Annie and Niles know they are better off than many Canadians because they both have defined-benefit pension plans, but still they worry. If Niles finally quits working this fall at age 65, their income will drop substantially.
Niles has already retired from his long-term career in 2001 and is collecting a work pension and Canada Pension Plan benefits. Since retiring, he has been working at two other jobs, saving money and anticipating the day he can finally hang up his hat. Annie is turning 64 this fall, so she plans to continue working for another year.
They want to make sure they have enough money to pursue their hobbies, travel and visit their children.
“We are nervous pre-retirees,” Niles writes in an e-mail. “Do we have enough money? We want to retire, but when?” he asks. Both work in health care. Niles gets an indexed pension of $36,000 a year, while Annie will get an indexed pension of $60,000 a year when she retires next year.
Longer term, they plan to move from their home in Southwestern Ontario to a condo in the suburban Toronto area. The last goal on their list: “Not run out of money.”
Short term, they wonder whether they should dip into their savings to buy a new car. Most of all, they are afraid they might be missing something in their plans for the future.
“What are we not considering?” Niles asks. “Do we have any blind spots regarding retirement?”
We asked Warren MacKenzie, president and CEO of Weigh House Investor Services of Toronto, a fee-only consulting firm that sells no investment products, to look at Annie and Niles’s situation.
What the expert says
Most people need a financial plan so they know how much to save, Mr. MacKenzie says. Annie and Niles need one to understand that they already have more than they need to achieve everything on their wish list.
“When they understand the reality of their situation, they will enjoy life more.”
If Niles is working because he enjoys it, then by all means he should continue, the planner says. “But it would be sad if he is tired of working and would like to stop but keeps working because he is unsure whether or not he can afford to retire,” Mr. MacKenzie says.
Looking ahead, say five years into retirement, their after-tax pension income alone will be about 20-per-cent more than they need to achieve all of their planned expenses, including travel and recreation, he notes. Niles and Annie estimate they will need after-tax income of $70,000 in today’s dollars. As a result, they will have about $2,000 a month to save even after they have stopped working.
Assuming they achieve a return that’s 2.5 percentage points above the long-term average return of inflation, their net worth will increase to more than $4-million by age 100 (if they live that long), the planner says. Since they have not expressed a desire to leave a big estate, it only makes sense for them to spend and enjoy some of their capital while they are living, Mr. MacKenzie says.
“They can start to spend more, or provide some help to their three children, or give back to the community.” He suggests the following things that Annie and Niles should do now:
-Go to a fee-only financial planner and have a plan drawn up that would illustrate how their situation would change under different economic scenarios;
-Consider giving some money to their children now rather than leaving it to them in an estate.
-Consider protecting themselves from unexpected health care or long-term care costs by taking out critical illness and long-term care insurance;
-Withdraw some of their registered retirement income fund money early, thereby reducing the clawback of their Old Age Security benefits later in retirement;
-Better diversify their investment portfolio. Because they have indexed pensions, they can afford at least to have a balanced investment portfolio. Being more diversified would give them some additional inflation protection, which could be helpful if Canada were to face a situation such as in Europe where some pension benefits may be trimmed back.
“Wealth is only useful if it helps to increase the quality of your life,” Mr. MacKenzie says. “It’s sad when investors who have the potential to increase their financial freedom, comfort and enjoyment through the wise use of their capital while living eventually die with a large estate and much of the hard-earned capital eventually goes in taxes, legal fees, is given to people who don’t need or want it, or is spent on things that are not consistent with the values of the individuals who left the money.”
Niles, 64, and Annie, 63.
How to determine when they have saved enough to finally retire comfortably without having to worry about running out of money.
Draw up a formal financial plan that will show how they will fare under different economic scenarios. Consider long-term care insurance to deal with nagging concerns about the future. Then loosen up a bit, spend a little more and consider giving some of their wealth away.
Peace of mind that comes from having a realistic grasp of one’s assets, both financial and otherwise.
Monthly net income
Non-registered savings and investments $80,000; registered savings $272,000; home $310,000; net present value of pension plans, (hers) $1,140,656; (his) $552,318. Total: $2,354,974.
Property tax $450; maintenance and capital improvements $840 (variable); utilities, insurance, gardening $425; car insurance, fuel $268; groceries $600; clothing $200; gifts $350; charitable $50; vacation, travel $200; dining, drinks $300; personal care $75; sports $50; subscriptions $50; life insurance $300; medical, dental $75; telecom, phone, Internet $335; RRSP $640. Total: $5,208.
Special to The Globe and Mail
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