In a small Ontario city, a couple we'll call Sam and Martha are straddling work and retirement. Sam, 54, is a retired employee of a major automobile manufacturer. Martha, 52, works in health care. They have three grown children. Their net monthly income of $6,431 supports modest expenses and substantial savings. They have no debts.
They are concerned that their retirement plans could be wrecked if Sam's pension plan, which is far from being fully funded by his employer, were to be unable to maintain his promised pension. Currently, the plan pays him $38,712 a year until age 65 when, after his Canada Pension Plan benefits begin, it drops to $21,948 a year. Martha expects a pension of $9,600 a year at age 65 with possible, but not guaranteed, indexing. After Martha retires, they would like to have after-tax income of $56,000 a year. That, they figure will cover their current expenses of $36,000 a year, which excludes their savings, plus $20,000 a year for travel.
"My husband and I have saved carefully for many years. We think we are in good financial shape, but I am a skeptic at heart," Martha says. "I am reluctant to retire soon because I want to ensure that we have enough for travel and that I would have enough if my husband passed away to continue travelling and maintaining our lifestyle."
What our expert says:
Facelift asked Derek Moran, a registered financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C., to test the feasibility of Sam and Martha's plans.
"There is a real problem here and it has nothing to do with frugalness or saving or rates of return on capital," Mr. Moran says. "The problem is that Sam's pension is only funded to a level of 76 per cent of its obligations. The shortfall may not affect the couple at all, but it is a critical issue. Sam's pension is the backbone of their retirement income."
Sam has earned 82.6 per cent of the current maximum Canada Pension Plan benefit of $10,615 a year or $8,768. Martha, who left her career to raise their children, will have earned 58.3 per cent of the maximum benefit if she works to age 55, 83 per cent if she works to age 60 and 95 per cent if she works to age 65. At age 65, assuming that she quits work at age 55, she will receive $6,189 in 2008 dollars, Mr. Moran says.
Martha and Sam can each begin to receive CPP benefits at age 60, but that's not advisable, Mr. Moran cautions, because of the penalties. Leaving work at age 60 would cost Martha and Sam 30 per cent of each CPP pension, so they should defer taking benefits until age 65, he says.
At age 65, each will qualify for Old Age Security benefits of $6,028 a year.
The couple has $237,000 in registered retirement savings plans, 73 per cent of which are in Martha's name. This imbalance is good, for it puts most of their investment income from registered savings into Martha's hands. She has a smaller pension income and is in a lower tax bracket.
Sam and Martha are conservative to a fault in their investment choices. Their RRSPs are a blend of Canada Savings Bonds and guaranteed investment certificates and a few mutual funds. They should rebalance this portfolio so they have a third in real estate (excluding their home), a third in fixed income and a third in stocks. They should consider cashing in their low-yield CSBs and GICs and use the proceeds to buy units in mortgage investment corporations that have consistently paid as much as 10 per cent a year. In Canada, these companies lend conservatively and avoid the problems that have plagued the U.S. mortgage industry, Mr. Moran says. They are equity lenders and well secured, he adds. For equity and fixed income, which should be two-thirds of their portfolio, the couple can use balanced funds, he says.
Sam and Martha stopped contributing to their RRSPs to pay for a home renovation, which was an error, Mr. Moran says. Martha has $3,300 of RRSP room, which should be used before the end of February even if she has borrow funds. Sam has no RRSP room.
Income from their RRSPs will supplement their pensions. Assuming that Martha adds $3,300 a year to her RRSP, that their investment generates a 6-per-cent return and that inflation runs at 3 per cent a year, they can look forward to an annual retirement income of $62,900 before tax. Martha is concerned about her income after Sam passes away. Currently, the couple has three sources of life insurance: $74,000 from Sam's former employer, a whole life policy on Sam's life with a cash surrender value of $24,000, and a $50,000 term life policy that costs $33 a month. Mr. Moran says Sam and Martha should use the $24,000 tied up in the whole life policy plus the $33 a month to buy a 20-year term policy with a death benefit of $250,000.
If Sam's pension is maintained, if neither Martha nor Sam outlive the other by many years, then their retirement plans should work. However, the couple might have to trim their planned $20,000 annual travel budget should other expenses increase, he warns.
The couple have to weigh the value of retiring early versus retiring with security, Mr. Moran says. "If Martha works to age 60 or 65, they will make their retirements more secure."
"Rather than having my wife work to age 65, I would go back to work," Sam says. "We would both work to age 60 in order to add to retirement savings and to the CPP benefits that we will eventually receive. If there has to be more work, we will share it."
Sam, 54, and Martha, 52, live in Ontario.
They want to retire at age 55, but their pension base is modest and rests in parts on an under-funded company plan.
Work to age 60 to boost CPP and other pension components.
More financial security in retirement.
NET MONTHLY INCOME
RRSPs $237,000, house $280,000, cars $26,000. Total: $543,000.
Utilities $325, property taxes $245, food $650, entertainment $620, clothing $100, gasoline $300, car repairs $60, auto insurance $162, home insurance $65, cable $56, phone & Internet $85, life insurance $33, miscellaneous $300, saving for new car $300, retirement saving $3,130. Total: $6,431.
© The Globe and Mail, used by permission.