When she lost her job two days before her 60th birthday in 2009, Rebecca's retirement plans suffered a setback. After a spell of unemployment, she landed a part-time consulting contract last year that she hoped might be extended to the end of this year. Alas, it came to an abrupt end last month.
Now, at 63, she wonders whether she can get by on her savings or whether she has to start looking for work again.
"Can I ever stop working and stop worrying?" Rebecca asks in an e-mail. "Is this another dashed retirement dream?"
Rebecca has contributed faithfully to her registered retirement savings plan since the tax break first came into being, amassing a tidy nest egg. She also has some non-registered savings and investments and a small monthly pension entitlement from a former employer. But low interest rates and stock market gyrations have left her feeling pessimistic about her investments.
Short term, she needs a new car and a new furnace for her Toronto home. When she retires, she hopes to "continue to enjoy my house, my many interests and do some extensive travelling," she writes. Can she meet her retirement income goal of $5,000 a month? If so, how does she go about drawing on her various income sources?
Adelle Léger, vice-president and financial planning specialist, and Philip Mathew, financial planning analyst, both of RBC Wealth Management, looked at Rebecca's situation.
What the experts say
Rebecca's financial resources could support after-tax expenses of about $60,000 this year and $50,000 annually thereafter, the planners calculate. That assumes no further employment income beyond the $15,500 she already has earned this year. The calculations also assume Rebecca dips into her savings to buy new vehicles in 2013 and again in 2023 ($25,000 each) and the furnace this year ($6,000). Ms. Léger and Mr. Mathew assume an average annual rate of return on Rebecca's investments of 4 per cent, inflation of 2.5 per cent and a life expectancy of 90 years.
That money would have to cover food, clothing, entertainment, home maintenance, telephone and cellphone, vehicle maintenance, insurance and travel and anything else she wanted to buy. Whether Rebecca can get by on that amount becomes a question of personal choices, priorities and understanding her expenses, the planners say.
"It seems most people know how much they earn in a year but don't know how much they spend," Ms. Léger points out. She suggests Rebecca track her expenses until she gets a good handle on them and then draw up a budget. This is important for someone whose income is about to drop substantially and who needs to be armed with the right information to make good decisions.
Rebecca would like to work part-time, the planners note. While it may be difficult for her to find employment, if she is able to pick up the odd contract job over the next few years, the extra money would help with discretionary expenses such as travel. Extra money could also be set aside for unforeseen expenses or to "provide for a bit of wiggle room." If Rebecca is open to downsizing her home, say, at age 80, this would give her more capital so she might be able to increase her annual expenses slightly, the planners say. With a 2.5-per-cent annual rate of increase in her home price, downsizing by 40 per cent at age 80 to a home worth $348,000 in today's dollars could mean increasing her annual after-tax income by about $7,000 a year. This would give her a total of about $57,000 a year in today's dollars.
As for where the money will come from each year, the rule of thumb is generally to draw on non-registered assets first, the planners say. Rebecca's small work pension would give her $348 a month indexed to inflation. To get by, she will have to draw quite heavily on her non-registered savings (guaranteed investment certificates, stocks) this year and next.
In 2014, when she turns 65, she will start receiving Canada Pension Plan and Old Age Security benefits, so she will be drawing less from her savings.
By age 70, she will have used most of her non-registered assets and will need to start drawing on her RRSP or registered retirement income fund (RRIF). From that point forward, her income would come from her pension, CPP, OAS and RRIF. If she decides in future to downsize her home, she could use the net proceeds to contribute to a tax-free savings account or perhaps even look into purchasing an annuity, the planners say.
Now that she is out of work, can she afford to retire?
Get a firm handle on expenses and aim to settle for less than she had hoped. Try to pick up some more part-time work and perhaps consider downsizing her home at some point.
A sense of financial security from knowing she can get by if she keeps a close watch on her expenses, time to enjoy her home, and enough money to do a little travelling.
Monthly net income
Nothing at the moment, down from $3,460 previously.
Non-registered investments $250,505; RRSP $615,000; TFSA $20,500; home $580,000. Total: $1.47-million.
Housing costs (property tax, insurance, utilities, maintenance) $980; garden $450; car expenses $440; groceries, clothing, dry cleaning $690; discretionary (drinks, beauty, club memberships, dining out, entertainment, pets, sports, hobbies, subscriptions) $645; travel, miscellaneous $300; doctors, dentists, prescriptions, supplements $325; telecom, cable, Internet $200; TFSA $420. Total: $4,450.
Special to The Globe and Mail
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