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- (Chris Bolin For The Globe and Mail)
- (Chris Bolin For The Globe and Mail)

FINANCIAL FACELIFT

Career change at this stage could swamp retirement goals Add to ...

Burt and Betty seem to be in an enviable position work-wise – she is a self-employed yoga teacher, while he earns a six-figure salary in education.

Yet they can hardly wait to throw off the shackles. He’s thinking of changing jobs, casting his teacher’s pension to the wind. She wants to close up shop by the time she is 55.

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Betty is 47, Burt is 49. They have two children, 15 and 17.

Their goals: to retire sooner rather than later, and to help the children pay for their schooling. Short-term, they need a new car and some work done on their house in suburban Toronto. Longer term, they wonder whether they can make the desired changes and still maintain the same lifestyle. They like to travel with the children and pay for it using their Air Miles reward miles.

On top of his salary, Burt brings in a little extra money consulting, which could lead to a new job. But the salary and benefits are unknown. Burt’s current pension and benefits would be “impossible to replicate with a non-governmental employer,” Betty writes in an e-mail. Would it be “financially disastrous” if he quit his job? she asks.

Betty likes her work, but is finding it increasingly taxing physically. “If I quit at 55, before the mortgage is paid out, can we afford our present lifestyle?” she wonders.

We asked Ian Black, a fee-only financial planner at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Burt and Betty’s situation.

What the expert says

Until Burt determines what the salary and benefits of a new job would be, making meaningful financial forecasts based on a change in jobs is difficult at best, Mr. Black says. He assumes Burt stays in his current position.

Burt and Betty have about $1,500 a month in unattached savings (after pension and RRSP contributions), some of which could be directed toward the mortgage, Mr. Black says. Burt brings in another $600 to $700 a month freelancing, which the planner does not include in his analysis. He sees it as a “cushion.”

By the time Betty is 55, the mortgage balance will be down to $47,000 from $210,760 now. If they made extra lump-sum payments of $5,000 a year, or increased their weekly payments by $100, they could have the mortgage paid off in eight years, Mr. Black says. They should pay off their $18,000 credit line first because the interest rate is higher.

As for the children’s education, it “seems to be well under control,” the planner says. Both have registered education savings plans and some money in trust.

In preparing his retirement forecast, Mr. Black assumes Betty quits at age 55 and Burt at age 60. Their retirement spending goal is $70,000 a year after tax. Both will get Old Age Security benefits and an estimated 85 per cent of full Canada Pension Plan benefits. Their savings capacity is estimated to be $1,900 a month or $22,800 a year ($1,500 a month surplus plus $400 RRSP contribution).

They can achieve their goal if they continue in their current jobs until they retire, Mr. Black concludes. Thanks mainly to Burt’s pension, their estimated retirement cash flow will be $76,700 a year before tax. Income in Burt’s first full year of retirement will come from his pension, his Canada Pension Plan benefits, their non-registered savings and if necessary, Betty’s RRSP. Federal income-splitting rules will lower their average tax rate to about 11 per cent.

If they added Burt’s “cushion” income to their savings, their retirement cash flow would be even higher. “With an additional savings capacity of $6,000 a year, annual income could increase to $79,700 pretax,” Mr. Black says. Betty and Burt should keep some liquid funds for emergencies or some room available on their line of credit to use if needed.

On the investment front, the couple need to watch costs carefully on their mutual funds and exchange-traded funds, the planner says. They should draw up an investment plan outlining how much of their savings will be invested in each asset class and stick to it, he adds. “Don’t get distracted by the noise in the media.”

He suggests they diversify across asset classes “at all times” – cash, fixed income, real estate investment trusts and Canadian, U.S. and international stocks or stock funds.

**

Client situation

The people: Burt, 49, Betty, 47, and their two children.

The problem: Can Betty hang up her hat at age 55 without compromising their lifestyle? Can Burt change careers?

The plan: Make extra payments to the mortgage to pay it off in eight years. Burt continues in his current job, with its good pension and benefits, until he is 60, while Betty retires at age 55 (when Burt is 57).

The payoff: Financial security and no drop in lifestyle, thanks mainly to Burt’s defined benefit pension plan.

Monthly net income (variable): $11,230

Assets: Residence $800,000; RRSP $103,000; estimated present value of his DB pension plan $690,000; children’s RESPs $107,000; children’s trust funds $42,000; other $6,170. Total $1.75-million

Monthly disbursements: Mortgage $1,970; property tax $460; water, sewer $400; home insurance $130; hydro, heating $400; maintenance, garden $250; transportation $650; groceries $1,800; clothing, dry cleaning $230; line of credit $500; gifts, charitable $150; personal discretionary (grooming, club memberships, dining, entertainment) $430; four cellphones $270; cable, Internet, telephone $160; RRSP $400; professional association $115; group benefits $185; pension plan contributions $1,200. Total: $9,700. Unattached savings $1,530

Liabilities: Mortgage $210,760 at 2.6 per cent; line of credit $18,000 at 3.5 per cent. Total: $228,760

Read more from Financial Facelift.

Want a free financial facelift? E-mail finfacelift@gmail.com Some details may be changed to protect the privacy of the persons profiled.

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