Situation Single woman looking to retire at 47
Strategy Work part-time until 50 to preserve financial assets
Solution Modest income until government pensions start paying out
In Alberta, a woman we'll call Elizabeth, 47, has been operating her own business long enough. She works one day a week and brings in $2,423 a month for the effort.
But all this leisure time has convinced her that she wants more. She wants a life of less stress and more travel and leisure time — in short, full retirement at 47.
"If necessary, I can continue to work one or two days a week," she says. "But I'd rather not."
Elizabeth has been running her own business as a hearing aid specialist. She is single, never having been married, and has no trouble filling her spare time — growing her own vegetables, running, doing home repairs, writing poetry and volunteering. Plus she spends lots of quality time with her English bulldog, Maggie.
She has accumulated a net worth of $1-million from as she says "saving madly" in her early years. Her bottom line question: Is that enough for what might be four or five decades of retirement?
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Elizabeth to test her wish to move from working a day or two a week to full retirement.
She has been frugal but a few more years of work will make all the difference to her finances, says Mr. Moran.
"The risk of error in a normal 25-year retirement projection is much smaller than a 40-year plan," he says.
"Moreover, the risk of quitting a career when many colleagues are just hitting their peak earning years, which is common in the forties and fifties, raises a serious question — what happens if, in a few years or even a decade, Elizabeth changes her mind and wants to go back to work."
Elizabeth bought her house 11 years ago for $138,000. Today, it has an estimated value of $369,000. She has approximately $238,138 in taxable financial assets and $365,805 in her RRSP with another $18,802 in her TFSA. In all, her assets total just more than $1-million with no debts.
Her more than $600,000 in investable assets are in mutual funds with fees that average 2.5% a year and a few that soar into the stratosphere at 3%. These days such fees, if Elizabeth could keep them for herself, would be considered an acceptable return. In fact, she pays management fees that amount to $15,570 a year.
She has outgrown the mutual fund sales model of investing and could either devote her time to managing her own assets or hire a professional portfolio manager for perhaps 1% to 1.25% per year. Even that would save her as much as $9,000 a year.
She could make the switch fairly painlessly, for her funds were bought with front loads and without penalties for departure within the typical six-year period.
For now, Elizabeth is able to cover her modest expenses of about $2,000 per month net of savings. But if she makes no further contribution to her investments and if her financial assets produce a 3% annual return after inflation adjustments, her portfolio will be able to support payouts of $27,700 each year before tax or $23,550 after tax for 38 years to her age 85, Mr. Moran estimates.
That is not enough to support her present expenses, at least until the age of 60 when she can begin to receive Canada Pension Plan benefits.
Elizabeth understands that she might have to work at least to age 50 merely to cover her living expenses. She will maintain her professional license and society memberships as insurance if she wants — or needs — to return to a heavier work schedule.
Adding to retirement income
That extra three years would boost Elizabeth's annual investment income to $30,600 to age 85, at which time her capital other than her house would be exhausted. At that point, she would live on CPP and OAS plus income from downsizing or the sale of her house.
At age 65, Elizabeth could draw $5,225 from the Canada Pension Plan based on expected work and then receive $6,481 per year from Old Age Security at age 67. Her total income after age 65 would therefore be $47,706 per year, all indexed and before tax. At a 15% average tax rate, she would have $3,380 to spend per month.
Because of her modest lifestyle, she can anticipate saving $6,600 a year from OAS and CPP to add to her nest egg and extend her capital by seven more years to age 92.
She would have a sufficient income for her present way of life, but it might not cover such things as a costly long-term care policy, a vacation home or foreign travel. For now, Elizabeth isn't interested in such things, but that might change if she retires fully and wonders what to do with herself. And the necessities of life change. Forty years ago, there were no cellphones or notebook computers, gasoline for a car cost pocket change, and you could heat your house for $150 per month in a hard winter. Forty years from now, 2012 may seem a time of quaint penny pinching budgets.
"It would be a good thing for Elizabeth to work another three years," concludes Mr. Moran. "That would boost her income and more importantly delay the time she has to begin drawing down her savings."
(c) 2012 The Financial Post, Used by Permission