I recently read a profile in The Globe about a couple wondering if they could retire in another 10 years. I’ll offer my take on their plans and a comparison to our own.
The Bio:
- David, 52, and Ruth, 50.
- David got severed from his job after 25 years a couple of years ago. He’s back working.
- Ruth has a government job, full defined benefit pension plan.
The Math:
- Assets > $2 million:
- bank accounts $22,000; stocks (mainly stock in his former employer) $58,000; combined TFSAs $72,000; combined RRSPs $321,000; estimated value of his pension $750,000; estimated value of her pension $250,000
- home $470,000; cabin $125,000.
- Liabilities = $0.
The Dream:
- David and Ruth are wondering whether they can quit work – David at age 62 and Ruth at 60 – and still maintain their lifestyle.
Can they retire in 10 years?
I would hope so…
With no debt, I think David and Ruth are in outstanding financial shape. This is because they have a generous cash bank account, decent RRSP assets but most importantly, $1 million worth of vested pensions in their 50s. Those pensions are gold – and if they continue to work for another few years – they should be able to cover most if not all of their basic retirement costs like food, property taxes, home maintenance and utilities, and insurance from workplace pension income alone.
Those RRSP assets should easily cover some hobbies. Even if they only manage to contribute $1,000 per year for the next 10 years, that RRSP nest egg will balloon to over half a million dollars, using a 5% rate of return. This would leave them more than $300,000 in the accounts, and at a 40% tax rate; it would allow them to spend at least $10,000 per year for the next couple of decades.
In addition to their workplace pensions, RRSP assets, let’s not forget about Canada Pension Plan and Old Age Security payments. Most retirement couples could expect to earn at least $24,000 per year, combined, from these programs.
In their elderly years, they could always sell their home and cabin if cash flow was ever (although not likely) tight. Unless they spend their brains out, things are looking great for David and Ruth.
How do we stack up?
Not nearly as well, yet. We are very fortunate to have workplace pension plans although neither one is as good as the gold-plated government plan Ruth has. I’m certainly not complaining, we’re VERY fortunate to have any pension plan. Our RRSP nest egg is modest, and growing with each passing month. We believe a good goal for us is to have RRSP assets approaching $500,000 when we retire. In the meantime, we’ll continue to max out our Tax Free Savings Accounts (TFSAs).
Unlike David and Ruth, we have debt, plenty of it, in the form of a mortgage. We are attempting to slay the mortgage dragon in another five years. After our debt is gone, and registered accounts are maxed out, we will focus on our non-registered accounts leading up to retirement.
While no two financial plans should be compared (everyone and every couple is different), I do like to read financial articles about others, use the analysis from financial advisors, to see how we might stack up. We’re certainly not at the same level of assets as David and Ruth, but things are coming along. To be frank, our financial plan is rather boring but I’ve learned when it comes to investing and money management, boring works and tends to work very well over time. No doubt David and Ruth figured that out as well.
What’s your take? Is this couple ready for retirement?
Oh forgot to add he retired at age 60
This is the exact situation my father and mother in law were in when they retired. Being part of the greatest generation he retired with a goverment pension, she earned very little. Yet while thier grossed dropped after retirement thier net actually increased a but due to an expected bonus of a small German pension. This was due to the many tax breaks and subsidy the government gives old folks. Once they add in a RIF they will probably take home more retired than working with the added bonus of lower costs.
If they should be worried about anything it’s the massive 6-7 figure check the kids will be sending to the goverment while settling the estate. Garth did a great post on this a while back. Will post it when I get home
Thanks for sharing Rob. For 60-somethings that have worked a public service job for 30 years (or so), they are set. There are however no guarantees which is why we’re saving on our own.
I’ve always mentioned that having a tax problem in retirement is a good problem to have. Thanks for reading.
Given the numbers and their situation, I’d think they can retire now or in a couple of years already.
They are doing very well with their plan. Good on them. In another 10 years, they are absolutely set with zero debt.
