For 25 years, Arnie and Tuula have been planning, saving and investing for an early retirement. He is 52, she is 46.
As managers in the engineering field, they bring in good money - $255,000 a year between them - but they're "looking to exit work's highway and travel life's country roads," Tuula writes in an e-mail.
They plan to do enough part-time contract work to bring in $50,000 a year each for another five to 10 years before finally hanging up their hats. They figure they'll need $65,000 a year after tax when they retire. They have nearly $1-million in investments, a fully paid for home in Calgary, no debts and no children to provide for.
Short term, they want to buy a recreational property. Longer term, they'd like to give more to charity.
Will they have enough money? They wonder. "Or should we work a little longer?"
We asked Kurt Rosentreter, a senior financial adviser at Manulife Securities Inc. in Toronto, to look at the couple's situation.
What the Expert Says
To reach their desired income goal, Tuula and Arnie will have to build savings of $1.3-million to $1.5-million, Mr. Rosentreter calculates.
"Even with modest savings in the next 10 years, they will hit the $1.3-million target," he says. That does not include their real estate.
"Looks like they can scale back from work now."
The $65,000 a year they think they'll need will be $80,000 a year in 10 years, assuming an inflation rate of 2 per cent a year, Mr. Rosentreter says. Pre-tax, that is about $100,000. A portion of this will come from the Canada Pension Plan, Old Age Security and Arnie's small pension from a previous job of $7,500 a year, leaving roughly $75,000 pre-tax to come from their investments.
As for the recreational property, "go ahead and do it," the planner says, but don't spend too much and pay off any loans taken out to buy it before finally retiring.
Given the long time Arnie and Tuula may have to depend mainly on investment income, Mr. Rosentreter does sound a cautionary note. Forty years or more is a long time to live on a fixed budget, he notes. Interest rates have tumbled and stock market returns have been lacklustre. He also points to volatile gasoline and energy prices and the rising cost of food. "The cost of living can double every 20 years."
Then there are home repairs, vehicles to buy, big vacations and potentially, long-term medical costs.
Given the size of their portfolio, Tuula and Arnie have outgrown conventional mutual funds and should consider dividend-paying stocks, exchange-traded funds and low-cost F-class funds, Mr. Rosentreter says.
When they finally retire, they could think about converting part of their savings to a joint life annuity with annual inflation adjustments.
"Buy just enough to cover the fixed and essential costs of living," he says. Annuity income is guaranteed, often yields 6 per cent or more and after age 60, can be tax-efficient, he adds. A form of annuity called a prescribed annuity can average out the income tax on annual income over a lifetime, resulting in smaller tax bills.
Both Arnie and Tuula have life insurance, which they don't really need, he adds. They could donate their insurance policies to charity to achieve their charitable goals. Making the charity both the policy owner now and the beneficiary may make future premiums tax deductible, he says.
Far more important is having "iron-clad" disability insurance to ensure they make it to the home stretch of their financial plan, he says. He also suggests they create a safety net of services, care providers and institutions at the ready "should bad things happen in the distant future."