Financial Post Article: Middle-aged woman who just lost her high-income job wonders when it’s ‘safe’ to retire

The Financial Post asked me to review the finances of a 47-year-old woman who lost her high-income job, and wants to know when it’s “safe” to retire. 

A successful professional, she was well on her way to an early retirement at age 52 or 53, but now she’s wondering if that will still be possible, and how much she’ll have to scale back her original plans.

In the article you’ll learn:

• What her retirement options are.
• How much she’ll need to keep up the standard of living she currently has in retirement, which includes golf, skiing, and annual trips to tropical climates.
• When she can have a “safe” retirement.
• What the CPP formula and drop-out provisions give her.
• Will downsizing her home help?

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

Middle-aged woman who just lost her high-income job wonders when it’s ‘safe’ to retire

Financial Planning Notes & Ed’s Insights

Is her initial plan to retire at 52 or 53 still possible? What would that look like?

Jennifer can still retire at age 52, if she wants. She will need $144,000/year before tax to provide the $7,000/month after-tax lifestyle she wants and make her existing debt payments. She will need $3.1 million to provide this for her life, which is what she is projected to have without saving any more, as long as she does not withdraw from her investments for the next 5 years. It is better to have some room for error and wait a year or 2 more, but she is still on track to retire at age 52.

If she gets a job with a much lower income that makes $150,000/year or more (the lowest she expects), she should be able to live her desired lifestyle for the next 5 years. She does not need to save more, just let her investments grow for at least 5 years.

In all cases, what are the implications for her Canada Pension Plan payments? 

She believes she will receive the maximum amount but she doesn’t know the impact of having taken time out of the workforce when her first child was born. She was 18, the first year to start contributing to CPP, and didn’t enter the workforce until she was 22. At this point, and given the longevity in her family (her grandmother is about to turn 100) Jennifer is thinking about delaying CPP and wants to know what impact that will have on her retirement.

Jennifer should not worry about not contributing to CPP before age 22, since CPP has  a 7-year “Child Rearing Dropout”. They should consider her having contributed the maximum until now. CPP also has a general dropout of 17%. If she starts CPP early at age 60, her contributory period will be 38 years (from age 22 to 60), so the 17% dropout is 6.5 years after she stops working.

Therefore, if she retires at age 52 and retires at age 60, CPP will consider her to have contributed the maximum to age 58.5, which means she should almost get the maximum CPP. However, if she delays CPP to age 65 or 70 without contributing more, it will add almost nothing to her CPP payout.

Her best plan should be to start CPP early at age 60. If she works longer, than she should start CPP 7 years after she stops working to get the maximum CPP.

The CPP formula provides an implied return of 10.4%/year by delaying from age 60 to 65, and 6.8%/year by delaying from age 65 to 70. As an equity investor, it should be worthwhile for her to delay to age 65, but not age 70. However, it’s not worthwhile for her to delay more than 7 years after she retires.

While she’s happy to work to age 60 or 65 so long as she finds meaningful employment, Jennifer would like to know what the “safe” age for her to retire is.

A “safe” retirement for Jennifer is at age 53 or 54. She is essentially on track to retire at age 52, but it’s better to have a margin of safety by being 10-20% ahead. She is projected to be 5% ahead at age 53 and 12% at age 54.

She is also wondering if she should downsize her primary residence. There is a potential of purchasing a less expensive home at a cost of about $550,000, but this may still leave her with a mortgage given her current debt. 

From experience, most Canadians prefer to stay in their home after they retire, even if it is larger than necessary. Usually, they are comfortable there and they would not clear a lot of money by downsizing, even to a much smaller home in the same city.

For Jennifer, it is not necessary for her to downsize her home. If she sells her $750,000 home to downsize to a $550,000 home, after real estate and legal fees, she will clear only about $150,000. That is not a lot if the home is a lot smaller. This can reduce her mortgage to just under $100,000, but she will still have her mortgage payment for almost 10 years.

Downsizing helps her a bit and should allow her a “safe” retirement one year earlier with a 12% margin of safely at age 53 (instead of age 54).

Ed