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Jennifer Roberts/The Globe and Mail

Sara has a good job in sales, earning $130,000 a year plus bonus before tax, but she wants to give it up and retire early. She is 56.

Sam, who has health problems, earns about $30,000 a year working part-time. He is 57.

"I've been working at my current job for 25 years now," Sara writes in an e-mail. "The job is hectic and on the stressful side, so I would love to be able to slow down and enjoy life a bit more than I have been," she adds.

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Although Sara has a work pension, it will be reduced by 5 per cent a year if she quits before age 62. Offsetting this penalty is a "flex" benefit to help compensate her in case she chooses to retire earlier.

In the meantime, they are doubling up on the mortgage payments on their Hamilton house so their $50,000 home-equity line of credit will be wiped out before Sara retires. They rent out an apartment in their home – and sometimes their cottage – to help cover costs.

Sara and Sam have a number of questions. Can she afford to retire in two years without drawing on her pension until she is 62? Can they afford to spend three months down south each year? Once the line of credit is gone, Sara wonders where they should direct the extra money: to tax-free savings accounts, RRSPs or a condo in the sun?

"Can we live comfortably and maintain our current lifestyle and standard of living?" Sara asks. "We also need to assume paying rent in an old-age home at some point." Their retirement spending goal is $85,000 a year after tax.

We asked Linda Stalker, a financial planner and director, wealth advisory services, at Henderson Partners LLP in Oakville, Ont., to look at Sara and Sam's situation.

What the expert says

Sara and Sam have ambitious goals and will have difficult choices to make because they cannot do all that they want, Ms. Stalker says. If Sara retires early and delays taking her pension, she will have four years without earned income. She will have the flex benefit of $220,000, but that will not replace her current income for the full four years. Assuming that the $220,000 yields current cash equivalent rates of 1 per cent a year, it can generate around $4,677 per month or about $56,130 of annual taxable income (principal and interest) over four years.

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"If they want to maintain the current standard of living, the flex benefit would last 20.5 months if they draw an income of $10,833 per month," the planner says. This means that they will have a shortfall in cash flow from then to the time Sara starts drawing her pension at age 62. They will have to come up with the difference from somewhere else, such as from savings, or through reduced lifestyle expenses, Ms. Stalker says. "Sam's income may be able to supplement the difference."

A compromise would be for Sara to retire just two years early – at age 60 rather than 58 – allowing the flex benefit to meet their lifestyle needs over the two-year period where there is no earned income.

Sara and Sam plan to pay off their mortgage in the next year to 18 months, the planner notes. In the past, Sara has drawn from her RRSP to pay down the mortgage. Because her marginal tax rate is 46.41 per cent and Sam's is 20.05 per cent, Sara should not be the one withdrawing funds from her RRSP during her working years. The rate on the mortgage is 2.7 per cent.

"The preferred strategy is to use savings to pay down the mortgage rather than increase taxable income for either Sara or Sam." There could be an argument made for Sam's withdrawing some funds from his RRSP during Sara's working years in an effort to split income. The goal would be to keep Sam's income under $40,922 (based on 2015 tax rates), the planner says. In retirement, they will be able to split pension and RRIF income (registered retirement income fund).

Once the mortgage is paid off, the couple will have an additional $3,200 a month to invest. If Sara has RRSP room and is still working or receiving her flex benefit, she could continue to contribute to a spousal RRSP for Sam. They should also be contributing as much as possible to their TFSA. Sara has not started saving in a TFSA yet and has $41,000 of contribution room as of Jan 1, 2015. Sam has not maximized his contributions to his TFSA.

As for whether buying a condo down south would make sense, "investing further in the real-estate condominium market is somewhat risky based on uncertainty around interest rates," Ms. Stalker says. Besides, Sara and Sam have the majority of their net worth (excluding defined-benefit pension plan) allocated to real estate.

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Sara and Sam's main goal in retirement is to live comfortably and maintain their current lifestyle and standard of living, Ms. Stalker says. In drawing up her plan, she assumed that the mortgage will be paid off by the time Sara retires and that she will no longer be adding to their savings. The couple's goal of $85,000 a year after tax is attainable if they earn 4.5 per cent on their investable assets throughout retirement, the planner adds. "If, however, rates of return averaged 2 per cent throughout retirement (which would be a conservative return based on their asset allocation), they would need to cut spending by about $6,000 per year," the planner says. "They will need to be very disciplined to ensure they live within their means throughout retirement."

In her calculations, Ms. Stalker assumes Sara retires at age 60 and draws down the lump-sum pension benefit over four years. She and Sam would split the pension benefit. When Sara begins collecting her pension at age 62, they would split that income as well.

Sara is concerned about long-term care should they require it. "At the highest end, remaining in your home and having care seven days a week will cost $200,000 per year," the planner says. "At the most basic level, a nursing home will be about $5,000 per month." They could end up having to run two households if one spouse requires care in a nursing home and the other remained in their home. "At their current spending levels, it is unlikely that they would be able to afford private care in the home," the planner says. "They will have the option of selling their home at some point and using the proceeds to fund a retirement or nursing home."


Client situation

The people

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Sara, 56, and Sam, 57

The problem

Can they live comfortably and maintain their current standard of living in retirement? How should they allocate surplus funds once the home-equity line of credit (HELOC) is paid off?

The plan

Retire in four years; pay off mortgage before retirement; take full advantage of tax-free savings accounts.

The payoff

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A comfortable early retirement

Monthly net income

$12,620 (variable)


House $800,000; cottage $200,000; RRSPs $271,000; her RPP $150,000; his TFSA $18,000; non-registered $380,000; estimated value of her defined-benefit pension plan $704,413. Total: $2.5-million

Monthly distributions

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Mortgage $3,200; property taxes, property insurance, utilities and repairs $1,720; transportation, gas, car insurance, maintenance, parking $560; groceries $1,200; clothing, dry cleaning $225; charitable $120; phone, Internet, cable $285; vacation $600; gifts $200; entertainment, dining out, alcohol, hobbies, personal care $1,125; health-care expenses $455; RRSP and TFSA contributions $2,500; her pension-plan contributions $430.

Total: $12,620


HELOC $50,000

Want a free financial facelift? E-mail Some details may be changed to protect the privacy of the persons profiled.

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