Financial Post Article: 54-year-old’s retirement plan needs finessing in sickness and in health

The Financial Post asked me to review the finances of a 54-year old teacher who lives on her own and has health issues.

She is wondering at what age she will be able to retire, and keep the same lifestyle she has now.

In this article you’ll learn:

• Why not factoring in variable and discretionary expenses is a common mistake people make when calculating their desired retirement lifestyle.
• What options does she have to retire with her current lifestyle?
• Does commuting her pension help her?
• Whether she should stay in Ontario, or if she can afford moving out west.
• Should she diversify her investments?
• At what age should she start her CPP?

CLICK THE LINK BELOW TO READ THE ARTICLE BY MARY TERESA BITTI:

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

Background:

More people are living solo in Canada than ever before. According to the latest Census, 4.4 million people lived alone in 2021, up from 1.7 million in 1981.

Elena*, 54, is among this cohort. While she has managed just fine on her teacher’s salary of $103,000, health issues have forced her to take time off work over the last few years, which has cut into her salary.

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 $4,500. 

Her health, in addition to inflation, the costs of home ownership – in the last six months she had to deal with electrical and plumbing issues – 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. Due to her ongoing health issues 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. 

At this point, she is concerned she doesn’t have enough to retire next year regardless of the location. “Some months, it’s tough to make ends meet. 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 will provide a bridge of $6,000 a year until she can collect Canada Pension Plan payments at age 60. 

If Elena waits to retire until age 65, the pension will pay $65,000 a year before tax. When she does retire, she will have to supplement her health insurance, which she anticipates will cost about $150 a month.

Elena purchased her current home, which is now valued at $700,000, about seven years ago and dipped into her Tax Free Savings Account to fund the down payment. She has $116,000 remaining on the mortgage at 3.99 per cent. Monthly mortgage 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.

Elena has $300,000 in her Registered Retirement Savings Plan (RRSP) but stopped contributing about four years ago to focus on paying down the mortgage and investing in her TFSA, which is now worth $11,000. 

Both her RRSP and TFSA are invested in Nasdaq ETFs. She contributes $100 a month to her TFSA, which also serves as an emergency fund. She has mandatory life insurance through her employer that will pay out two times her salary.

Elena’s monthly expenses total about $3,300 including a car payment of $439.80 at 0 per cent financing. She will have it paid off next year.

When she does retire, Elena plans to take on part time work, perhaps as a tutor, but doesn’t want to have to rely on that to pay her bills. “I worry about bag lady syndrome,” said Elena. “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?”

Additional info for the planners (Expenses):

Mortgage payment: $945.18

Home insurance: $73.42

Utilities: $355 (gas, electricity, water heater, water, sewer)

Property tax: $5,600.00/year

Home repairs:

My home is 6 years old so there haven’t been any repairs or maintenance until recently. In the last 6 months, I had an electrical and plumbing issue that needed to be addressed. The total for both repairs was $360.00. I would like to do some landscaping to beautify my outdoor space. The quotes have been from 3200-5500. That would be a significant expenditure that may not be financially prudent. Also should I move in the next few years it may not be worthwhile investing in landscaping.

HomeOwners Association fee: $100.00 This covers snow removal and grass cutting. Portion of the monthly fee goes into a roof fund.

Furnishings: $220.00 In the last 6 months, I spent 222.00 on incidental items for my home.

Internet/Phone: $150.00

Car payment: $439.80

Car insurance: $73.42

Gas for car: $120.00

Investments: $100 into my TFSA

Groceries (includes non perishables): $320 

The lowest in the last 6 months was $260 and the highest was last month at $410.00. When certain items are on sale, I will stock up which raises the monthly expenditure.

Eating out: $30 per month

Entertainment: $18.00 for Netflix. I will be getting rid of Netflix at the end of the summer.

Clothing: $400.00 in the last 12 months.

Travel: My last trip was just prior to the Covid lockdown. Before Covid I was fortunate enough to travel quite regularly, usually twice per year. Now I wonder if that is even feasible anymore.

Education: $20 on items for my classroom or students e.g. art supplies, resources for students to use. This would be an interesting article to share with the public as to the insane amount of personal money teachers spend on their classrooms and students because we are underfunded.

Pet food: $110 ( special diet formula from vet and regular food from Petsmart)

Charitable donations: $700 for the year

Vet bill: This is the toughest one to measure because it fluctuates. All of my pets were considered difficult to adopt because of health issues and were going to be euthanized. 

I adopted them and they have been wonderful companions and healthy. Having pets most of my life as well as volunteering at the shelter, I know it is best to be proactive and address issues promptly to avoid costly vet bills. My pets are entering their senior years and I am seeing the vet more often. Two of my pets are on medication for life which will be an ongoing expense. Another is on a specialty food due to a health issue. One of the lowest bills in the last 6 months was $90.00. The highest was $1,800. They all ended up at the vet within days of each other.

Financial Plan Summary

How much does Elena need to retire? 

Expenses of $3,300/month exclude car repairs, vet bills, spending money & vacations. 

The expenses given add to $3,400/month + $100/month for TFSA. 

Typical amounts are $1,000/year for car repairs, $500/year minimum in her case for vet bills, say $0 for spending money, plus $2,500/year for travel. This totals $330/month. 

When she retires, she could stop the TFSA savings of $100/month (retirement savings, but also an emergency fund), but she needs $150/month more for health coverage. Her mortgage payment will take 13 years to pay it off, so she will still have the mortgage payment in retirement.

