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Marjorie has a pension that is estimated at about $59,000 a year at age 60 but declines at age 65 to about $44,000 a year, the planner says. That is when her bridge benefit ends. Marjorie’s Canada Pension Plan and Old Age Security benefits should more than make up for the decline, he says.Fred Lum/The Globe and Mail

Marjorie and Phillip give the impression of a couple hoping to retire from work soon, but not sure if they are ready financially.

She is 57 and he will be 61 later this year. Marjorie has a $93,000 a year communications job and a defined benefit pension plan indexed to inflation. Phillip is self-employed with income of about $30,000 a year and falling.

“My husband was forced into semi-retirement because of the [COVID-19] pandemic and health issues,” Marjorie writes in an e-mail. “It’s changed our plan and we’re kind of struggling to adapt.”

They have a house in Toronto and two young adult children, one of whom is living at home.

One problem is their debt. They still have about $157,000 outstanding on their mortgage and a $30,000 line of credit.

The other is their aspirations. Short-term, they want to renovate the kitchen and buy a “newish” car. Long-term, they want to help one of their children buy a first home. They want to travel three months each year to an “economical destination,” Marjorie writes.

Their retirement spending target? “This is hard to say because we are barely surviving now,” Marjorie adds. “Can I retire at 60? Or later?” Marjorie asks. “Can we afford to age in place in Toronto? I really want to stay in the city in our home.”

We asked Jason Heath, a certified financial planner (CFP) and managing director of Objective Financial Partners Inc. in Markham, Ont., an advice-only financial planning firm, to look at Marjorie and Phillip’s situation.

What the expert says

Marjorie and Phillip have both had health problems, and Phillip especially would like to retire as soon as he can, Mr. Heath says. “As a starting point, I assumed they both retire in June, 2026, when Marjorie turns 60.”

Marjorie has a pension that is estimated at about $59,000 a year at age 60 but declines at age 65 to about $44,000 a year, the planner says. That is when her bridge benefit ends. Marjorie’s Canada Pension Plan and Old Age Security benefits should more than make up for the decline, he says.

“Given both Marjorie and Phillip have had health issues, I assumed they started their CPP as soon as they retire and their OAS right at age 65,” Mr. Heath says. Their combined CPP is estimated at about $22,000 and OAS about $9,000 each. “I assumed they were both entitled to 80 per cent of the maximum CPP given Marjorie’s early retirement and Phillip’s relatively low self-employment income,” he adds. They can confirm their CPP entitlement with Service Canada by requesting a statement of contributions.

Marjorie can split up to 50 per cent of her workplace pension with Phillip to equalize their incomes. This will help them reduce their combined income tax, which is projected to be less than 10 per cent throughout their retirement.

They have identified monthly expenses of $7,275, which is $87,300 a year. But once they no longer have to make mortgage payments, line of credit payments and pension plan contributions, their living expenses are only $4,675 a month or $56,100 a year, Mr. Heath says.

Their $187,000 of debt – the balances on their mortgage and line of credit – will be paid down over the next few years, helped, possibly, by an inheritance.

“The inheritance is a wild card,” the planner says. It will come from a share in a house valued at $750,000 owned by Marjorie’s father, who is elderly and may need nursing home care soon. Some or all of the house proceeds may eventually be needed to provide for his care. So the inheritance could be more or less than the anticipated $250,000 – and it could be years away, Mr. Heath says.

Marjorie and Phillip want to travel three months a year. As well, their medical expenses will rise in retirement once they are no longer part of a group insurance plan. “If we round their expenses up to $70,000 per year, that may give us a starting point for assessing their retirement readiness,” the planner says.

“If we assume Marjorie receives a $250,000 inheritance in five years and they use it to pay off their remaining debt, renovate their kitchen for $50,000 and buy a relatively new car for $30,000, they might end up debt-free with a little bit of cash in the bank,” Mr. Heath says.

Assuming a conservative 4-per-cent return on their investments, they may be able to maintain $50,000 to $100,000 in a tax-free savings account throughout most of their retirement, he adds. But that may not provide much of a buffer later for their own long-term care costs, especially if they are hoping to help out their kids financially.

“My suggestion to them would be to really focus on tracking their expenses over the next year or two to determine a budget going into retirement,” Mr. Heath says. If Phillip’s health prevents him from working much longer, Marjorie may need to revisit her age 60 retirement target based in part on her future inheritance. If her own health makes her reluctant to keep working, they may need to reduce their retirement budget or more seriously consider how they use their home equity, he says.

They would like to be able to help one of their kids buy a house. “I worry that Marjorie and Phillip may compromise their own retirement if they give money to their kids,” the planner says. “I would take a wait-and-see approach as it may hinge on a larger inheritance than expected or Marjorie working past age 60.”

Phillip has a life insurance policy that is relatively expensive at nearly $3,000 a year. It may be worth maintaining it if his life expectancy could be shortened based on his health conditions. Likewise with Marjorie’s insurance, but she may not have the option given it is a group policy, he says. “Some group policies allow you to convert to a personal policy without a medical.” Regardless, there could be some planning to do for both of them regarding life insurance. “Life insurance is not generally necessary in retirement once a couple has become financially independent, but an exception is if you have existing coverage, and you have health issues.”

Their wills and powers of attorney are 10 years old and may not necessarily need a refresh but if nothing else, they should review the key terms and appointees to make sure they still apply, the planner says.


Client situation

The people: Marjorie, 57, Phillip, 60, and their children, 23 and 24.

The problem: Can they afford to retire soon and still achieve all their goals? Can they age in place in their Toronto house?

The plan: Be careful because a lot depends on Marjorie’s anticipated inheritance. She may end up having to work longer. Rethink the idea of helping the offspring with a down payment.

The payoff: A plan that will help them achieve a key goal of remaining in their Toronto home as long as possible.

Monthly net income: $5,530.

Assets: Cash $100; registered education savings plan $25,000; residence $1,400,000. Total: $1,425,100.

Estimated present value of Marjorie’s DB pension $950,000. This is what a person with no pension would have to save to generate cash flow equal to Marjorie’s pension.

Monthly outlays: Mortgage $1,800; property tax $450; water, sewer, garbage $75; home insurance $150; electricity $200; heating $240; maintenance $300; transportation $625; groceries $700; clothing $100; line of credit $200; vacation, travel $300; other $250; dining, drinks, entertainment $500; personal care $100; club membership $140; subscriptions $50; life insurance $240; phones, TV, internet $255; pension plan contributions $600. Total: $7,275.

Liabilities: Mortgage $157,000 at 1.87 per cent; line of credit $30,000 at 7.7 per cent. Total: $187,000.

Want a free financial facelift? E-mail [email protected].

Some details may be changed to protect the privacy of the persons profiled.

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