Matthew Sherwood/The Globe and Mail
A bout of cancer a few years back got Melody thinking about how she'd like to spend the rest of her life.
"The thought of a recurrence is never far from my mind," Melody writes in an e-mail. "It is this thought that is prompting me to question whether I should leave my career behind earlier than I had originally planned."
She is 53 and earns more than $100,000 a year, plus about $5,000 a year of other income that will continue after she quits her job. Her husband, Yves, is 51, and earns $70,500 a year. They have no children. Their house is paid off and they have no debts.
"Our main question revolves around whether or not we can take the hit with respect to me retiring on a significantly reduced pension at age 55," Melody writes. She is concerned that such a move would crimp their plans to fix up the house ($20,000) and travel ($12,000 a year for the next few years).
They have some savings and both have defined benefit pension plans.
"Our hope in retirement is to be able to live abroad (in a low-cost area of Europe such as Portugal, or in South/Central America, such as Ecuador or Costa Rica) for four months of the year in lieu of major trips," Melody adds. Their retirement spending goal is $67,200 a year after tax.
We asked Marc Henein, an investment adviser at ScotiaMcLeod in Mississauga, to look at Melody and Yves's situation.
What the expert says
Melody and Yves spend about $9,200 a month after tax, not including their savings, Mr. Henein says. Their retirement goal is to live on $5,600 a month.
Melody is fortunate to be a member of a defined benefit pension plan, he notes. She has an option to retire at age 55 and get a reduced pension of $24,960 a year, plus a bridge benefit of $5,640 a year. The bridge benefit is an amount that will be payable until she begins drawing government benefits at age 65.
Yves plans to work longer, retiring in 2022 at the age of 58. His pension plan will pay $32,393 a year, plus a bridge benefit of $10,050 a year to age 65.
"They effectively have three phases of retirement," Mr. Henein says. The first phase is 2017 to 2022, when Melody will have retired but Yves will still be working. "Their combined income of Melody's pension and Yves's salary would equal about $100,000 pre-tax," the planner says.
In phase two, from 2022 to 2030, they will both be retired, but their combined pension income of $73,000 a year before tax will fall short of their needs. Phase three, from 2030 on, their combined pension income of $57,000, plus their combined Canada Pension Plan and Old Age Security benefits of $34,000, would give them before-tax income of $91,000 a year.
Because they can comfortably sustain their lifestyle in the first phase of retirement, Melody can retire at age 55, Mr. Henein says. In the second phase, they will fall short so they may want to keep a closer eye on their spending. "Assuming a 30-per-cent tax bracket in retirement, their after-tax income in phase two would be $4,200 a month, leaving them $1,400 short of the $5,600 a month income goal. In phase three, assuming the same tax bracket, they will have $5,300 after tax, "which puts them very close to their spending goal," the planner says.
Will they have enough?
Their other assets include a $42,000 locked-in retirement account, $215,000 in Melody's Registered Retirement Savings Plan and $50,000 in Yves's RRSP. They are not saving for retirement beyond their pension contributions. Their combined registered assets of $307,000 (not including the modest amount in their tax-free savings accounts), "look to be sufficient to fund the gaps in their retirement plan in phases two and three, Mr. Henein says.
If they earn an average annual return of 5 per cent a year on their savings, their portfolio will grow to about $410,000 by 2022. The couple will need to generate $17,000 a year after tax between 2022 and 2030 from their investment portfolio, he says. If they can keep earning 5 per cent a year, "that will generate $20,500, which will cover the majority of this gap."
In phase three, from 2030 on, they can lower the risk to their investment portfolio and target a return of 3 per cent to 4 per cent a year. The portfolio will still be enough to bridge the gap between their pension income and their target income.
As for the renovations, they should do them before Melody retires, taking the money from savings, the planner says. They should also set aside an emergency fund.
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Client situation
The people: Melody, 53, and Yves, 51
The problem: Can Melody take early retirement in two years?
The plan: Go ahead and retire as planned. Target a 5-per-cent annual return on investments for the years that income will fall short.
The payoff: Goal of retiring early attained
Monthly net income: $12,104
Assets: Cash in bank $60,000; her locked-in retirement account $42,000; TFSAs $2,155; her RRSP $215,000; his RRSP $50,000; residence $615,000; estimated present value of her DB pension plan: $500,000; estimated present value of his DB pension plan $440,000. Total: $1,924,155
Monthly disbursements: Housing $915; transportation $625; grocery store, clothing $765; items paid for by credit card and not allocated $4,000; gifts, charitable $140; vacation, travel $1,000; pocket money $520; personal discretionary (dining, drinks, entertainment, sports, hobbies, cleaning service) $855; vitamins $10; telecom, TV, Internet $390; savings (for renovations, personal) $1,300; pension plan contributions $1,595. Total: $12,115
Liabilities: None
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(An earlier version of this story misstated the monthly net income in the Client situation breakdown)