Financial Freedom Target Age 50 – May 2019 Update
Up until a few years ago, I never bothered to post any specific age-related date where I think my wife and I could semi-retire. Well, here that updated post: financial freedom age 50.
It’s not that I didn’t think about that from time to time…semi-retirement…but the opportunity to work on my own terms just seemed so far away in prior years.
Fast forward to this year – after picking away at many financial goals each year, the massive financial milestones that seemed too far in the future to fathom are now becoming much more real:
Objects in the mirror are closer than they appear!
- Big fat money goal #1 – become debt-free.
- Big fat money goal #2 – own a personal portfolio worth $1 M (excluding any workplace pensions that will come our way; ignoring any future government benefits like Canada Pension Plan (CPP) and Old Age Security (OAS)).
Those are our BIG goals. Your mileage might vary!
Where we want to be…
Today’s post will revisit those assumptions and provide an update on where I think we’re trending to. I look forward to your comments.
Projected key assets by the end of 2023 (age 50):
1. Principle residence age 50 = >$700,000
A lot has changed in the last couple of years. My wife and bought a condo, we’re downsizing for simplicity, and we’re moving back into the city of Ottawa this summer. It’s exciting (and stressful), but long-term this move is where we want to be. We knew we’d always move back to town and live in a smaller place. It’s happening now. With our move, we’ll be closer to amenities, current work (and new work opportunities) and much more. Our condo location is walking distance to groceries, restaurants, and entertainment – no more than 30 minutes in any direction.
In our previous post we assumed our house value would increase by about 2% per year going-forward. This condo value, while nice, is not necessary for our retirement plan. Actually, we’re not counting on our house for a retirement plan. A house is a place for us to live. Your investment plan with real estate may vary.
With some mortgage debt remaining on the books, including after our condo move, we’re optimistic we can slay the mortgage dragon within the next 4-5 years. Once the mortgage is done, part-time work will be a strong consideration.
2. Defined benefit pension (mine) age 50 = $450,000 (value?)
I’m very grateful for this pension. I’ve been contributing to this plan for 17 years, with the following formula:
1.6% x your Best Average Earnings x years of pensionable service.
Based on the my terms, if I leave my job on or after age 55 (not likely):
- I can receive a deferred pension from the Plan payable at age 65
OR
- I can receive a reduced immediate pension from the Plan payable the first of any month prior to age 65
If I leave my job before age 55 (very, very likely):
- I can receive a deferred pension from the Plan payable at age 65 (which I will probably take – thoughts on that readers???)
OR
- I can receive a benefit as early as age 55 with a reduction, (reduced by 0.4% per month prior to age 60; reduced by 0.3% per month between ages 60-65. I’m not planning on this option – thoughts readers???)
OR
- I can receive an amount transferred to a locked-in Registered Retirement Savings Plan (RRSP) or a Locked-In Retirement Account (LIRA), as applicable, equal to the commuted value of your deferred pension
FWIW, I already have a small LIRA here.
It is my intention, although who knows, to keep contributing to this pension until part-time work begins.
3. Defined contribution pension (wife) age 50 = $400,000 (maybe?)
My wife is very grateful for her pension as well. She has been contributing to her defined contribution plan for about 17 years, but as a contributory plan, while my benefit is known at the time of retirement her benefits are not.
I’m confident though based on the assets available to invest in (mainly low-cost indexed mutual funds), her portfolio value might be worth this much when she’s 50. This is unclear to us since the stock market and bond market however will be the decider of that.
4. Personal investments, $1 M at age 50?
Long before I started my blog (hard to believe it’s been almost 10 years…), my wife and I recognized with good paying jobs and maintaining our health, a consistent savings rate would be our biggest ticket to financial freedom in our 50s.
Time in the market versus worrying about when to invest in the market has been our friend.
We figure we need to max out our contributions to our TFSAs and RRSPs, every year, for the next five years (until end of 2023) to have a realistic shot of reaching this portfolio goal.
How have we been getting there? How will we get there? Via a simple two-pronged approach:
- We invest in mainly Canadian dividend paying stocks for passive income. Our long-term goal is to earn $30,000 per year from Canadian companies in taxable and tax-free accounts.. This goal while very aggressive is within reach.
