Retirement plan meets cold reality

via The Globe and Mail featuring Matthew Ardrey and Warren Baldwin | March 3 , 2014

Haley and Hank have worked diligently over the years to pay off the mortgage on their Southwestern Ontario home and build a nest egg.

She is 54, a letter carrier; he is 51 and works in customer service. Together, they earn about $108,000.

For some time now, Haley has been worrying whether they were saving enough and whether their savings were properly invested, concerns that became more pressing a few months ago when Canada Post announced it was restructuring and cutting its work force. Haley is perilously close to the bottom of the seniority ladder.

At best, she might get another five years of work, Haley writes in an e-mail. By then she will be 59.

“Should I look for new work or ride it out?” she asks. She does not expect a severance package if she is let go, but she will be entitled to a pension at age 60. Hank has no company pension.

They’d like to know they can continue to travel when they no longer are working. “We usually take one big trip a year and three to four long-weekend getaways,” Haley writes.

We asked Matthew Ardrey and Warren Baldwin of T.E. Wealth in Toronto to look at Haley and Hank’s situation; Mr. Baldwin is regional vice-president, Mr. Ardrey is manager of financial planning.

What the experts say

Ideally, Hank and Haley would like $48,000 a year after tax when they retire, the planners note. Haley expects to stop working when she is 59, and Hank when he is 60. Their home is mortgage-free and their line of credit will be paid in full shortly after Haley quits working.

In preparing their forecast, the planners assume Haley and Hank continue to save at the current rate, that they earn an average of 5 per cent a year on their investments and that inflation averages 2 per cent a year. They assume Haley gets $968 a month in Canada Pension Plan benefits at age 65 and Hank gets a reduced benefit of $596 at age 60, adjusted for inflation. Haley’s Old Age Security benefits will start at age 66, Hank’s at 67.

In addition, Haley will get a pension of $556 a month, rising with inflation, starting at age 60, plus a pension bridge benefit of $272 a month until the earlier of age 65 or when she begins collecting CPP. The remainder of their spending needs will be funded from their portfolio.

Unfortunately, the numbers don’t work, the planners say.

“Based on these assumptions, they would run out of capital by 2038.”

One alternative would be to reduce their spending by about $6,500 a year, which would still allow them to live comfortably but not allow for extra luxuries such as travel, Mr. Ardrey says. The second alternative would be to increase savings – by a whopping $34,000 a year over the next five years.

“As neither of these options is particularly palatable, we looked at a third option,” the planners write.

In the third option, Haley finds part-time work paying $20,000 a year from the time she loses her job at age 59 until she retires at age 65. Hank also extends his working career, retiring in 2025.

“This gives them time to save longer, less time to spend their assets, and increases Hank’s CPP by limiting the age reduction factor,” the planners add.

This alone is not enough. Haley and Hank will need to save an additional $4,000 a year each to their RRSPs until their new retirement dates.

Next, the planners turned their eye to the portfolios. Hank and Haley have 28 per cent in fixed income and 72 per cent in equities, they note. The equity portion is 50 per cent in Canada.

“This is much too concentrated a portfolio mix.” Instead, they would limit Canadian stock holdings to one-third, with the rest invested in the United States and internationally. By diversifying geographically, Haley and Hank would also be diversifying among industry sectors.

“This will help reduce risk and enhance returns in times when Canadian industrial sectors are not leading.”

Hank and Haley are using mutual funds, but they could save upward of one percentage point by switching to a portfolio of exchange-traded funds, the planners say. By the time Hank is 65, they would have combined financial assets of more than $750,000.

“A one-percentage-point savings on a portfolio of that size is $7,500 a year.”

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



The people

Haley, 54, and Hank, 51.

The problem

How to prepare for Haley’s possible job loss without endangering retirement plans.

The plan

If Haley does lose her job, she should try to find other work until she is 65; Hank should plan to work a bit longer, too. In the meantime, focus more on saving.

The payoff

A financially secure retirement without having to sacrifice their travels.

Monthly net income



TFSAs $8,300; her RRSP $85,000; his RRSP $103,500; estim. present value of her DB pension plan $17,250; residence $191,000. Total: $405,050

Monthly disbursements

Property tax $240; other housing $260; transportation $290; groceries, clothing $400; line of credit $365; gifts, charitable $40; vacation $500; entertainment $540; personal discretionary (grooming, clubs, pets, sports, subscriptions) $180; life insurance $50; telecom $200; RRSPs $600; TFSAs $500; her pension plan $340; professional association $75; group benefits $155. Total: $4,735


Line of credit $26,000

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