Early retirement could cut pension income nearly in half

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British Columbia-based couple Gloria* (49) and Rob (51) are focused on an early retirement and a career-change for Gloria. But are the two goals compatible?

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They each earn about $80,000 a year each before tax, and Rob will be eligible for two pensions from previous employers that should pay out a combined $2,000 a month if he retires at 60.

Gloria, who immigrated to Canada in 2009 and started working here in 2010, wants to retrain to move into a new field (she declined to specify her field for privacy reasons). She anticipates if she does leave her current role and field, her annual income will likely drop by about $10,000. “Will I be able to retire at 63 if I make this move?”

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The couple recently paid off the mortgage on their primary residence, which is valued at $800,000. They plan to stay for at least the next 10 years, at which point they will likely downsize but remain in the same area. They also own a rental property with a current market value of about $600,000 that generates about $3,000 a year in rental income after expenses. It has a $200,000 mortgage at 3.8 per cent ($1,300 a month) that will be up for renewal in 2027.

“We view the rental property as a way to diversify our investments,” said Gloria. However, it’s an older property with big maintenance bills on the horizon, including a new roof. The cost of upkeep and insurance is exceeding rental increases and inflation. “Our plan was to keep it for another 10 to 20 years, but are we better off to sell now and invest the proceeds?” she asked. The couple is hesitant, as the real estate market is softening.

“We have long-term renters who currently pay $1,975 a month. If they were to leave, we could increase the rent to better reflect market prices, but that doesn’t seem likely.” The couple feel stuck and would like to know what the experts advise. Sell now or wait it out?

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Gloria and Rob have an investment portfolio that includes about $30,000 in cash to cover emergencies, $108,000 in tax-free savings accounts (TFSAs), and $242,000 in registered retirement savings plans (RRSPs). All of these registered accounts are invested for growth in exchange-traded funds. Now that they have paid off the mortgage on their primary residence, they plan to focus on maximizing TFSA and RRSP contributions.

When it comes to their plans for retirement, they would like to travel for at least the first five to eight years, including three-to-four month stays in different countries. Their current monthly expenses are about $4,840. Both Gloria and Rob also plan to continue working part-time in retirement, although they are not sure what that might look like or how much they would earn. They wonder when they should consider drawing Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.

What the expert says

Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management, said with the mortgage paid off on their primary residence freeing up cash flow to increase savings it’s the ideal time to engage a professional to help them create their financial plan.

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“Their situation has a lot of variables that need to be considered and some that need to be clarified,” he said. “This will include income and asset projections over the next 40 years that will lead to strategies to maximize income and minimize tax throughout retirement.”

There are several key questions the couple needs to address, Einarson said. For example, is Rob willing to retire five years early for almost half the lifetime pension? Is his pension indexed to inflation? If they do work in retirement, how much income can they realistically earn part-time and for how long? How much do they plan to save each year now that the mortgage is paid off? What will the extensive travel in retirement really cost? Do they have health or medical concerns? What about estate goals? When will they downsize and how much equity, if any, would that unlock? How would they feel about losing money on the rental property? Do they want to manage their own portfolios throughout retirement and how will they deal with market changes?

“The rental property is a great example of their need for a planning consultation and broader discussion of how this investment fits into the picture,” said Einarson. “They claim that the rental was a way to diversify their investments, but real estate makes up about 80 per cent of their total net worth and only generates $3,000 net a year. This property might be the largest risk that could derail their retirement plans and so should be addressed in the context of their goals and risk tolerance.”

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Based on current investments and future pension and government benefit estimates, Gloria and Rob will likely meet their basic income needs at 63 and 65 respectively, said Einarson, while acknowledging basic needs will differ from total income goals.

“A total net income of about $8,000 a month is possible if they work until Rob is 65 and therefore receives his full unreduced pension and CPP. A retirement before this age would compromise their income significantly as Rob will have a much-reduced pension and CPP, and investments receive less time to grow. If they retire when Rob turns 60, he and Gloria would be able to sustain about $5,000 a month in total net income for life, just over 37 per cent less.”

Selling the rental property now and using the cash to boost investments and future income could help them reduce risk and better afford an earlier, more comfortable retirement.

“However cash flow is just one side of the equation,” said Einarson. “The key is going to be discovering their future needs through the planning process. Once they know what they need and are comfortable with that target they can plan around that. For some $5,000 a month will be a dream retirement but not for many others.”

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Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we’ll find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).

*Names have been changed to protect privacy

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