Fred Lum/The Globe and Mail
At the age of 45, Stella is thinking of giving up a secure job in education, pension and all, to sell real estate, something she's always wanted to do. Her husband, Steve, is an accountant, a partner in the practice. He is 50. Together, they bring in more than $175,000 a year.
They've raised four children, now in their teens, and are looking to the future. Steve would like to retire at the end of 2025, while Stella would like to change careers some time in the next five years.
They have a mortgage-free house, a cottage and some savings. When they retire, they hope to have $55,000 a year after tax plus another $10,000 for travel until Steve turns 80.
Their big question is Stella's uncertain earning power if she chooses to give up her well-paying job to be a real estate agent, in which case her livelihood will depend on commission income in an uncertain market. She wonders how much she would have to earn to keep their retirement plans on track.
"Is a career change possible or do I have to stay put?" Stella asks in an e-mail.
We asked Matthew Ardrey, vice-president at T.E. Wealth in Toronto, to look at Stella and Steve's situation. T.E. Wealth is a fee-only financial planning firm.
What the expert says
Stella's career change would result in a substantial drop in both her current income and future pension income, Mr. Ardrey says. The couple asked the planner to look at two different scenarios, one where Stella changes jobs in five years at the age of 50 and the second where she continues in her current job to 56. In his calculations, the planner assumes a rate of return on investments of 5 per cent a year, inflation of 2 per cent and lifespans of 90 years for the couple. He assumes they both get maximum Canada Pension Plan benefits but their Old Age Security benefits are clawed back because of their high income.
Stella figures she will earn about $25,000 a year selling real estate. She would retire from that job at 60. At 61, she would get a pension of $43,890 a year, partly indexed to inflation, comprising $39,062 in base pension and a $4,828 pension bridge until the age of 65. (Pension bridges, part of some union contracts, are designed to carry over employees who take early retirement until they begin collecting government benefits at age 65.)
"In the first scenario, Steve and Stella are able to meet their retirement goal with a bit to spare," Mr. Ardrey says. They would leave behind an estate of about $700,000 plus real estate and personal effects upon Stella's death. "If, instead of leaving an estate, they only left behind the real estate and personal effects, they could increase their spending from $55,000 per year to $59,800 per year, inflation adjusted," the planner says.
In the second scenario, Stella sticks with her current job until she is 56, at which time she will receive an unreduced pension of $53,330, divided into two components, a $47,465 base pension and a $5,865 pension bridge until 65. The couple are able to meet their retirement goal with an additional spending cushion.
"They would leave behind an estate of about $1.6-million plus real estate and personal effects upon Stella's death," Mr. Ardrey says. "If, instead of leaving an estate, they only left behind the real estate and personal effects, they could increase their spending from $55,000 per year to $66,600 per year, inflation adjusted."
While the numbers look encouraging, the planner has some concerns. "There are some issues that they need to deal with today to make that dream a reality," Mr. Ardrey says. Their current budget includes about $2,000 a month that is unaccounted for. "This represents significant leakage in their budget and needs to be addressed immediately," he says. "Most people know what they earn and what they save but lose track of what they spend."
This leakage will become increasingly important as they approach retirement. "Two thousand dollars a month changes a budget of $55,000 a year to $79,000 and causes them to fall short of this new spending goal," Mr. Ardrey says. "If Stella changes jobs and they continue spending in this manner, they will be running a $1,200-per-month deficit," he adds. Before they make any decisions about retirement, "they need to get their budget under control today."
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CLIENT SITUATION
The people: Stella, 45, and Steve, 50.
The problem: Can Stella quit her well-paying job to sell real estate?
The plan: She could, but they'd have a bigger cushion if she didn't. But first, they must pay closer attention to their spending.
The payoff: A clear road map to the future.
Monthly net income: $10,465
Assets: Bank $3,335; GICs $4,110; her TFSA $32,465; her RRSP $118,085; his RRSP $290,565; present value of her defined-benefit pension plan $367,210; children's RESP $332,000; residence $600,000; cottage $75,000. Total: $1.8-million
Monthly disbursements: Property tax $380; water, sewer $60; home insurance $195; hydro $155; heat $190; maintenance $200; transportation $670; grocery store $1,500; clothing $110; charitable $100; vacation, travel $600; other $200; dining, drinks, entertainment $600; grooming $50; club membership $75; pets $25; life, disability insurance $125; telecom, TV, Internet $245; RRSPs $1,085; RESP $415; TFSA $460; pension plan contributions $960. Total: $8,400 Unallocated surplus: $2,065
Liabilities: None
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