After more than 30 years working on a boat, Tom, 52, had been looking forward to hanging up his work boots soon and enjoying some leisure in his North Vancouver neighbourhood that he likes so much.
Being single with no dependents, he has been able to buy a condominium and stash away $212,000 in an RRSP on his $75,000-a-year salary. He has another quarter of a million dollars or so in his union-sponsored defined contribution pension plan. Tom had hoped to retire at 55 – a mere three years hence.
But when the stock market tumbled, “everybody had to reset their retirement date,” he acknowledges. He also has a $167,000 mortgage to pay off.
“I've been beaten by the market and I'm hoping to rehabilitate my portfolio,” he says.
Client situation
| The Person: | Tom, age 52 |
| The Problem: | How to retire at age 55 without running out of money |
| The Plan: | Be willing to spend less, pick up a part-time job or work for another five years |
| The Payoff: | Long-term financial security |
| Monthly net income: | About $4,180, depending on overtime |
| Assets: | Condominium, about $500,000; RRSPs $212,000; non-registered investments $27,000; defined contribution pension plan $226,860; car $10,000. Total: $975,860 |
| Monthly Disbursements: | Mortgage and taxes $1,662; condo fees $338; food $600; clothing $250; household $350; telephone $85; TV and Internet $75; car and home insurance $120; discretionary (entertainment, gifts) $700. Total: $4,180 |
| Liabilities: | Mortgage $167,000; line of credit $22,000. Total: $189,000 |
Tom figures he will need about $60,000 a year – $42,000 after tax – to live comfortably when he retires. He wonders how much longer he has to keep working and whether his RRSP portfolio, which is all in stocks, is suitably invested.
What our expert says
We asked Warren MacKenzie, president and chief executive officer of Second Opinion Investor Services Inc., to look at Tom's situation. As it turns out, Tom will have to take a sharp pencil to his budget if he wants to retire any time soon, Mr. MacKenzie concludes. And he will have to shift his investment stance from aggressive growth to preservation of capital.
Like many Canadians, Tom thinks of retirement mainly as an economic event – and that less capital automatically delays retirement, Mr. MacKenzie says.
In reality, money is only one factor, and not even the most important one, making for a successful retirement. Good health, having friends and family, and a purpose in life are all more important, and Tom is fortunate in these areas.
Tom is to be congratulated for saving and managing his money prudently and building up a net worth of about $800,000 – more than the average Canadian has at retirement, Mr. MacKenzie notes. With regular RRSP savings, paying down his mortgage and modest growth in his capital, the total of his non-real estate assets should be more than $500,000 by the time he turns 55, assuming a net return of 5 per cent.
“The bad news is that if Tom retires at age 55 and spends the amount he thinks he wants to spend, he will run out of money in his 70s,” the planner says. But all is not lost. If Tom is typical, he is overestimating the amount of money he needs for a comfortable retirement.
Mind you, a lot can go wrong when planning for a 40-year retirement, Mr. MacKenzie cautions. A man who retires at age 55 has a 52-per-cent probability of living to age 80, a 33-per-cent chance of living to age 85 and a 15-per-cent probability of living to age 90. “So to be prudent, male retirees must plan to live until age 95.” With 40 years to plan for and no one to rely on but himself, Tom has to have a cushion.
Mr. MacKenzie outlines several issues that Tom faces.
Tom's RRSPs and pension plan together are about 75 per cent equity and 25 per cent cash and fixed income.
