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(JOHN WOODS For The Globe and Mail)
(JOHN WOODS For The Globe and Mail)

FINANCIAL FACELIFT

Can woman quit her high-paying job for the things she loves? Add to ...

This fall, at the age of 42, Janice hopes to walk away from her $135,000 a year job, with its pension plan and health benefits, to pursue the things she loves – gardening, cooking, canning and spending time with her 8-year-old daughter.

For income, she plans to join with a couple of friends to open a yoga studio, where she figures she can earn at least $12,000 a year and perhaps more.

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Her husband, Stuart, likes his job – which pays $85,000 a year – and plans to work until he is 65. He is 43. Stuart has a defined contribution pension plan to which he and his employer each contribute about $390 a month.

Janice’s job stresses have been building, she writes in an e-mail, and she is tired of the travelling her sales job requires.

“I want to spend more time with family and friends doing the things that feed me,” Janice writes. “I feel that life is too short.

“Luckily, we have been very judicious with our money and savings, so our lifestyle has allowed us to make this decision,” she adds. They have been living off his salary and using hers to pay off the mortgage and save, so they own their $500,000 home outright.

There will be their daughter’s private school expenses to pay for when she reaches high school age ($60,000 over four years), and later, university, plus a couple of new cars along the way ($45,000 each).

“I want to be there for her and be able to experience her growing up,” Janice says of her only child. “The past eight years have flown by.”

Their biggest fear: “Not having enough money when we retire.”

We asked Charles Chan, a financial planner at fee-only E.E.S. Financial Services Ltd. in Markham, Ont., to look at Janice and Stuart’s situation.

What the expert says

Janice and Stuart have basic living expenses of $52,000 a year, not including savings, Mr. Chan notes.

“If this basic spending is realistic and they can stick to it closely, they will be able to live on Stuart’s salary and Janice’s expected $12,000 a year from yoga without touching their capital,” he says. He thinks their budget “may be a little light on vacation and dining out expenses.”

They will need to tap their non-registered portfolio for car purchases and their daughter’s private school tuition. But the income they earn on their investments “should be sufficient to keep up with these extraordinary expenses,” the planner says.

“At age 60, assuming a rate of return of 5 per cent, Janice and Stuart will have about $2.4-million,” excluding their home, Mr. Chan says.

If they continue to contribute $2,500 a year to their daughter’s registered education savings plan, she will have about $80,000 for post-secondary education by the time she is 18, again with a 5 per cent return – the couple’s own assumption.

Fortunately, Janice will have pension income from her previous and current employers. With a 5 per cent return, her pension plans, plus her registered retirement savings plan, will be worth a total of $950,000 by the time she retires at age 60, Mr. Chan says.

Underestimating their expenses is not the only risk to Janice’s plan. Their income could fall short of expectations.

“Stuart has to earn at least $85,000 in today’s dollars uninterrupted until he turns 65,” Mr. Chan says. “If there are any interruptions to his earnings such as a disability or layoff, the plan for Janice to retire early will not work.”

Once they retire and begin drawing on their savings, things begin to look up.

“If Janice starts to draw on her RRSP at age 60, they will have a cash flow surplus of about $25,000 a year,” the planner says. By then, they would have put their daughter through school so their expenses will be lower. When Stuart retires at age 65, his RRSP will be worth about $1.5-million, which will allow for monthly withdrawals sufficient to replace about 70 per cent of his income. He will be entitled to full Canada Pension Plan benefits, while she will get half the maximum because she will not have worked as long.

As part of their plan, the couple should update their wills and powers of attorney and be sure to renew their term life insurance even if Janice quits her job. They also need disability insurance.

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Client Situation

The people

Stuart, 43, Janice, 42, and their 8-year-old daughter.

The problem

Figuring out whether Janice can quit her high-paying job to spend more time pursuing her interests.

The plan

Draw up a strict budget and stick to it. Be mindful of the risks. Then take the plunge.

The payoff

A less stressful and more rewarding lifestyle for the entire family.

Monthly net income

$11,600

Assets

Residence $500,000; his inheritance $90,000; cash in bank $17,000; joint investments $141,000; her non-registered investments $58,000; her RRSP $77,000; commuted value of her work pension from previous employer $127,000; her current pension, including commuted value of DB portion $193,000; his DC pension plan $12,000; his RRSP $202,000; her TFSA $28,590; his TFSA $28,000; child’s RESP $25,320. Total: $1.5-million.

Monthly disbursements

Property tax $400; utilities, home insurance, maintenance $375; transportation $820; grocery store $800; clothing $200; charitable $150; vacations, travel $200; grooming $200; clubs, dining out, entertainment $305; sports and hobbies $200; child’s activities $100; subscriptions $15; life insurance $105; disability insurance $90; dentists, drugstore $100; telecom, Internet, TV $270; his work pension $390; her work pension $266; RRSPs $650; RESP $210; TFSA $150. Total: $5,996. Surplus: $5,604

Liabilities

None

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Read more from Financial Facelift.

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Some details may be changed to protect the privacy of the persons profiled.

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