In total, she needs about $3,800/month ($46,000/year) after tax, or $54,000/year before tax. That is, if she is right about her expenses.

However, Elena seems to have a lot more spending. She seems to be making a common mistake of listing fixed expenses, and missing out on the variable & discretionary expenses. 

Her take-home pay should be about $5,500/month (based on $103,000/year less normal tax & 10% of pay going to pension), so she would have $2,000/month left over if her expenses are actually $3,300/month.

Where did the $2,000/month net cash go? 

Her lower income from being off work should only be $300-400/month less. It was probably for discretionary expenses that have become part of her lifestyle, such as vacations (she used to do 2/year), higher vet bills, probably more entertainment or spending money, perhaps some home repairs or furniture in the past.

If she wants her retirement lifestyle to be the same as now (plus $150/month health costs), she needs $89,000/year.

If we ignore her extra spending and assume she can live without that $2,000/month, then she needs about $54,000/year to retire.

She says her pension next year is $56,000/year, so her pension alone could cover it if she is okay with $54,000/year, but she would need $750,000 investments to provide her current lifestyle.

Pension statements are often confusing, whether they are today’s or future dollars, whether or not they include the bridge benefit, they often show total income including CPP & OAS.

My pension calculator estimates Elena’s pension at $43,000/year + $6,000/year bridge benefit = $49,000/year. 

(Based on 30 years in the pension next year, $103,000 income and teachers’ pension formula.) She says it is $56,000/year (not clear whether that includes the $6,000/year bridge benefit).

Even if her pension is $49,000/year with the bridge benefit, her CPP should be close to $11,000/year at age 60 and OAS can start at age 65.

Conclusion: She can retire next year on only her pension if she is okay with $2,000/month lower spending than now (with only the spending she listed). She only needs her RRSP to cover $5,000/year for 5 years until CPP starts.

However, Elena has been spending $2,000/month more. To keep her same lifestyle, she needs $750,000/year investments next year. She is estimated to have about $340,000 by next year. So she needs $380,000/year more.

Options to retire with today’s lifestyle:

1. Work until age 62.

2. Invest $33,000/year. If she does not need the $2,000/month, she should be able to save this much by contributing $2,000/month to RRSP (until her room is maximized) & then reinvesting her tax refund.

3. Sell her home & invest about $550,000 she should clear and rent for $2,000/month or less. She has a lot of equity doing nothing for her retirement. That is the bulk of her net worth. This would allow her to retire at age 59, or at 55 if she reduces her expenses by $500/month.

4. Retire today and commute her pension by transferring it to a locked-in RRSP. This is the only way she can access her pension before age 55. She should make a higher return with her investments than in the pension, based on how she invests. Commuting a pension & investing in equities typically allows retiring 2-3 years earlier. She can ask for an estimate for commuting & then calculate whether it is enough.

Recommend: Try saving $2,000/month. If she can do it for the next year and she is okay with the lifestyle, then she can retire in a year.

Questions for the experts

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

Details above. Depends on whether or not she needs the extra $2,000/month she has been spending. Recommend trying to invest $2,000/month now. If she can, then she can retire next year.

Her teachers’ pension will only start at age 55, unless she commutes her pension and then starts withdrawing from her locked-in RRSP. This is a real option that will probably work for Elena, since she is an equity investor. Equity investors should make 8-10%/year long-term vs. about 4.5%/year in the pension.

She could retire now and withdraw $89,000 from her RRSP over the next year until the pension starts. That can work if she does not need the extra $2,000/month and is happy with $54,000/year retirement income. It’s not recommended to withdraw nearly 1/3 of her retirement savings the first year of retirement, though.

If I can’t then when? What is the optimum year for me to retire?

Details above. Options are:

1.     Age 62 with her current lifestyle and savings.

2.     Next year if she can save $2,000/month for a year.

3.     Between age 55-59 if she sells her home & rents for $2,000/month or less.

4.     Between now and age 59 if she commutes her pension. Get an estimate & consider it.

Can I afford to move out west where housing prices are as prohibitive as they are here?

What can I do to ensure I have financial security in retirement?

If house prices out west are the same as in her current town/city, then it won’t make much difference. She will lose $50-100,000 by moving, between real estate fees, land transfer tax, moving, & settling into her new home (some furniture or renos).

Should I diversify my investments?

Yes. She is 100% in NASDAQ ETFs, which is heavily in technology. There will be huge ups & downs. Being focused in one sector gives her a lot more volatility, but not necessarily higher long-term returns.

Better choices are the broad indexes, such as the US equity index (S&P500) or global index (MSCI World Index). Avoid the Canadian index (TSX60), since it is also not diversified.

Should I take my CPP at 60?

Yes. She will need the income to retire earlier.

The main factors in determining whether to take CPP early are tax & how you invest. If she is retired by then, then there is no tax issue. Her investments in 100% equities should make at least 8%/year long-term, while there is an implied gain of 5%/year from deferring CPP.

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

I don’t have children or extended family so I will have to rely on paying for services to help as I age. When my father required surgery, I was able to bring him home to stay with me and care for him as he recovered. I won’t have that option.

If she needs $89,000/year to retire comfortably, Elena will need her investments + more. 

If she stays invested in equities, she should be able to withdraw enough for her lifestyle, plus they should grow somewhat over time. 

If she withdraws 4%/year (based on the “4% Rule”) and increases it by 3%/year for inflation, but earns 8%/year on her investments long-term, she should have a buffer in the future for unexpected expenses, or a retirement/nursing home.

Ed