Job loss forces rethink on retirement

Three years ago, Barb and Andy thought they had all their retirement plans set. She would retire at age 50, he at age 55.

That's when Andy was still working as a vice-president of a large non-profit agency.

"Then everything changed," Andy writes in an e-mail. "During a house cleaning [at his employer] I lost my job." Not wanting to move and start a new life elsewhere, the couple decided to stay put in the southwestern Ontario town where they live. Andy took a job at a much reduced salary.

Retirement is still very much on their minds. Barb would like to quit work in March, 2011, when she will be 52, Andy in December, 2012, just before his 58th birthday.

"We would like to spend the cold winter months in a warm spot like Florida where we can golf instead of shovelling snow," he writes. "Can these retirement dates be met?"

We asked Linda Stalker of Henderson Partners LLP to look at the couple's situation.

What our Expert Says

Andy and Barb have done a great job of paying off all their debts, Ms. Stalker says. They have also benefited from working for companies with good pension plans, particularly Andy, who has a defined-benefit pension from his previous employer.

Andy will receive a pension of $58,656 a year at age 55. Barb has a defined-contribution pension plan, which is like an RRSP, in the amount of $148,200. Both will start collecting Canada Pension Plan benefits at age 60 and Old Age Security at age 65.

But if they retire when she is 52 and he is 58, their income will fall short of the $84,000 after tax they figure they'll need to continue their current level of spending, she adds.

They will either have to save more money between now and then or plan to tighten their belts in retirement, Ms. Stalker's report shows. If they keep on spending the way they are now, they would need another $68,669 in the bank today to offset future shortfalls if they retire according to their plan.

Saving another $1,980 a month, indexed for inflation, between now and retirement would provide the $84,000 they want, she estimates.

"This is achievable as they have no debt and the majority of their expenses are discretionary," the planner says.

Alternatively, they could spend less in retirement. By paring back their after-tax income needs from $84,000 to a still generous $74,318, the pair would be able to retire when they want to and still leave an estate when they die. That's a cut of $9,682 a year or about $800 a month - an amount that seems readily achievable.

"Relatively modest changes in your behaviour can reap very significant benefits that can dramatically enhance your future financial destiny," the planner notes.

If neither saving more nor spending less appeals to Barb and Andy, then they'll just have to work a little longer, Ms. Stalker says. If they both retire at age 60, they will have their $84,000 a year after tax, assuming an inflation rate of 3 per cent and a return on investments of about 7.3 per cent, she estimates. And they'll still leave an estate when they die.

Ms. Stalker recommends that Andy take his pension at age 55 with a 60-per-cent spousal benefit because their expenses are mostly lifestyle-related and would decrease significantly if one of them was to die.

The planner also recommends the couple diversify their investments to reduce potential risk. As it stands, they have no cash in their investment portfolio, about 34 per cent in fixed income, 4.3 per cent in a category called special income, 42.5 per cent in Canadian stocks, about 9 per cent in U.S. stocks and 10 per cent in international stocks.

Instead, Ms. Stalker recommends 5 per cent cash, 43 per cent fixed income, 17 per cent Canadian stocks, 15 per cent U.S. large-cap stocks, 7 per cent U.S. small-cap stocks, 8 per cent international stocks and 5 per cent real estate. While this allocation could lower the rate of return slightly, its greater diversification would also lower the potential risk.

She also recommends an emergency fund equal to three to six months of expenses depending on whether they have a line of credit that could be used to bridge unexpected short-term needs.

Finally, if Andy was to die prematurely, there would be a capital shortfall of $255,075, she calculates. This could be offset by additional insurance coverage in the same amount.

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Client situation

The People: Andy, 55, and Barb, 51

The Problem: How to ensure a comfortable early retirement despite Andy's being downsized and taking a big drop in salary

The Plan: Work until Andy's age 58 and Barb's age 52, save more in the meantime or plan to spend less in retirement

The Payoff: A comfortable lifestyle with winters in Florida

Monthly Net Income: $9,635

Assets: House $250,000; RRSPs $74,390; defined contribution pension plan $149,700; non-registered portfolio $74,159. Total $548,249

Monthly Distributions:

Property taxes, property insurance, utilities and repairs $1,124; car loan, gas, car insurance $1,392; groceries $625; clothing $292; phone $167; vacation $417; entertainment, dining out $542; gifts $333; charity $208; personal care $83; gardening and crafts $125; club memberships $417; pocket money $709; Florida condo $667; employer pension plan $695; other savings $1,839. Total: $9,635

Liabilities: None