- We invest in a couple of low-cost, U.S.-listed Exchange Traded Funds (ETFs) inside our RRSPs. I’ve learned to appreciate the lazy but effective approach that low-cost ETF investing can bring. We use ETFs for mainly international investments.
Projected liabilities by the end of 2023?
A big fat zero. None. Nada. Zilch.
Ultimately our goal is to enter semi-retirement without any debt.
I hope we get there. I’ll keep you posted if we realize our goals.
Any financial freedom goals you have set for yourself?
Have you already realized the fruits of your labour?
What do you make of my plan and approach?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Based on your flexible approach I believe that you will get there. Well done!
I hope so Dale. There might be a career change soon enough 🙂
Aren’t these nice “problems” to have. Great job creating options for yourself. Part time work is so freeing – I love it. It’s all about creating cash flow to cover your cost of living. Can you make arrangements with current employer to go part time and test it out when the time comes? Don’t ask, don’t get. Would you consider going part time earlier if it means you have to carry the debt longer. Best part is you have a plan. Well done!
Thanks Gruff. Probably before age 50, I would like to make some arrangement to go part-time. I figure next year I might start negotiating since it takes eons to make some changes.
Options in life are good – I’m getting there 🙂
“Objects in the mirror are closer than they appear!
Good one! True. Very well done so far, and trending looks great.
I like your goals. I note a change in the order now!
Lloyd covered my most questions/points. It sounds like it but is it correct the 1.6% is a straight calculation and there is no bridge benefit involved? With your wife’s DC plan is 50% available to transfer to RRSP? I assume whatever pension balance remains 50-100% in LIRA it is accessible under LIF rules min/max at age 55+?
Without question in your financial circumstances and plans for PT work I would advocate to receive your pension @65 and not commuted value. That’s surprising to me though that all of your commuted pension value is eligible to go to registered. (no immediate tax implications)
You have retirement severance bonuses too if you left at say age 50?
Correct, no bridge for me. Something to think about, as well as, losing purchasing power to inflation.
As for my wife’s DC, yes, 50% can be “unlocked” to her RRSP I recall. Age 50 confirmed by FSCO but I think it’s really age 55. I would have to double-check that since I don’t think they are right 🙂 The rest of hers would go into a LIRA or then eventually LIF you are correct. I figure her pension should be close to $400k in another few years assuming she works full-time and the stock market returns 7% annualized. That, with our personal portfolio ($1 M goal) and no debt is enough to retire on without my pension at all I suspect.
Back to my pension, I recall from the Income Tax Act there is max. amount I can transfer to LIRA. Has to do with a max. transfer factor of 9 or something under age 50. Meaning, if pension is projected to be $30k x 9 factor (Income Tax Act) = max. transfer value of $270k.
https://www.canada.ca/en/treasury-board-secretariat/services/pension-plan/plan-information/transfer-value.html
There is also an opportunity to transfer value to RRSP as well but that has to do with my pension adjustment reversal and I would need to read up on that.
All that to say, I figure most money could go from any commuted value to registered accounts.
I have not (yet) factored in any severance values (in detail at least….) but it has crossed my mind.
Something for me to think about is if part-time work can be done, then keep money in “the Plan”. If I intend to work occasionally, (i.e., just the blog and freelance) I would be very curious to see what the commuted value is and how much of that I could put into LIRA + RRSP.
I agree with your assets and her DC funds it’s enough to retire on, especially with a little side income and RRSPs to consider.
I know before deciding anything you’ll certainly be checking into commuted values, tax defferal amounts and considering all the factors that are most important to you and your wife.
Agreed. If we can get to our $1 M goal, no debt, I know for a fact we can work part-time (each of us) with her pension and my pension in our futures.
Even if we’re not yet to our $1 M goal, in doing some deeper thinking on this article, I can see more clearly there are other options. Any combination of the following might work:
-Delay paying off mortgage (not ideal…) but work part-time sooner but longer;
-Increase side income (kill debt faster) and retire sooner;
-Look into commuted value (create new LIRA; move other assets to RRSP); start “living off dividends” sooner with any taxable assets provided.
The list goes on. Options are starting to open up. Options when it comes to work are a very good thing.
