When preparing for retirement, one wonders what is the worst mistake: not having a plan, not following the one that has been established, or developing a plan on false premises.
The result will probably be the same but, in the first two cases, it will be less surprising for the saver. In other words, when you start planning your retirement without having a good idea of what you will do and what it will cost, you will be exposed to bad surprises.
This is the lesson that must be remembered in the story of Caroline, in the prime of life, who wonders when she will be able to achieve financial independence.
This 50-year-old professional lives with her 17-year-old teenager who enters college and for whom she has academic ambitions. “I intend to pay her so that she can devote herself to her studies,” she says.
Caroline’s financial situation is solid. She is a manager in a large company, earning her an annual salary of $ 150,000. She lives in a mortgage-free house that she estimates is worth $ 300,000. She has $ 51,000 in a non-registered account, $ 10,000 in a TFSA and almost $ 350,000 in her RRSP. She also benefits from a defined contribution supplementary pension plan, that is to say from which she does not know the benefits to come.
In addition to spending on her daughter, Caroline spends $ 10,000 to $ 12,000 a year on travel. For the rest, she does not have luxury tastes. “I play tennis, I hike and I go to the restaurant,” she lists.
Ideally, Caroline would like to retire at age 55, based on an annual cost of living of $ 25,000 to $ 30,000.
We entrusted Daniel Laverdière, Senior Director, Center of Expertise, to National Bank Private Wealth 1859. At first glance, the financial planner expresses doubts about the cost of living estimated by Caroline. “If she had $ 60,000, I would understand, but with a salary of $ 150,000, you have to validate,” he says.
If this data was validated, Caroline could retire at 55 without trouble, but what would happen if her cost of life was higher than expected? “The plan would not hold and it would deplete its assets too soon,” says Daniel Laverdière.
Evaluate your needs
What did Caroline rely on to estimate her needs at $ 30,000? “I took a sabbatical year in 2012 and was able to manage with $ 2,000 a month,” she says. She also relies on the fact that her daughter will become independent in the meantime.
Reflecting on this, she acknowledges that she did not travel during her sabbatical year and that, in general, she had to manage her expenses tightly. Is it the pace of life she wants for retirement? “Of course I would like to travel,” she says. After reassessment, she estimates her needs at an amount ranging from $ 45,000 to $ 55,000. She also discusses the possibility of living with her new spouse, as concubinage can reduce costs.
Daniel Laverdière will base his calculations on a $50,000 cost of living. “However, if it spends $ 55,000, the plan will be at risk,” he observes. As for the spouse, he prefers not to include it in his assessment because the relationship is too recent. A separation would turn everything upside down.
“Caroline would be better off refining her assessment,” says Laverdière.
According to her calculations, and as soon as she begins to limit her cost of living to $ 50,000, Caroline will not be able to retire before the age of 60. These five additional years on the job market will allow him to significantly increase his cushion.
It will be able to count on a capital of $ 1.3 million in 10 years, which includes a life income fund (LIF) that comes from its employer pension plan.
Caroline can live at this rate until she is 91 years old. The following year, it will have exhausted its resources, and the next one, it will only be able to rely on public pensions (old age security pension [PSV] and Quebec Pension Plan [QPP]). So it’s tight.
Daniel Laverdière relied on an expected inflation rate of 2% and a savings yield of 4%. In his calculations, he did not transfer the money from the non-registered account to the TFSA, but Caroline would be well advised to do so. He also did not flatten the tax rate on the entire retirement. There would be additional gains to be obtained with a little tax optimization. “However, these small adjustments would not change much in the overall plan,” he acknowledges. An additional yield of 1% would have much more impact than all this development. “