Sabbatical-planning 101: Professor prepares for reduced income

via The Globe and Mail | April 2013

Benjamin is a university professor about to take a year’s sabbatical, during which time his salary will
drop by 60 per cent. He is 47, single, and lives in suburban Vancouver.

While he is off, researching and writing, Benjamin plans to continue paying for his benefits, including
making pension plan contributions, so money will be tight. He is contributing more than necessary to
his defined contribution pension plan so he will have a larger income when he retires at age 65. His
retirement spending goal is $55,000 a year.

He wonders whether he should give up his apartment and put his stuff in storage for the six months to
a year he will be in Asia. He could also sublet it.

Early on, Benjamin decided against home ownership because of the work involved, so he has a fair
amount of capital to invest – most of it sitting in cash – and is seeking some advice on how to go about
building a portfolio. He has no debt and lives fairly modestly, paying $1,250 a month in rent.

We asked Lynne Triffon, a financial planner with T.E. Wealth in Vancouver, to look at Benjamin’s

What the expert says

If he can, Benjamin would be better off subletting his apartment rather than giving it up entirely and
paying for storage, Ms. Triffon says.

First off, he should sit down and draw up a budget, detailing what he will be spending during his stay in
Asia, as well as his ongoing expenses at home. Then he should look for expenses to cut, such as the
cost of operating his vehicle.

In addition to his pension contribution, Benjamin saves $1,100 a month in a non-registered account,
an outlay he could suspend for the year that he is off work, the planner says.

“The bottom line is that you do want to be prudent and reduce your expenses as much as possible
during your sabbatical,” Ms. Triffon says. He could make up for the forgone savings later.

If Benjamin decides to continue saving at the current rate, he is on track for a potential after-tax
income of $50,000 a year in today’s dollars when he retires 18 years from now, Ms. Triffon says.
That does not include any Old Age Security benefits he might be entitled to.

The planner assumes an average 6 per cent rate of return on investment, an inflation rate of 3 per cent
a year, and a life expectancy of 100 – a bit on the high side.

“One of the biggest risks in retirement is outliving your money,” she says.

If instead he suspends his savings plus the voluntary portion of his pension contribution for one year,
and allocates $17,000 to living expenses in Asia ($1,000 a month plus a contingency reserve of
$5,000), he will have potential retirement income of $48,000 after tax using the same assumptions,
Ms. Triffon calculates. OAS would lift him closer to his $55,000 target.

Benjamin recently shifted much of his savings from mutual funds to cash. As a result, he is earning a
“negligible” return, which will hurt his retirement income prospects, the planner says.

He is waiting for stock prices to fall to a point where they look attractive.

“The first thing he needs to do is assess his risk tolerance and his goals and determine an appropriate
asset allocation,” she says.

She suggests Benjamin set aside $20,000 in short-term holdings as an emergency fund and begin
investing the rest – approximately $275,000. Once he has determined the appropriate asset mix, he
needs to ensure that he is well diversified across geographic regions (Canada, the United States and

“With about $275,000, it would be very difficult to get adequate diversification geographically as
well as across industries and companies using individual stocks and bonds or guaranteed investment
certificates,” the planner says.

Rather than trying to build a portfolio of individual stocks and bonds, the planner recommends
Benjamin invest in low-cost mutual or exchange traded funds instead.

Benjamin tells how his friends say he is wasting money by renting rather than owning a home, but
home ownership is not without risk, Ms. Triffon says – especially in expensive Western Canadian


The person
Benjamin, 47

The problem
How to finance a year’s sabbatical, during which his income will drop, without crimping retirement

The plan
Draw up a budget, looking for ways to cut spending. If necessary, suspend monthly savings for the
duration of the sabbatical, and plan to catch up later.

The payoff
A solid, worry-free footing for the long term.

Monthly net income

Non-registered savings $221,000; TFSA $20,500; RRSP $54,000; employer pension plans (current
and previous employers) $132,000. Total: $427,500.

Monthly disbursements
Rent $1,250; other housing $113; transportation $250; groceries $450; clothing $70; charitable
$120; vacations, travel $200; dining out, entertainment, $440; other personal discretionary $490;
dentists, drugstore $190; telecom, TV $155; savings $1,100; professional association $25; group
benefits $52. Total: $4,905.


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