The biggest thing for us right now is our debt. Once that is gone, I believe based on what we’ve worked for a new world of options will appear. Starting to see that now and that was a big reason to put this post up and my thoughts down on paper.
Good assessment. Yes. Lots of options and writing them down helps. Having options is always a very good thing.
Ideally killing debt opens up a fair bit more flexibility but takes time. You’ll be there.
Being able to negotitate something with work that works for your future would also be very fortunate. G/L with that.
That is my hope I can negotiate something in the coming year – for future 3-4 years. I’m really not that far away. That would be nice.
G/L with that – I’ll need it given my current environment.
Mark can you delete my previous comment (and remove this – can’t edit comments)
Just curious as to how much the move cost? Had several friends move houses (both empty nesters) and they both said they blew through 75 grand like it was nothing. Most of the costs were related to fixing the place up. They both got good deals and had no desire to DIY it. My one friend got a steal of a deal on a condo, Rich kids parents bought it for while the son was in Uni and sold it as is (4 years of student living). so she gutted and renovated the whole place to a very high standard. New kitchen bathroom etc. Looked gorgeous.
Hey Rob – no way I would spend $75k to move and “fix” stuff in the new place. Been there, done that, not worth it again. That said, when I add in the costs of our realtor, land transfer taxes, lawyers fees, etc. I won’t be surprised if the sum of those “moving” costs aren’t close to $40k this spring. Moving is not cheap and I expect to write a post about all of it in the coming months once everything closes and the dust settles.
That’s the thing eh Rob….you get to a point in life whereby you think….what the hell is all this for? I’m really getting there now.
Lets see, retire at 50 with expected life span to 85 to 95 ( I have friends over 95)? That means you can look forward to at least 35 to 45 years of retirement.
You certainly will be ready for retirement financially and I know you’ve mentioned what you expect to do, but that’s still another life time to look forward to in retirement.
We wern’t financially able to retire at 50 and I never wanted to retire that early. In fact retirement or not working was not something I really wanted to do, even when we could.
Guess if one likes the work they do, why quit, if not find something else, which you and your wife will have the opportunity of doing.
Ya, I think that’s the thing…I want to semi-retire and work elsewhere. Not lots of options for me in my current job. Working on that. I won’t “retire” 100% by age 50. I’ve made it clear I will always work but I simply want to work on my own terms. Having reached our $1 M in the bank goal will be ideal for that, and of course, no debt.
I don’t think I ever want to retire in any traditional sense – i.e., no work at all. I look forward to having options cannew 🙂
After a quick read a couple of things come to mind. In your current pension, you mention it is based on average earnings. Is that a total career average or a best six year type of average? IIRC (and that might be a stretch) there are limits for sheltering commuted values? I remember one guy at work had to take some of the commuted pay out as income. He had RRSP room he used to cover the rest. And last, is your survivor benefits on your pension sufficient to look after your wife in the event of your passing?
One thing I’d also consider is that you’ve likely got options to continue at your job as your target date gets closer. If stuff goes for crap in the next 3-4 years you can re-visit the work termination date even if it’s just a year by year move. Each year gets you more pension/RRSP and decreases the need to start using the saved assets. I like having options.
All in all it seems like you’ve got a really good handle on it.
Current pension is based on average contribution earnings as part of this formula: 1.6% x your Best Average Earnings x years of pensionable service. I recall it’s over my career here.
I do recall the commuted value is eligible for the RRSP or LIRA. Here is the exact wording from a 2017 statement:
“Minimum Benefit
If you terminate your employment with CBS and elect to transfer your pension to a RRSP or LIRA, your
benefit will be equal to the value of your pension or a factor multiplied by your contributions accumulated with
interest, whichever is greater.
If you have less than 1 year of pensionable service, the factor is 100%. The factor ranges from 110% after
one year of pensionable service to 200% when you have 10 or more years of pensionable service.”
My factor would be 200%. After 17 years, I don’t see any reason why my DB pension should be less than my wife’s DC pension.
Re: Survivor, worth 66.6%. Actual wording:
“Sur vivor Protection
Under the normal for m of pension payment, your retirement income is payable for your lifetime with a
guaranteed minimum of 120 payments. In the event of your death before you have received 120 monthly
pension payments, the balance of these 120 monthly payments will be paid to your beneficiary.
