Irene Quillen makes her living as an accountant, crunching numbers for a municipal school board in Toronto. Her prowess with figures has proved useful in planning her retirement.
$55,000 from employment; $5,112 CPP survivor’s benefit.
House, $250,000 (no mortgage); auto, 1997 Honda $12,500 (paid for); condo, $221,000 to be paid from proceeds of sale of house; pensions, OMERS plan that pays $17,875 a year if retirement begins Dec. 31, 2003; RRSP, $133,300; Non-registered investments: $59,810; cash, $5,000; life insurance policies, maximum $358,000, minimum $53,000; expected inheritance, $200,000.
Income tax, $1,000; CPP, $125; employment insurance, $73; RRSP, $200; property taxes, $255; house insurance, $36; house cleaner, $130; utilities, $305; phone, $80; car insurance, $100; gas and repairs, $280; food, $240; restaurant, $160; clothing, $166; food, $240; restaurants, $160; clothing, $166; personal care, $100; entertainment, $65; newspapers, $40; pets, $40; vacations, $300; gifts and charity, $330; medical, $165; life insurance, $125.
At 49, she is in good health in spite of serious past illnesses and earns $55,000 a year.She wants to sell a large house she shared with her late husband, and she plans to move to a condo soon. Meticulous in planning for retirement, Ms. Quillen (not her real name) would like to leave her job within a few years, but she is not sure when her pensions and investments will produce her goal of $50,000 a year before tax. In preparation for retirement, she is also uncertain how much current spending to divert to the period when her income stops and various pensions begin.
“Deciding when to retire is a pressing concern,” she says. “My health is good now, but it might not last. So should I retire soon and take my pension, perhaps getting another job? Or hang on to my defined benefit, indexed plan that will become more valuable as time goes on?”
Irene is typical in her work history but unusual in the attention she has given to planning. Her goals, she says, are to simplify her investments and to achieve better results, to make monthly contributions to registered retirement savings plans, to buy a new car in five years, to have two vacations each year, to make generous contributions to her two grown children and to her church, and to make a smooth transition to retirement.
What our expert says
Facelift asked Michael Cherney, a certified financial planner in Toronto, to speak with Irene, to help her to refine her planning, and to determine if her goals can be realized.
His view is that she can achieve her plans. Assuming that Irene lives to age 90, more than life insurance tables predict but, as Mr. Cherney says, “an error on the side of caution,” and that long-term inflation is 3 per cent a year, then with returns of 6 per cent in non-registered accounts and 7 per cent in her RRSP, she can expect about 3- to 4-per-cent annual real return on her investments.
She will have to give up 6 per cent a year from her Canada Pension Plan benefits for each year before age 65 that she retires. Claiming at age 60, the earliest possible, would therefore cost her 30 per cent of maximum CPP benefits. However, when she claims her CPP benefits, a new calculation base goes into effect that likely will leave her at the maximum CPP retirement payout for early retirement. In her case, while she has not worked continuously, the merging of her widow’s benefits and her work-based benefits would push her payout at age 60 to $552, which is 70 per cent of the maximum $788.75 in today’s dollars.
Irene will also qualify for Old Age Security at age 65. The current OAS benefit is $442.66 a month indexed to inflation. Since Irene’s annual retirement income is going to be about $50,000 in current dollars, it should not be subject to the clawback that begins at $56,968, Mr. Cherney says.
After running some spreadsheets on the various combinations of retirement ages, Mr. Cherney notes that leaving the Ontario Municipal Employees Retirement Board (OMERS) pension plan at age 50 and working at another job to age 56, Irene would have a total work pension income of $17,875 a year, but by working within OMERS until age 56, she would have a $33,768 annual pension in current dollars. In other words, by investing another seven years in her public sector job, she would add 89 per cent to her work pension.
Moreover, Mr. Cherney cautions, “with capital markets in turmoil, it does no harm to err on the side of conservatism.”
Leaving OMERS before complete retirement at 65 has a profound result for the rest of her life. At 80, Irene would have annual pension income of $65,947 in 2033 dollars, compared with $30,833 in 2033 dollars if she were to leave OMERS at 50. At 90, total pension income of $88,627 in 2043 dollars would compare with $41,438 in 2043 dollars she would have if she left OMERS at 50.
But Irene’s target of $50,000 a year total income will be achievable if she works until 56 within OMERS, Mr. Cherney says.
Irene’s retirement income will be substantially influenced by what she can get from her registered and non-registered investments that total $193,000. She has 20 mutual funds ranging from low-fee equity funds sold by Phillips Hager & North to conventional fee funds sold by Fidelity Investments to some high-fee labour-sponsored venture capital funds.
As well, she has sector funds in health care, regional funds, emerging markets funds, and a few diversified equity funds. Some funds that tend to have high turnover of stocks and thus produce significant distributions are in her taxable account.
It’s not a good mix, Mr. Cherney says. He notes that there are no bonds at all in the portfolio and not even balanced funds that have bonds. Irene figures that her OMERS and CPP pensions are as solid as government bonds, which is true, Mr. Cherney agrees.
Nevertheless, the absence of bonds means that when stocks crumble, there can be no offsetting capital gains on bonds, which tend to rise when stocks fall. As well, there is a conspicuous lack of value funds, he says. A few funds, including emerging markets portfolios that did well in 1993 and 1999, are, as Mr. Cherney says, “more trouble than they are worth.”
Irene worries that she does not have enough life insurance to provide benefits for her two grown children. No longer insurable, she has a $275,000 policy that pays five times her current salary of $55,000 a year but that ceases coverage when she turns 65, a $50,000 policy converted from her husband’s work policy, and a $33,000 policy, the face value of which falls by 10 per cent a year until it reaches $3,000 at age 70.
Irene finds this frustrating, for by living to age 70, she would wind up with as little as $53,000 of life insurance death benefits. “It is a sad reality that there are no economic or affordable insurance policies available, given that she has a history of serious illness,” Mr. Cherney says.
Irene’s estate plan is not hopeless, however. Her heirs will be able to receive a portion of a $200,000 inheritance she expects. And her own principal residence, when sold, will not be taxed and so will leave full value for her heirs, Mr. Cherney says.
Irene has made realistic plans for her retirement, Mr. Cherney says.
“She has ample funds for her reasonable and modest way of life. She can set aside a few thousand a year for a new car that she wants in 2007 and for a couple of vacations each year. She has ample money for making charitable contributions. Indeed, Irene’s planning shows how much a person of ordinary means can do to arrange a comfortable and secure retirement.”
“I have a lot of tolerance for risk, but that does not mean I should be risking my basic pension,” Irene says.
“So I think I am going to work longer, even to age 59, to build the base for a much stronger pension than I would have if I retired in the near future.”
Interested in being considered for a free Financial Facelift? Drop a line to the writer at 444 Front St. W., Toronto, M5V 2S9, or at the address below with details of your situation.
Irene Quillen, 49, is an accountant for a municipal school board. She is planning retirement.
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