Even with a Net Worth of $4-million, Retirement at 50 is a Struggle

Andrew Allentuck
 
When Alex loses his job in his mid-fifties, he and his wife realize they can't live a six-figure lifestyle on a five-figure income.
 
In British Columbia, a couple we’ll call Alex, 54, and Caitlin, 50, have a comfortable life in a beautiful house worth almost $2-million, financial assets of another $2-million and — when they turn 65 — combined company pensions of more than $15,000 a year.
 
The Financial Post’s Melissa Leong explains why RRSPs are much like your beloved social media and as deserving of your attention.
 
Things were humming along just fine with Alex earning $285,000 a year in a manufacturing job where he earned a vice-president income with travel perks and bonuses to boot. When that job suddenly ended, it was time to regroup.  A combination of RRSP payouts based on an annuity model which returns capital along with income – massively increasing payouts over a defined time period, and spending cuts will keep most of the couple’s way of life.
 
Alex and Caitlin are in a very tough spot. They have developed a style of living that they cannot support on an income appreciably less than the $285,000 he used to earn.  Months of job hunting have not paid off with anything like a job with a comparable income. Without jobs, they need to cut expenses from lavish living to what they can support on an income that will be less than a third of that, and find a new sustainable way of life on that.
 
Alex is taking his situation philosophically. With no good leads after nearly a year of job hunting, he sees moving his life to a new plane. “Having no job is a new opportunity to do something different with my life, but the problem is that I have reached out and not much has turned up,” Alex says. “Our parents are gone. We have no children. We are on our own.”
 
They realize that the prospect of duplicating his former salary are “pretty dim” and figure they just need to get through the years until they reach 65 and start getting employer and government pension payments.
 
The couple has $900,000 in RRSPs, $60,000 in TFSAs, $150,000 in cash and taxable investments of $970,000 plus a $1.9-million house and undeveloped land worth an estimated $365,000.
 
It is a healthy net worth — almost $4-million — but they will need to rely on their RRSPs and other assets to sustain them for a decade or more.
 
Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., favours options that will allow much of the couple’s registered savings to remain untouched, since their withdrawals with income splitting won’t likely be sufficient to claw back their OAS pension.
 
Unless I can find a six-figure job to replace the one I lost, we’d have to adjust to this new reality
He says they would be better off getting rid of some assets, first their speculative land and then their large house. TFSAs, which can be cashed out tax free, are next.
 
The way this retirement will work, says Mr. Moran, is by aggressive cost cutting until they reach pension age in their mid-60s. Then, in their 70s, engineering their RRSPs to use an annuity-type payout to generate 80% more income than what a simple payout of income would offer.
 
From present monthly expenditures of $4,274 on wine, restaurants, clothing and grooming, travel and their golf club, they could eliminate $3,540. They would still have a $200 per month wine allowance, $320 for restaurants, $350 for clothing and grooming, and $670 for travel. This is still more than most people spend on these pleasures. Their golf club, $1,000 a month, would have to go, but they could still pay green fees and play when they like or cut back on a few other things that would enable them to have a part time membership in a golf club or one less elite than the one in which they currently play.  Sacrifices will have to be made, the planner insists. It’s either that or just run out of money in their 70s. After all, they cannot maintain a six-figure lifestyle on a five-figure income. “Unless I can find a six-figure job to replace the one I lost, we’d have to adjust to this new reality,” Alex says.
 
They will also have to downsize their $1.9-million house, maybe to something still very nice with half the price, sell a $365,000 parcel of undeveloped land they do not use and are just holding for potential appreciation, and pay off a $147,000 line of credit. That would free up a lot of capital to invest, release income from paying the line of credit, and allow them to take a bigger income from it.
 
Selling assets and boosting investment returns would still leave close to $6,000 a month before tax to sustain them until the time that both Alex and Caitlin can draw full pensions. When Alex is 71 and Caitlin is 67, they would have $15,465 in work pensions, an annual total of $20,665 of CPP benefits and $13,236 in two Old Age Security benefits – a total of $49,366 in 2014 dollars.  They can then add investment income from the RRSPs that they have sheltered until age 71, when, by regulations, they must begin to pay out their assets as lump sum withdrawals, RRIF income or annuity payments.  The annuity from $300,000 of RRSPs will pay $16,292 a year to Caitlin’s age 90, 81% more than straight 3% interest, $9,000 a year.
 
This annuity model will push their annual income to $65,658. After 10% average tax, they would have $4,925 to spend a month. They would be solvent, have their house as an asset they could sell if necessary, and have survived an unexpected career termination.
 
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