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By Julie Cazzin with Allan Norman
Q: I’m 48 years old and not sure how much longer I can continue working at my job. I don’t enjoy it anymore. What would happen if I stopped working now? I earn $170,000 annually. My 51-year-old husband Tom is self-employed and earns $40,000 annually. Our home is worth $1 million and has a $170,000 mortgage. I have a registered retirement savings plan (RRSP) of $420,000, a defined-contribution pension plan (DCPP) worth $360,000, and a tax-free savings account (TFSA) of $20,000. I vacation in Europe twice a year, love the theatre and we enjoy takeout and restaurant dining that totals about $1,000 per month. I estimate we spend $110,000 per year on ourselves and our home. I contribute eight per cent of my salary to my RRSP and my company contributes four per cent to the DCPP. If I can’t quit now, how long before I can? — Kasia and Tom
FP Answers: My first thought when I received this question from Kasia was that “retiring at age 48 is not going to work.” But until you lay it out to look at the big picture, there is no way to really know, or to know what is possible. So, after laying it out for Kasia and a few “what if” sessions with her, she found a workable solution she’s happy with.
The first model was ugly because it laid things out bare for them. With their current and anticipated income, expenses, fixed assets and investments, Kasia’s retirement at age 48 is not happening unless they are willing to sacrifice their lifestyle. Nobody wants to sacrifice their lifestyle, and neither do they.
Now, the ball was in my court. If Kasia lives to age 95 and Tom to age 85, what kind of solution am I going to come up with that gives them the income they need?
Financial planners’ solutions often revolve around math and lead to simple solutions such as: working longer, saving more money, increasing investment risk or reducing retirement spending. There is nothing positive in those misguided solutions and Kasia wasn’t going to accept any of them.
Frankly, I’m sure she is capable of coming up with those possibilities on her own. She doesn’t need a financial planner to rub it in. Working longer and saving more is a cost to her life, with less time to do things or less money to spend on the things she enjoys. Increased investment risk doesn’t guarantee higher returns and may come with an emotional cost. And who wants to reduce their lifestyle spending in retirement? There are no good options here for Kasia.
This is where I turned the tables and said, “Kasia, there is a gap here, so what do you think you could do to close the gap?” It is not your financial planner’s job to figure it out for you. This is Kasia’s financial plan. Once she has built her plan, that is when a planner can apply their advice around taxes, Canada Pension Plan (CPP) income planning, investing, insurance and so forth.
After a bit of hesitation, Kasia asked what would happen if she worked another five years at her current job and then retired? In that case, their money runs out at about age 63. What else could she do?
Kasia loves gardening, so she suggested she could work part time from age 53 to 64 with a landscape company and hope to earn $20,000 per year. Doing that would give her enough income to about age 72. Is there anything else she could do?
They live in an area where real estate prices are high and Kasia wondered what would happen if they moved in nine years to an area where real estate prices were lower. This is where Tom piped up and suggested that his business income may be cut in half if they move. Not a problem. They had more than enough money to get Kasia to age 95 and Tom to 85 when I modelled this option.
Now, they have a workable financial plan they created themselves and one they have control over. This is the point when a financial adviser steps in to look for efficiencies and improvements to the outcome of their plan.
Kasia may or may not follow the plan she has put together and that’s OK. She has experienced a sigh of relief knowing she doesn’t have to work at a job she doesn’t enjoy for another 17 years, and she has an out in five years. Plus, who knows what the next five years will bring?
Answering Kasia’s question makes it obvious that financial planners, with all their tactics and strategies, can only do so much. In this case, the solution had to come from Kasia. Develop your financial plan first, with or without the help of a planner, and then apply the tactics and strategies of an adviser, if needed. That will give you a plan better suited to your goals.
Allan Norman provides fee-only certified financial planning services through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Investment Industry Regulatory Organization of Canada. Allan can be reached at [email protected]
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