However, if you have a spouse when you retire, your monthly pension will be automatically reduced so that
your spouse will receive 66 2/3% of your monthly pension after your death, which is the 66 2/3% joint and
survivor for m of pension payment.”
re: work environment: “One thing I’d also consider is that you’ve likely got options to continue at your job as your target date gets closer. If stuff goes for crap in the next 3-4 years you can re-visit the work termination date even if it’s just a year by year move.”
You bet, exactly my line of thinking!
Thanks for your questions!
Mark
Another question is what happens to the deferred pension as far as indexing or potential growth? 15 years of stagnation on deferring may be onerous if there is no consideration for inflation.
Fair question. Deferred pension stays with “the plan” but I won’t get any increases to the base income since I won’t be (nor will my employer be) contributing after any voluntary leave. So, over time, I would lose purchasing power to inflation. Something to think about…
If that is the case, I’d be leaning to taking a commuted value. The potential loss on the inflation side and the 100% survivor benefits of a LIRA/LIRRSP would be a couple of very large pros for me to take a commuted over a 15 year deferral. YMMV.
Good point Lloyd however I’m thinking these considerations would be reflected in both the pension and the commuted value option. ie less money taking commuted value vs leaving funds for 15 years allowing more assumed growth before taking pension.
However, the devil is in the details and getting the specifics will be important.
“leaving funds for 15 years allowing more assumed growth before taking pension.”
My understanding of Mark’s answers is that there is no potential for growth for those fifteen years and no inflation factor.
I don’t see any details in my plan where if I leave it, will it grow on its own without employee or employer contributions. The only wording related to inflation is when I start taking the benefit – not while it is sitting there. So, not ideal since purchasing power eats away at pension sitting for me between ages 50-65, if that’s the plan to leave work full-time then….
Exact wording from my statement:
“Post Retirement Indexing
Effective each January 1st following your retirement, your pension payments will be indexed based on 75%
of the Consumer Price Index Increase less 2%, to a maximum of 5.5%.”
Perhaps I didn’t explain that correctly. What I mean is the amount of the commuted value is likely reduced significantly by taking it 15 years earlier vs leaving it and taking indexed payments starting at 65.
Getting the commuted value to do the comparison vs self managed earlier would answer the question.
Ah yes, I see what you mean…I suspect so. I asked my plan provider a few years ago to provide me with the numbers/commuted value – they would not do it. Odd I thought but then again, I suspect they don’t want employees to get ahead of themselves.
You and Lloyd and others might find this interesting…certainly an alarm for me in recent years:
“Financial Information
According to the last two actuarial valuations, the transfer ratios of the Plan were as follows:
Valuation Date December 31, 2013 December 31, 2016
Transfer Ratio 86.8% 75.0%
The transfer ratio is the ratio of the Plan’s solvency assets as a percentage of its solvency liabilities inclusive
of indexation of pensions, assuming the Plan was terminated on the valuation date. When the transfer ratio
is less than 100%, it means that the Plan’s assets would not have been sufficient to fund the benefits
accumulated to the valuation date had the Plan terminated.”
Meaning, pension liabilities are growing and if the ratio continues to fall, there is merit in seriously thinking about the commuted value and firing everything I can into RRSP + LIRA.
Thoughts? Lots of factors…might need to write a specific post about commuted value of pensions, etc.
Mark
I suspect so too.
Your HR likely doesn’t like to do those detailed calculations way in advance of 65 because for most people it’s just pie in the sky stuff (waste of time). Also importantly interest rates are going to affect that commuted value so it may be a guesstimate years in advance.
I think so, actuarial stuff not worth their time to figure out until folks actually need the data.
“I don’t see any details in my plan where if I leave it, will it grow on its own without employee or employer contributions.
When I left my previous job, I got a pension statement with the pension amount I had earned up to that point and stated that that amount would be indexed to inflation on an annual basis as if I was receiving it. We were in a DB with full indexation. So my pension would have been adjusted for the intervening years. I ended up taking the CV which as I said previously was a mistake. I should have transferred the old pension into my new employers plan (pretty well identical DB plan). Just goes to show that each person has to be very cognizant of *their* pension plan and how it works.