… and still maintain their lifestyle is key. If they live in TO or Van it might be insufficient… It doesn’t really say what they spend and what their lifestyle is, so yes/no would only be a guess. Based on house price and cabin price I will say this is very similar to where my family is and, well I’m a stay at home dad… and our NW just based on my wife working is growing at about a 5-7% annual rate. I am “retired” at 43… Given our financial position, we are planning for my wife to have the option to be out of the rat race by 50, although if she stays until 55, her company pension would be significantly higher, so we will evaluate as the years pass. So in summary we are younger and living their future plan currently on less net-worth but possibly in a similar location setting, and it seems to be working… What they define as their lifestyle is and their current spending are key though in the calculation. All said there are lots of people who manage on lots less, it really depends on lifestyle and health. – Cheers
Phil, from what I know, you and your wife are in great financial shape. Very well done 🙂
In the end it really depends on your lifestyle. You have rich tastes, buy expensive things, you need to work longer to sustain that!
Good to hear from you. Hope the ski season was good?!
Thy sure look to be in a good shape. There are still some unknown elements like the current spending they have and the spending they think to have.
Maybe we need to ask a more ambitious question: can they retire today? According to our plan, having 1,4mio in assets (lets remove house and cabin) might do the trick. If not today, then maybe in 2/3 years?
$1.4M in assets is very good Amber Tree without house or cabin. That’s excellent in fact and likely “enough” money depending how you spend your cash. Continued success.
With that, I would be out the door and into retirement right now.
They appear in good shape now and if planning to work for another 10 years could have a high level retirement.
Although I wouldn’t consider their home as a financial asset in terms of their retirement income planning. The cottage sure as they will likely only have one home after retiring.
The estimate of only $300K value of the RRSP accounts after tax seems conservative. It is doubtful their tax rate will be as high as 40% given their assets, potential pensions and pension income splitting in retirement. If so it’s doubtful their efforts in using their RRSP’s benefited them. Using $500K as an nest egg, 5% ROR, 30% tax rate, depletion by age 95 by the oldest they would have $26,000 (non indexed), $19,000 (if indexed 2%) to spend annually. Hypothetically if their combined work pensions are 75K, govt benefits are 24K, withdrawals are 26K they would have an income of approx $125K or somewhere around 30% tax rate.
We can’t really answer the question about maintaining their same lifestyle since we don’t know their current incomes but it would certainly seem they will have a very comfortable retirement income in store by age 60/62, and especially so if they save at a high rate for the next 10 years.
I usually avoid comparing our financial situation to other people, except in general to simply say we’re lucky and in good shape to meet our own needs and wants.
I’m loath to compare myself to others and vice versa. Every person (couple) has different circumstances, expenses, wants and needs. What may be adequate for some might be considered subsistence living for others. Having said that, this couple appears to have done well. For the most part, long term company pension plans are the holy grail of retirement planning. If you got ’em, you’re usually good to go.
Thanks Lloyd. I don’t do it to see “who is winning” but rather how they have organized their financial affairs to determine they are ready to retire. You’re right, what is adequate for some is inadequate for others. Those gold-plated pensions are almost priceless for retirees.
Great case study. It’s nice to see an example of a couple who has saved and will be prepared for retirement.
They’ve done very well for sure Ben.
Once all the debt like the mortgage are paid, it’s easier to quit work since it’s a big chunk of money that you don’t have to pay. They already paid it so they are in an outstanding position. If they can’t retire in ten year, they have a crazy spending lifestyle.
No kidding eh? They are doing very well and YES they can retire in 10 years IMO!
I don’t know the ins and outs of Canadian taxes, situations… but if I were them I’d be considering calling it quits now assuming they can cash flow their expenses from those assets. $2 mil in assets against $0 liabilities is a great place to be in. Glad to see they’ve done well with saving/investing. A couple issues with their plan as it stands right now. One that $58k in employer stock needs to go if it can. Even if I worked for JNJ, T, KO…there’s no way I’d have that much exposure to my employer. Especially when you add in the exposure via the pension. I’m curious how much the lump sum payments are in relation to the cash flow they can get from the employer pension. If it’s a reasonable amount then I’d look to take that if I were in their situation.
Good point about the stock employer plan JC. Diversification is key. For most of the defined benefit pensions I’ve seen here in Canada, it’s best to stay with the plan than take any commuted value to make your own cash flow. Thanks for checking in and good to hear from you.
I would echo JC PIP. This couple seems ready to retire today.
Of course, I do not know:
1) The age at which those pensions start paying
2) Whether the payments are fixed or inflation adjusted
3) How “safe” are pensions in Canada ( is there something like Pension Benefit Guarantee Corporation like in the US)
Perhaps they ask whether they need to retire because half of their net worth is in those pensions. A quarter is in housing. And “only” a quarter is in securities. I would also dispose of empl stock.