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Case Study #2 - Am I Ready to Retire?

Our Case Study series reviews the financial lives of everyday Canadians. While helping individuals plan and answer pressing questions, we find transferable lessons to help others navigate similar situations. If you have recommendations for future case studies or would like to be featured, please email me. While details were changed to protect the identity of our participants, the information and recommendations are reflective of the situation.

Personal and financial background

Summary

Kathryn is a widowed 60 year old who lives in Vancouver, where she rents an apartment and works downtown in the financial services industry. She loves cooking with fresh ingredients and prioritizes spending on groceries to ensure she’s eating healthy and enjoying her time in the kitchen.

Her primary reason for reaching out was to see if she’s on track to retire in five years. She also wants to know what would happen to her retirement spending if she decided to retire earlier.

Finances

Assets: Emergency fund of $8,000, RRSP of $334,000, TFSA of $28,500, defined contribution pension plan of $16,500, non-registered investments of $105,000, and a life insurance cash value of $40,000. Total of $532,000.

Liabilities: N/A.

Income: Kathryn works in the financial services industry and earns a base salary of $86,300 plus a typical annual bonus of $9,300.

Monthly expenses: Rent of $1,600, groceries of $1,000, personal expenses of $500, insurance premiums of $500, travel of $375, transportation of $325, dining and entertainment of $240, gifts and charity of $100, and utilities and maintenance of $50. Total of $4,690.

Review and recommendations

Spending

When creating a budget, a typical target is to assign 50% of your income to required spending (e.g., rent, groceries), 30% to discretionary spending (e.g., travel) and 20% to savings or debt repayment. Because of the high cost of living in Vancouver, much of Kathryn’s base income goes towards required spending. She also enjoys cooking, so some of her groceries could be considered discretionary spending. Kathryn uses her annual bonus to top up her savings above the target of 20%.

Investment planning

Working in the financial services industry, Kathryn was introduced to investing fairly early in her career. While she’s been invested for years, most of her money is in mutual funds that charge roughly a 2% management expense ratio (MER). As a result, Kathryn pays close to $6,000 a year in fees. We discussed several ways to reduce these fees by moving to a low-cost solution (e.g., a robo-advisor).

If Kathryn lowered the MER from 2% to 0.7%, a typical fee for a robo-advisor, she’d save $4,000 each year. She could instead use some of this money to work with an advice-only financial planner as she sees fit.

Kathryn has roughly 60% of her savings in higher-risk investments (e.g., stocks). Based on her financial knowledge, experience in the market and long time-horizon before she needs some of her money, this risk level seems appropriate. Kathryn also mentioned that she currently has multiple non-registered accounts, Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs). To make it easier on herself and reduce fees, Kathryn could consolidate her accounts with one or two providers.

Retirement planning

Kathryn’s primary goal is to confirm if she can retire in five years at the age of 65. She’s also curious how much she could spend in retirement if she chose, or was forced, to stop working sooner.

At her current age of 60, Kathryn has a 25% chance of living to at least 97. As a result, she’ll want to plan for her desired spending level until at least this age. If she were to live past 97, she would still have income from government pensions, but she’d need to reduce her discretionary spending. Another solution would be to adjust her spending throughout retirement depending on her investment returns and health.

Kathryn will need to decide when to start receiving payments from the Canada Pension Plan (CPP) and Old Age Security (OAS). Given her sizable investment portfolio and long life expectancy, she’s likely best to wait to receive OAS and CPP payments until she’s 70. Delaying CPP and OAS will reduce the risk that Kathryn outlives her retirement savings since more of her income will be guaranteed for life and increase over time.

Kathryn plans to continue renting in retirement, but she expects to move to a lower cost of living area. Between a slight reduction in rent, no longer requiring most of her insurance and reduced transportation costs, Kathryn expects to spend 15% less in retirement. As a result, Kathryn is targeting an annual after-tax budget of $45,000.

The following chart shows Kathryn’s assets growing to roughly $750,000 before she retires at 65. From 65 to 70, her savings decline at a faster rate because she isn’t yet receiving CPP or OAS. Once these payments begin at age 70, she’ll draw on her savings more slowly.