I don’t see anything in my statement to see where my pension would be adjusted for the intervening years – where I as the employee or the employer do not contribute.
I do however see where as soon as I start taking my pension, it is partially indexed.
“Just goes to show that each person has to be very cognizant of *their* pension plan and how it works.” Well said.
Great information Mark. I agree that’s a very serious consideration, along with getting the actual detailed calculations at the appropriate time. I wonder if this will mean changes to future pensions and/or with contributions and indexing for existing employees if there isn’t already a fix in place. My guess is some if they are responsible.
I don’t follow your indexing formula. 75% of CPI LESS 2%?
If CPI is 2% does that mean zero? or 1.5% – 2% of that = 1.497%
Or something else?
We’re living it here with my wife’s govt. pension having large unfunded liability that our Premier is trying to address with the union….. more pensioners than employees, 3 tiers of retirees, no indexing here due to liability. suggested solutions by pension trustees have been mostly ignored for a lot of years =cluster #^*!. At least I got a response from Premier when I wrote to him and it looks like a showdown coming with the union, that seems to be resisting.
I think the “fix” just involves increasing the employee contributions. Currently:
“In accordance with…the required contribution rates for the years 2013, 2014, 2015,2016 and 2017 are 5.90% for Plan members and 7.90% for employees.” I suspect it will go up in 2019 or soon…re: underfunded.
The indexing wording is very confusing. They need a decent writer of this *crap* who knows how to write in plain language.
*Updated* The last bulletin didn’t have the correct language re: each January 1st following retirement, my pension is indexed to 75% of CPI increases less 2%, to a maximum of 5.5% any of CPI increase.
*Updated wording which is more clear*:
“Your pension will be indexed each January 1st to reflect 75% of the annual increase in the Consumer Price Index (CPI) above 2%, to a maximum of 5.5%. If the cost of living stays the same or goes down, your pension amount will not change. The survivor pension for your spouse will be indexed in the same way.”
Still…this comment stands: certainly makes me wonder about the folks administering this plan – do they really know what they are doing and why have they built such a convoluted structure. Seems you are “living the dream” now. re: large unfunded liability that your Premier is trying to address with the union….. Very good news – at least you got a response from your Premier.
I think unions had a great time and place decades ago but so much has changed – I’m not convinced in some cases if they are not creating far more harm than good. Another topic for another day!!
“the amount of the commuted value is likely reduced significantly by taking it 15 years earlier”
I’m not 100% sure I know exactly how CV is calculated. My understanding is that it is based on what pension credits one has upon leaving the job and by using age, actuarial charts and interest rates (and likely some eye of newt and toe of frog) a calculation is performed. I was given all the figures for my three options (leave with previous employer for a deferred pension, CV or transfer to new employer). I never did any calculations myself.
I don’t know for certain either, beyond the things you’ve listed. Frog, newt, ouija board, or other definitely unknown.
It seems logical to me that the commuted value is a lot less at age 50 than at 65. The funds vested up to age 50 by both parties must have greater value with an additional 15 year period. However, wording from Marks statement isn’t entirely clear on this or maybe its just my own ignorance- I can receive an amount transferred to a locked-in Registered Retirement Savings Plan (RRSP) or a Locked-In Retirement Account (LIRA), as applicable, equal to the commuted value of your deferred pension.
Getting the exact numbers from the 3 options listed (retire before age 55) at retirement will be the final test. Ideally getting more clarity in the meantime would probably be helpful planning wise.
That would be good if your plan gets fixed.
We’ll see about my wife’s plan. The 3 fixes that all need to be implemented aren’t hardships to my wife.
She’s in the one of the 3 tiers or classes of retirees/future retirees who shouldn’t have to pay now and ideally will benefit in time with indexing restored. Union seems to be fighting anything negative to anyone but in the meantime the pension is being crushed. Returns are fine. Last year they were positive in fact.
I absolutely have the option of putting any commuted value into LIRA or RRSP, and then anything else is taxable. The pension is affiliated with OPSEU (Ontario Public Service Employees Union), ONA (Ontario Nurses Association) and other unions, so little risk of insolvency but never say never. I don’t!