Move has eliminated enough stress that Melissa now wants to work longer than planned, boosting retirement savings
A couple we’ll call Melissa, 45, and Larry, 63, live in Ontario. Melissa is an account manager for a financial institution. Her pre-tax salary of $14,000 leaves her with about $8,500 per month to spend and she banks annual year-end bonuses of $90,000 composed of cash and company stock. Larry retired a few years ago and, even though she is much younger, Melissa is hoping to join him soon. The question is how soon.
Melissa had been aiming to retire at 47 — she was tired of the two-hour daily commute to her job. COVID-19, however, changed her plans. Now she works at home. Her employer has told her she can continue to work from home full time as long as she likes. She is considering five more years of work to age 50. With no commuting, she has less stress and saves money on gas, parking and lunch. On top of additional savings, working for those extra three years will also mean fewer years of retirement ahead to run down savings.
When to retire
There is no doubt that retiring at 50 in five years’ time is the more financially sound option for Melissa. The couple has approximately $1.24 million in financial assets and their present home mortgage, which has $130,000 outstanding, will be paid in five years if they continue their $2,200 monthly payments.
Even with a delayed retirement, however, the couple will need to stretch their financial assets over a long horizon — 45 years to age 95 for Melissa and perhaps 30 for Larry. Melissa even at 50 will be a decade from early application for her Canada Pension Plan benefits and fifteen years from the first chance to tap Old Age Security. Larry has yet to take CPP.
Family Finance asked Eliott Einarson, a financial planner in the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Melissa and Larry.
The couple, Einarson notes, are “frugal millionaires,” something that bodes well for their retirement plans.
“They go to Florida each year for a couple of weeks and camp in their old van,” he adds, approvingly.
At present, the couple has $8,500 to spend each month. A decent portion of that goes to savings: They allocate $500 to their TFSAs, $800 to RRSPs and $1,000 to cash savings. Melissa’s company provides no pension but she receives a bonus, $90,000 in company stock and cash in one recent year, that goes into her non-registered investments.
The couple’s expectation is that they will need $6,000 per month when Melissa is retired. They can draw that income from RRSPs, non-registered investments and their TFSAs. But when to retire — in two years or five — is the issue.
Their present RRSPs with a value of $415,000 and growing at $9,600 per year will increase to $460,350 in two years assuming a return of three per cent per year after three per cent inflation. That sum would then generate $18,636 per year for the 43 years from retirement at 47 to her age 90 with all income and capital paid out at that time. Alternatively, if her RRSP grows for five years with $9,600 annual additions, it would increase to $533,600 and then generate $22,410 per year to her age 90.
The non-registered account with a present value of $680,000 with $90,000 annual additions would grow to $909,600 in two years and then support annual payouts of $36,825 to exhaustion of all income and capital. If it grows with $90,000 annual additions for five years, it would rise to $1,280,460 and then support payouts of $53,100 for the following 40 years.
Melissa’s TFSA with a present balance of $58,000 and $6,000 annual contributions would grow to $74,077 with the same assumptions and then support payouts of $3,000 per year. If maintained for five years with $6,000 annual additions, the account would grow to $100,050 and then support tax-free cash flow of $4,200 per year.
The three accounts would generate additional savings from three more years of work and compounding of $470,083 and additional pre-tax income of $21,249 per year.
In two years, when he is 65, Larry can have $2,822 CPP and $7,362 OAS. If he defers the benefits to 68, he would have CPP benefits of $3,533 per year and OAS benefits of $8,952 per year.
When to quit
Adding up income if Melissa retires at age 47, they would have total taxable income from registered accounts and Larry’s OAS and CPP plus non-registered income and TFSA cash flow of $68,645. Split and taxed at an estimated average rate of 13 per cent (excluding TFSA cash flow), they would have about $5,000 to spend per month. It would be tight, for they would still have three years of mortgage payments at $2,200 per month.
If Melissa works to age 50, they would have three additional years of income, bonuses and savings. Their annual income would rise to $89,894. After 15 per cent average tax they would have $77,040 per year or $6,420 per month. Their mortgage would be paid and they would have more than their present after-tax income with more room for discretionary spending.
Assuming she retires in five years at 50, then at 65, Melissa could add $7,362 from OAS and an estimated $14,000 from CPP. That would push retirement income to $111,256. After splits of eligible income and 16 per cent average tax they would have $7,845 per month to spend.
Their additional $83,000 in cash savings in their non-registered account could be spent on a posh RV at retirement, travel, home repairs and gifts. Any surplus could go to their adult children or to good causes.
There are several risks ahead, of course. Given their 18-year difference in ages, it is possible that Larry will predecease Melissa. She is the larger contributor to household income, but if living without Larry, she would lose his OAS and CPP, combined value $10,184 per year, and the ability to split eligible income. Remaining income produced by her assets, about $80,000 per year, would face an average tax rate with no splitting of 21 per cent.
Working the extra three years to her age 50 would turn what would have been a bare-bones retirement at 47 into one with surplus income and a bigger cushion to compensate for the loss of income if Larry dies.
Retirement stars: Four **** out of five