54-year-old's retirement plan needs finessing in sickness and in health

Elena has three options to retire with today’s lifestyle: expert

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Elena* is among a growing group of people who are living on their own, one of 4.4 million people who did so in 2021, up from 1.7 million in 1981, according to the latest census.

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The 54-year-old has managed just fine on her teacher’s salary of $103,000, but health issues have forced her to take time off work over the past few years, which has cut into her income. She recently returned to work full time after being on a medical leave for several months. Even with short-term disability benefits, her income dropped by $4,500.

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Her health, in addition to inflation, the costs of home ownership — including electrical and plumbing issues in the past six months — and having older pets (one recent visit to the vet cost $1,800) has her worried about the future and what retirement will look like.

After 32 years of teaching, Elena, who is based in southwestern Ontario, can formally retire next year, but her doctor has recommended she retire sooner rather than later. She fell in love with Western Canada in her thirties and it has been her longtime dream to retire there, but she’s concerned she doesn’t have enough to retire next year regardless of the location.

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“Some months, it’s tough to make ends meet,” she says. “I can’t imagine what it will be like on a pension with a reduced income.”

I can’t imagine what it will be like on a pension with a reduced income


Her defined-benefit pension plan is indexed to inflation and will pay out $56,000 a year before tax if she retires next year, and it will provide a bridge of $6,000 a year until she can collect Canada Pension Plan (CPP) payments at age 60. If Elena waits to retire until she’s 65, the pension will pay $65,000 a year before tax. She will have to supplement her health insurance when she retires, which she anticipates will cost about $150 a month.

Elena purchased her current home, now valued at $700,000, about seven years ago and dipped into her tax-free savings account (TFSA) to fund the down payment. She has $116,000 remaining on the mortgage at 3.99 per cent and the monthly payments are $945.18. Initially, she made a point of doubling payments, but she hasn’t been able to be as aggressive in recent years.

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She also has $300,000 in her registered retirement savings plan (RRSP), but stopped contributing about four years ago to focus on paying down her mortgage and investing in her TFSA, which is now worth $11,000. Both her RRSP and TFSA are invested in Nasdaq exchange-traded funds. She contributes $100 a month to her TFSA, which also serves as an emergency fund, and has mandatory life insurance through her employer that will pay out two times her salary.

Her monthly expenses total about $3,300, including a car payment of $439.80 at zero-per-cent financing that will end next year.

Elena plans to take on part-time work when she retires, perhaps as a tutor, but doesn’t want to rely on that to pay her bills.

“I worry about bag lady syndrome,” she said. “I want to be able to take a vacation once a year, to live independently and to afford any services I might need in the future to make that happen. My car will be seven years old next year. Is having to get a new car going to break me?”

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What the expert says

The following is a Q&A with Ed Rempel, a fee-for-service financial planner, tax accountant and blogger.

Elena: Can I afford to retire next year or even sooner? I’d like to retire now, but is it possible?

Rempel: You seem to be making the common mistake of missing out on variable and discretionary expenses. Your take-home pay should be about $5,500 per month , so you would have $2,000 per month left over if your expenses are actually $3,300 per month. Where did the $2,000 net cash go?

If we ignore the missing $2,000 and assume you can live without that money, you need about $54,000 a year to retire. This means you can retire next year on your pension plus annual $5,000 RRSP drawdowns for the next five years until CPP payments start coming in.

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If you want your retirement lifestyle to be the same as now — that is, with the unaccounted for $2,000 plus $150 per month in health costs— you need $89,000 a year. This means you will require $750,000 in investments by next year. At this point, you should have about $340,000 by next year, so you need $380,000 per year more.

You have three options to retire with today’s lifestyle:

Work until age 62.

Invest $33,000 a year. If you do not need the $2,000 per month, you should be able to save this much by contributing $2,000 per month to your RRSP, until your room is maximized, and then reinvesting your tax refund.

Sell your home and invest about $550,000 and rent for $2,000 per month or less. This would allow you to retire at age 59, or at 55 if you reduce your expenses by $500 a month.

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Retire today and commute your pension by transferring it to a locked-in RRSP. This is the only way you can access your pension before age 55. You should make a higher return with your investments than in the pension, based on how you invest. Commuting a pension and investing in equities typically allows retiring two to three years earlier. You can ask for an estimate for commuting and then calculate whether it is enough.

My recommendation is to try saving $2,000 per month. If you can do that for the next year and you are OK with the lifestyle, then you can retire in a year.

Elena: Can I afford to move out West where housing prices are as prohibitive as they are here?

Rempel: If house prices out West are the same as in your current city, it won’t make much difference. Between real estate fees, land transfer tax, moving and settling into your new home, you can expect to lose between $50,000 and $100,000.

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Elena: Should I diversify my investments?

Rempel: Yes. You are 100 per cent in Nasdaq ETFs, which is heavily in technology. Being focused in one sector gives you a lot more volatility, but not necessarily higher long-term returns. Better choices are the broad indexes, such as the S&P 500 or the MSCI World index.

Elena: Should I take my CPP at 60?

Rempel: Yes. You will need the income to retire earlier. The main factors in determining whether to take CPP early are taxes and how you invest. If you are retired by then, then there is no tax issue. Your investments in 100-per-cent equities should make at least eight per cent a year long term, while there is an implied gain of five per cent a year from deferring CPP.

Elena: What can I do to ensure my investments continue to grow in retirement?

Rempel: If you stay invested in equities and earn eight per cent per year on your investments long term, you should have a buffer in the future for unexpected expenses and to pay for services as you age.

* Names have been changed to protect privacy

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