher.
To be conservative, he assumes she will sell her house by age 80 and move into a top-notch retirement home costing $100,000 a year in today’s dollars. Because Gwen has no desire to leave a large estate, she might consider giving to charity each year.
The projections show that if she spends $80,000 a year plus $12,000 a year in charitable donations, she would still be on track to leave an estate of close to $1 million in today’s purchasing power. That assumes a 5 per cent annual return on investments and 2 per cent inflation.
The $50,000 for the electric vehicle should come from her non-registered account. In her first year of retirement, cash receipts would come from her $39,700 pension, a $15,000 RRSP withdrawal and $53,300 from her non-registered account, for a total of $108,000.
Outflows would be about $86,000 for lifestyle spending, $13,000 in charitable donations and about $6,000 for income tax, for a total of $105,000.
At age 71, after she starts collecting CPP and OAS, her cash flow would consist of her $39,700 pension, $36,000 CPP, $17,700 OAS, a $27,600 RRIF withdrawal and $27,000 in non-registered withdrawals, for a total of $148,000. She would spend $114,000 on lifestyle spending, $17,000 on donations and $17,000 on income tax.
Gwen holds mutual funds and managed funds, with about 85 per cent in stock funds. Mr.
MacKenzie says she is exposed to more risk than necessary to achieve her goals, which an annual return of 5 per cent could support, while her existing portfolio is designed to earn about 10 per cent. “The markets are close to their record highs, so it makes no sense for her to be taking more risk than is necessary to achieve her goals,” he says.
He recommends a goals-based asset mix and suggests she ask three investment firms for proposals for a simplified, lower-risk strategy. Some of her investments have underperformed the relevant benchmark.
Later in life, he notes, she could consider a life annuity, which guarantees a return for life and requires no further investment decisions. After she retires and before she starts CPP and OAS, she will be in a lower tax bracket, so he suggests drawing some RRSP funds into income each year to minimize income tax and reduce any potential OAS clawback.
Donating surplus capital to her favourite charity each year would also reduce income tax. He adds that her financial plan should be updated annually, particularly if there is a major change in assumptions.
The plan: Go ahead and retire, seek more accountability in her investments, postpone government benefits to age 70, and feel free to spend a little more.
