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(Tim Fraser For The Globe and Mail)
(Tim Fraser For The Globe and Mail)

FINANCIAL FACELIFT

A retirement plan out of tune with changing circumstances Add to ...

When Marguerite quit her public service job in 2009 to get an MBA, her goal was clear. At 47, she was embarking on a new career in a field she felt would be more satisfying than her previous work.

Her salary, together with her public service pension, would form the groundwork of her longer term financial plan, enabling her, she hoped, to retire at age 60 with after-tax income of $50,000 a year.

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That was then. Now, at 51, Marguerite finds herself working on a part-time contract earning a little more than $30,000 a year, living with and caring for her mother, who is 87 and ailing. Her mother’s savings are enough to pay for her daytime caregivers for a few more years.

Although Marguerite is quite willing to fulfill the promise she and her three siblings made that their mother would stay in her own Vancouver-area home as long as possible – she is feeling overwhelmed, unable to step back from the day-to-day tasks of care giving. Of the four children, she is the only one who is single. Her siblings help out in other ways to the extent they can. Marguerite shops for groceries, cooks special meals for her mother and puts her to bed in the evening. Mornings are given over to her contract work.

“I want to find a way to make this work,” she says. Still, she wonders whether she can continue on this way and still meet her long-term goals. She feels she can’t give herself fully to a new job at this point and wonders if she should try to build a management consulting business where she could continue to work from home.

Her question: “Can I reach my retirement goal if I continue to work part-time to age 60 at a similar salary, which would allow me the flexibility I need to care for my mother?” Marguerite asks in an e-mail. If not, how much would she have to earn?

We asked Ngoc Day, a fee-only financial planner at Macdonald, Shymko & Co. Ltd. in Vancouver, to look at Marguerite’s situation.

What the expert says

Marguerite is working with her mother’s caregivers to increase their hours so Marguerite can resume full-time work, Ms. Day notes.

To reach her retirement spending goal of $50,000 a year by age 60, Marguerite would need before-tax retirement income of $63,500 a year. To achieve that, she would have to save $59,000 a year over the next nine years, the planner says. That implies she will need gross income of $116,000 a year.

Marguerite will get $25,700 a year in pension at age 60, reduced to $21,700 at age 65 when Canada Pension Plan benefits of $9,300 kick in, plus Old Age Security of $6,500. The remaining retirement cash flow will come from her savings. The planner’s assumptions are based on an average annual return on investments of 5 per cent and an annual inflation rate of 2.5 per cent. That income, combined with the savings she already has, would give her about $38,200 a year before-tax at age 60 (assuming no further savings) – far short of her goal.

In determining that Marguerite would need $116,000 of income to achieve her $50,000 after tax retirement spending goal, the planner deducts from that number income tax, CPP and EI contributions and $59,000 in savings, leaving Marguerite with $29,560 to cover her expenses. The savings would be allocated $20,880 to a registered retirement savings plan and $38,120 to a tax-free savings account and non-registered savings.

“Marguerite will need to determine how feasible it is to ramp up her gross income to the required level,” Ms. Day says. Alternatively, Marguerite could work longer or plan to spend less when she retires.

Marguerite and her siblings stand to inherit $150,000 to $200,000 each from the eventual sale of their mother’s home, but Ms. Day does not include this in her forecast.

“This would certainly reduce the savings rate required, but since the timing and amount is uncertain, I would not suggest Marguerite base her retirement plan on it,” Ms. Day says.

Marguerite wonders whether she should put any inheritance toward the purchase of a home. Only if she can buy a place that meets her needs without having to borrow, the planner says. “I would suggest that she does not go into retirement with a mortgage.”

Marguerite has a pension from a previous job that she can take as a lump sum – some of which can be rolled into her RRSP and some that would be taxable. She wonders if she should take it now. Given that Marguerite’s contract is ending soon and she has no assured work for the rest of the year, “there may be a window of opportunity to take her pension this year because she would be in the lowest tax bracket,” Ms. Day says. The decision depends on her work prospects.

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Client situation

The person

Marguerite, 51

The problem

Marguerite wants to balance caring for her mother with the need to work full time in order to save for retirement.

The plan

Establish additional care for her mother and begin full time employment to increase her savings rate.

The payoff

A higher expected income in retirement.

Monthly net income

$2,617

Monthly disbursements

Car insurance $175; gas $175; maintenance $40; parking $60; groceries $400; clothing/dry cleaning $90; gifts $95; donations $80; vacation/travel $60; other discretionary $110; grooming $175; dining out/entertainment $225; sports/hobbies $15; subscriptions $15; other discretionary $35; medical/dental care $70; prescriptions $75; vitamins $40; disability insurance $95; cellphone $40; telephone/cable $100; education $200; TFSA $30. Total: $2,400. Surplus: $217

Assets

Stocks $3,900; whole life insurance policy (cash surrender value) $12,600; TFSA $24,900; RRSP $85,400; lump-sum pension amount $16,900; present value of DB pension plan $271,000. Total: $414,700

Liabilities

None

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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