Everything Changed When Kevin’s Wife Died. He Now Wants To Retire Next Year, At 54, But Can He Afford To?

Kevin* has reprioritized his life choices since his wife died recently. “We spent a lot of time delaying everything we wanted to do. All of those plans have disappeared.”

He is now ready to make new plans. Specifically, he would like to retire next year, when he turns 54, to spend as much time as he can with his two children, who are both in university. “I haven’t decided what retirement will look like. I’ve never stopped working. I may decide to take a part-time position, but I don’t want to have to work full time anymore.”

Kevin earns $135,000 a year before tax. His annual expenses are between $40,000 and $45,000. His target annual income in retirement is approximately $80,000 before tax. If he does choose to work part time, he expects he will be able to earn about $20,000 a year before tax.

His employer hybrid pension plan will pay a minimum of about $30,000 a year at 65. He can take it as early as age 55 but it would be reduced to less than half per year. When his wife died, Kevin claimed the one-time death benefit of $2,500. He also receives a Canada Pension Plan (CPP) survivor benefit of $8,000 a year.

He is trying to decide when to take his employer pension, CPP and Old Age Security (OAS) to ensure he has the cash flow he needs, while maximizing tax efficiency and government benefits.

Kevin lives in British Columbia, is debt-free and owns a home valued at $1.5 million. He has no immediate plans to downsize. Ideally, he would like to leave the home to his children as their inheritance.

His investment portfolio is valued at $900,000 and includes $700,000 in a registered retirement savings plan (RRSP) invested in bank-managed growth oriented mutual funds, $150,000 in a tax-free savings account (TFSA) invested in a low-fee managed portfolio ($130,000) and equities ($20,000). He also has an unregistered account with $20,000 invested in individual stocks and $30,000 in cash equivalents.

He plans to start working with a retirement planner, but would like advice on how to go about choosing a credible adviser: “What questions should I ask? Should I hire a fee-only adviser? Or should I use the financial planning services offered by my bank?”

While he wants to enjoy life now, Kevin is concerned about ensuring his savings will last throughout his lifetime. He’d like his retirement income plan to extend to age 95 and end up having spent it all down.

“How much can my portfolio safely generate each year? Is it reasonable to attempt to retire comfortably but responsibly next year? What is the best scenario in terms of when to start drawing from RRSPs and take my employer pension, CPP and OAS, keeping in mind the ceiling for combined CPP (survivor and personal)?” he asked.

He added, “Are there tax strategies I can take advantage of? I’ve heard of delaying property tax as a strategy in B.C. Will I be able to leave the family home to my children?”

What the expert says

“To fully retire next year and achieve his target income of $80,000 a year before tax, Kevin would need about $1.4 million in investments. He is projected to have about $960,000 — about 31 per cent or about $440,000 short of his goal,” said Ed Rempel, a fee-for-service financial planner, tax accountant and blogger.

“Kevin’s investments are about 67 per cent equity and 33 per cent fixed income. His expected return over time is 6.76 per cent per year. If he invested all in equities, he would only be $270,000 or 22 per cent short of his goal — a gap he could largely wipe out by working part time earning $20,000 a year until age 65.”

If he is set on leaving the workforce completely next year and having his portfolio generate $80,000 before tax, Rempel suggested Kevin could downsize and invest $450,000 from the sale of his home. Or, he could stay where he is and cut his target annual income in retirement to $64,000.

If the target income of $80,000 a year before tax is non-negotiable, Rempel suggested Kevin could continue working full time to age 59, or to age 58 and then part time to age 65 to generate the recommended $1.4 million in investments.

“Having a full financial plan and interactively looking at all his options should help him decide which of these possible future lives he wants to live,” said Rempel.

“His hybrid employer pension plan likely earns a lower return than his investments, so it is best for him to start his pension when he retires, even if it is less than half of what it would be at age 65. That would allow his investments to continue to grow for 11 more years.”

Rempel said it is probably best for Kevin to start OAS and CPP at 65. “Deferring CPP from age 60 to 65 gives him an implied return of 10.4 per cent a year on investments he would have to withdraw to provide the same income. Deferring to age 70 gives him an implied return of 6.8 per cent a year — roughly the same as what his portfolio generates. He would likely still get about 75 per cent of the maximum CPP if he retires next year and should only lose a small amount of his CPP survivor benefit when he starts his own CPP at age 65.”

Rempel said Kevin could optimize his tax rate if he withdraws less from his RRSPs and more from his non-registered investments to target taxable income after retirement of $58,000 a year. This would result in a marginal tax rate of 22 per cent or less. “Ideally, he should continue to maximize his TFSA every year and completely deplete his non-registered investments before touching the TFSA, since it is all tax-free.”

Rempel did not recommend delaying property tax as the interest rate has been increased to prime plus two per cent. With prime at 4.45 per cent, he would be charged 6.45 per cent interest plus administration fees, and a restrictive lien would be put on the property.

A less expensive, more flexible option, at prime plus 0.5 per cent, is to put a secured line on his home, which can be used in any amount and for any reason, he said.

“Kevin needs a real financial plan to make the right decisions now, including whether it makes sense or is possible to leave the family home to his children. Usually, only a fee-for-service financial planner or fee-only financial planner does this type of interactive financial plan. A free financial plan is usually worth what you paid for it.”

*Names have been changed to protect privacy

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