Ill Health Forces Early Retirement Plan


Andrew Allentuck

In Calgary, a couple we'll call Curtis, 54, and Helena, 51, are raising their three children on two incomes that provide $11,100 per month after tax. Both government employees, their problem is getting to retirement age, for Helena is on a medical leave of absence for neurological issues and Curtis has serious cardiovascular issues of his own. Challenged by illness and guided by their own parents' bunker mentality of saving for rainy days, they have built up a relative fortune almost by accident.

Curtis and Helena have pushed the right buttons in their careers. They have accumulated hefty employment pensions plus $1.35-million in financial assets including substantial RESPs and various other investments for their three children, two of whom are in university. Their youngest child, 14, will begin university in three years. At that time, Curtis, who will be 57 and Helena, who will be 54, would like to retire.

"We saw our own parents scrimp and save for their retirement," Helena says. "They ended up having a lot more money than they required to live comfortably and now regret not enjoying life more at a younger age. We have a lot, but then it's really just an abstraction. The market could crash. Our savings are insurance."

The Issues

Family Finance asked financial planner Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Curtis and Helena. His view is sanguine.

"They can afford to retire when they wish," he says. "But there are costs. Early retirement will cut down the number of years and amounts they contribute to the Canada Pension Plan. Moreover, application for CPP benefits at age 60 would reduce amounts paid by 36% of the age 65 benefit. Still, early retirement is an important option because of their health issues."

Curtis and Helena won't have financial problems when they retire, but their case presents the problem of balancing the enjoyment of life today with what the future holds. The retirement they want will be filled with travel β€” as much as $18,000 per year will buy.

The Five-Year Plan

Year 1 (2011) The couple's health may limit how long they will be able to spend the money they have. For Helena, a return to work, should she feel well enough, would cost her a substantial disability pension, but her income would more than compensate. If she is laid off soon after returning to work, she would be eligible for a full year of severance, $117,000, plus three months of holiday pay, $29,250, both of which would be fully taxable.

Year 2 (2012) On the assumption that Helena has returned to work, she can retire, receiving 1ΒΌ years of pay in lieu of unused vacation pay and severance. The alternative is to roll some of the severance pay into an RRSP. Her RRSP room is used up. The only other room she has is $2,000 per year up to 1996, which is $20,000. If Helena retires in May, her severance and holiday pay would be spread over two years, lowering tax as much as possible.

Year 3 (2013) Curtis can retire, taking his pension but forgoing any CPP payments until at least age 60. The couple will have to draw on savings for at least one year to supplement pensions until Helena's pension starts at age 55.

Year 4 (2014) The youngest child will begin post-secondary education at age 18. In a financial sense, the parents are now independent of their children. They can begin the life of extensive travel they would like.

Year 5 (2015) It is time for estate planning. Curtis and Helena's parents, with their own health issues, may not be able to use all of the financial assets they have built up. If Curtis and Helena inherit money, they may wish to discuss testamentary trust arrangements with their lawyer. A testamentary trust would file its own tax return and would therefore be an income splitting device able to reduce total taxes for them and for their children.

The Longer Term

Canada Pension Plan early retirement penalties have risen to 0.6% per month of the age 65 CPP benefit for each month before age 65 that retirement begins. The earliest start date for retirement benefits is 60. Therefore both Curtis and Helena would be hit with substantial penalties. They should wait to age 65 to start benefits unless their health worsens and their life expectancies become appreciably shorter. If Curtis were to qualify for 75% of maximum CPP benefits of $11,520 per year at age 65 or $8,640, he would get just $5,530 at age 60. Helena is in the uncommon position of being regarded by her employer as working while receiving disability payments. By that assumption, if she remains on disability, she would receive maximum CPP benefits at 65, $11,520 per year. There are several combinations of retirement dates, but in the interest of simplicity, we'll assume that both wait to age 65 to receive their maximum respective employment and CPP pensions.

Helena's employment pension income is dependent on when and if she has returned to work. For purposes of planning, we'll assume that she does not return to work and receives $28,956 per year with 60% indexation to Alberta's consumer price index. Curtis, who we'll assume retired at age 57, can count on receiving a pension of $21,288 per year, Mr. Moran says. These are early retirement benefits with the understanding that their savings will carry them from their retirement dates to age 65, when their public pensions β€” CPP and OAS β€” begin, to Helena's age 90.

With those assumptions, from Curtis' age 57 to Helena's age 65, the couple will have $21,288 of Curtis' employment pension, $28,956 of Helena's job pension, and, if their investments produce a return of 3% above the rate of inflation, $15,941 from their RRSPs and $43,120 from their non-registered investments for a total of $109,305. That total income will be more than sufficient after 25% income tax, $27,326, to cover future expenses of $49,200 per year, which is current disbursements less RESP, TFSA, RRSP and non-registered savings.

After Helena turns 65, they will be able to add $8,640 each of estimated Canada Pension Plan benefits and $6,322 each from Old Age Security, for a total of $139,230 per year before tax or $97,460 after 30% tax. Split in two, each partner will have $69,615, a little above the OAS clawback start point of $67,688 per person.

"The couple's problem is not a lack of money, but avoiding regret for not using it wisely," Mr. Moran says. "They have been frugal spenders and careful investors. Now it is time to put their financial security to use for themselves, their children or for good causes. Their case raises the issue of what work is all about on the fundamental, human level."

(c) 2012 The Financial Post, Used by Permission