Ben and Barbara are looking forward to the day when they have more free time to spend together.
“Our retirement plans are not grand,” Barbara writes in an e-mail. “I like to garden, he likes to play chess. And we would like to travel a bit to see friends.”
They have raised three children, ages 17, 20 and 23. They own their B.C. home outright and have no debts.
“None of our children is financially settled yet, and although my husband will receive a decent pension upon retirement, I have not worked long enough to have much of one myself,” Barbara adds. She has been working as a substitute teacher for five years, earning $48,000 a year.
Spending time together in retirement is complicated by the fact that Ben is 67 and Barbara 51. Ben is planning to retire from his $87,140 a year teaching job later this year.
“I would like to be able to have a few years to enjoy retirement with my husband, but that will be difficult if I work until 65,” Barbara writes. “How long do I have to work?”
We asked Warren MacKenzie, founder of Weigh House Investor Services of Toronto, to look at Barbara and Ben’s situation. Weigh House is a fee-only firm that does not sell investments.
What the expert says
Ben and Barbara have about $200,000 in investments, Mr. MacKenzie notes. They would have had a lot more, but they decided it would be best for Barbara to work part time until the children finished high school.
“If Barbara works until age 65, there is a possibility that at retirement she will switch from being a full-time employee to being a full-time caregiver for her 81-year-old husband,” Mr. MacKenzie says. With steadily compounding returns and inflation, she would leave an estate of more than $2-million to the children, he adds.
If she hangs up her hat at 56, she and Ben “can expect to have 10 to 15 years to travel and enjoy retirement,” the planner estimates. They’d leave an estate of about $1.4-million.
If Barbara takes the middle road and works until she is 60, “they could reasonably expect to have five to 10 years of travel, good health in retirement, and greater financial security – and still leave an estate of about $1.6-million.”
Mr. MacKenzie’s forecast is based on the couple’s spending $66,000 a year in retirement and earning an average return of 4.75 per cent a year.
To improve their position, they could take steps to improve their investment portfolio. About 90 per cent of their capital is in savings accounts and guaranteed investment certificates, with the remaining 10 per cent in two stocks.
“Clearly, they have no investment strategy,” Mr. MacKenzie says. The long-term effect of following “a sensible investment strategy” would be about the same as working five years longer, he says. He recommends a diversified “couch potato” portfolio of exchange-traded funds or a low-fee, balanced mutual fund.
When Ben retires, he should choose the pension option that pays a lower amount, but that has an unreduced survivor benefit for as long as Barbara lives, the planner says.
Because of their age difference, Barbara can be expected to outlive her husband. Eventually, she will be taxed on her pension income, his pension income, the income from their registered retirement income funds as well as her Canada Pension Plan and Old Age Security benefits.
If Barbara retires at 56, her income will be relatively low until she begins collecting CPP benefits, “and considerably higher in the future,” Mr. MacKenzie says. To smooth out her income and thereby lower her future income taxes, she should turn her registered retirement savings plan into a RRIF and begin receiving payments immediately after she retires.
When Ben retires, his income will break down as follows: $2,128 a month from his current pension, $429 from a previous employer’s pension, $1,007 from the Canada Pension Plan and $550 in Old Age Security, for a total of $4,114 a month or about $49,000 a year before tax.
“To this we add Barbara’s teaching income of $48,000 per year for a total annual income of about $97,000,” the planner says.
If she retired at 56, Barbara would get about $8,155 a year in pension income in her first full year, or when she is 57. Their combined income would be $65,517, about $7,000 short of what they would need to achieve their after-tax spending goal, so they would have to dip into their capital until Barbara began collecting CPP and OAS. After that, their investment portfolio could be left intact to increase in value over time.
Ben, 67, and Barbara, 51.
How to spend quality time together in their retirement given the big gap between their ages without jeopardizing their financial security.
Weigh the different options put forward by the planner from both a financial and personal perspective. Take a more disciplined approach to investing to improve returns.
The comfort of knowing they are okay financially regardless of which option they choose.
Monthly net income
Bank accounts $55,130; term deposits and GICs $5,255; stocks $6,705; her TFSA $26,070; his TFSA $26,050; her RRSP $43,640; his RRSP $44,855; RESP $45,575; residence $330,000; estimated present value of his DB pension $735,000; estimated PV of her DB pension $34,000. Total: $1.35-million
Housing $735; transportation $525; grocery store $1,245; clothing $340; gifts, charitable $250; vacation, travel $370; other $600; entertainment, dining out, drinks $670; grooming, other $130; sports, hobbies $215; pets $65; subscriptions $275; doctors, dentists, drugstore $130; telecom, TV, Internet $130; RRSP $440; educational needs $110; TFSAs $835; pension plan contributions $1,055; professional associations $200; group benefits $155. Total: $8,475
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