Situation: Late-life career change dreams complicate retirement picture
Solution: Assess whether income will cover costs under new work scenario
A couple we’ll call Jeff, 55, and Tess, 48, live in B.C. with their child, Callie, age 10. A manager for a building company, Jeff brings home $5,100 per month. Tess, who works in advertising, adds $1,730 each month. Jeff, however is contemplating a career change, and is hoping to become a commercial artist within the next five years. It would be retirement with what amounts to a hobby that might generate income. The problem is that the income is not guaranteed or even predictable.
Their problem is to segue from their secure life with one solid job and some part-time income to a life with less financial security but more satisfaction. The goal — a $48,000 annual income after tax, which would be about 60 per cent of their current after-tax income. They have Tax-Free Savings Accounts, RRSPs and a future $6,000 annual job pension which Jeff earned in previous employment. Making ends meet after giving up a secure job is the challenge. Jeff spent eight years abroad and did not contribute to his Canada Pension Plan account in that period, so will not qualify for the maximum. Tess, born abroad, has lived in Canada since age 37.
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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Jeff and Tess. “They will have more than their income requirement at Jeff’s age 65, but it’s risky at his age 60 when he wants to make the move to a new career.”
Caille’s RESP has a $30,000 balance growing at $3,000 per year including the $500 Canada Education Savings Grant paid to the RESP as the lesser of 20 per cent of contributions or $500 per year. In seven years, assuming contributions are maintained and the fund grows at 3 per cent after inflation, it will have $60,000 in 2018 dollars, enough for tuition and books. If Callie lives at home, the RESP will be sufficient for a first certificate or degree.
Jeff and Tess hope that total savings excluding RESPs of about $429,000 will be sufficient for what could be a retirement of perhaps four decades.
The plan has many risks.
For instance, if Jeff were to try to transition to his new career before age 60, it is not clear how much of his $5,100 in monthly take home pay he would be able to replace.
To make up his share of the $48,000 after tax income target, he would have to earn at least $32,000 before tax, something that could be a challenge. (Tess’s pretax income would still be about $23,000.)
Jeff would also have to continue to make contributions to his RRSP. Coming up with the $7,200 he currently contributes — not to mention the $7,200 in matching funds his current employer provides — would be a tall order on such a reduced salary.
Therefore, he has little choice but to stay at his present job to age 60, building up savings.
Risks in early retirement
Once he turns 60, Jeff will at least have some options. While starting CPP at 60 is one of them, it would be very costly.
At 65, Jeff can expect $8,976 CPP, and Tess $5,444 when she reaches that milestone, for a total of $14,420 per year.
But for Jeff to start at 60 he would give up 36 per cent of his annual amount (7.2 per cent for each of the five years before 65), and then be stuck with that lower amount throughout his retirement. They should not do it, Moran cautions.
Assuming that Jeff remains in his current job for five more years, and maintains his current pace of matched RRSP contributions of $14,400 per year, the couple’s current $335,000 in RRSP and RRSP-like defined contribution pensions, growing at three per cent per year after inflation, would rise to $427,000.
That sum, invested at the same 3 per cent rate of return after inflation for 37 years to her age 90 would generate $19,300 per year.
The couple’s tax-free savings account, with a present balance of $94,000 and growing at $4,500 per year for five years with a 3 per cent rate of return after inflation, will become $133,600. With the same growth rate, it will support payouts of $6,025 for 37 years to Tess’s age 90.
Jeff also has a pension from prior employment of $6,000 a year available in 2018.
Retirement at Jeff’s age 60 with a target $48,000 after-tax annual income is going to be dicey. They will have a $6,000 work pension from Jeff’s former job, $19,300 from RRSPs and $6,025 from TFSAs. That’s $31,325. Tess can add her continuing income $20,800 to bring the total to $52,125 before tax or about $48,000 per year after 8 per cent average tax with no tax on TFSA payouts.
They will be on target but with little money for unexpected expenses. Income from Jeff’s work as a commercial artist might fill the gap, but things would likely remain tight.
When Jeff hits 65, and CPP and OAS kick in, the couple’s income would grow substantially.
In addition to CPP benefits of $8,976, Jeff should qualify for 37/40ths of the full OAS pension, currently $7,075 per year, about $6,544 net.
That extra $15,500 or so would allow them to reach their target, regardless of what Jeff pulls in.
When Tess hits 65, her CPP and OAS will kick in as well. Tess became a permanent resident of Canada in 2008 at age 38 and will have lived in Canada for about two-thirds of the years needed for full OAS benefits when she turns 65. She can expect about $4,717 per year in OAS benefits.
If she chooses to retire at 60, there could be a gap in which the couple would lose her steady income, but by then Jeff will have had some time to build up some work as an artist.
The biggest risk will be getting from Jeff’s age 60 to 65, Moran concludes.
Retirement stars: Two ** out of 5
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