Source: Snap Projections

Kathryn was also curious about what would happen if she needed to retire earlier than 65. We looked at several scenarios, including:

  1. Retiring today

    • She’d need to lower her target spending from $45,000 to $36,000 to avoid running out of savings before 97.

  2. Retiring at 62

    • She could spend $40,000 a year before running out at age 95.

  3. Part-time work earning $50,000 until 65

    • Kathryn can maintain her current lifestyle in Vancouver until 65 and then spend $40,000 a year in retirement.

Since Kathryn’s still enjoying her work, she plans to target retiring at 64 or 65 but was glad to see she can make it work if things change.

Tax planning

Kathryn has $56,200 in TFSA contribution room and $12,500 in RRSP room available. We discussed using some of her $104,000 non-registered savings to top up her registered accounts. While she’d realize some capital gains when selling her non-registered investments, she could offset this income with a contribution to her RRSP. That way, her investments would grow tax-free going forward. This small adjustment should save Kathryn roughly $500 a year in taxes.

Risk management (e.g., insurance)

Kathryn has a permanent life insurance policy with a $40,000 after-tax cash value. As a widow with growing assets and no dependents, she no longer requires the coverage and is considering taking the cash value to put towards her retirement savings.

To protect against risks to her income, Kathryn will continue to maintain disability and critical illness coverage until she retires.

Estate planning

Kathryn plans to leave any estate assets to her remaining family members. She doesn’t have a will in place as she previously considered creating a trust. We discussed several options to ensure the right portion of her estate gets to her intended recipients. She could:

  1. Name her family members as beneficiaries of her registered accounts. In this case, she could split the funds by specific percentages and name contingent beneficiaries in case someone passes away early.

  2. Create a will that outlines her wishes.

  3. Set up a trust that distributes set amounts to specific beneficiaries over time.

There are pros (e.g., simplicity, certainty) and cons (e.g., costs) associated with each option, and she could combine multiple together if she wished.

For now, Kathryn is comfortable updating the beneficiaries on her accounts.

Summary

Kathryn has had a successful career in the financial services industry in Vancouver and has set aside a great nest-egg to help her in retirement. Between government pensions and her existing savings, she’s well-positioned to enjoy the retirement lifestyle she has in mind.

By taking a few simple steps to reduce her investment costs and taxes, she’ll have another $4,500 a year available for her goals.

Transferable lessons

In each Case Study, we find transferable lessons to help you, a friend or a family member. Kathryn’s case helps us see:

  1. How much you could save by changing your investments.

    • Kathryn pays roughly $6,000 a year in management fees for her investments. By switching to a lower-cost solution (e.g., a robo-advisor), she could save $4,000 a year in costs.

  2. The benefits of tax-saving accounts like the TFSA and RRSP.

    • Kathryn had $100,000 invested in a non-registered account. In this account, any growth (e.g., interest, dividends, capital gains) is taxed. By contributing most of this money into her TFSA and RRSP, Kathryn will save $500 a year in taxes.

  3. The complexity of trade-off decisions when planning for retirement.

    • The retirement scenarios we looked at with Kathryn show that there are many options available when planning for retirement. There’s always a trade-off between:

      • working longer

      • taking on more investment risk

      • timing of government pensions and more

    • When you’re approaching retirement, it comes down to how much you’re enjoying your current work relative to the lifestyle you’d live if you weren’t working.

Closing remarks

Learning more about your finances has different benefits depending on how far along you are in the process.

  • In the early stages, personal finance is mostly about increasing your income and building strong habits.

  • Once you have money to put aside, it’s important to invest it, while minimizing taxes and costs.

  • After you’ve automated your investment plan, much of personal finance is about aligning your money with your life priorities and protecting yourself from unexpected events.

The end goal of all of this is to use money as a tool to live a fulfilling life.

If you’re early in your learning process, you can check out my book for free, or purchase it from Amazon or Indigo. If you’re further along in the process or would like personal guidance, I’m available for financial planning services through Ripple Financial Planning.

Thank you to Kathryn for sharing her experience. If you have recommendations for future case studies or would like to be featured, please email me. If you enjoyed this case study, please consider subscribing to our community at the bottom of the page to receive future emails. If you know someone else who could benefit from the resources on the site, your referral is much appreciated.