Sylvester, 55, earns $176,000 a year working in tech and Fiona, 51, earns $150,000 a year as a manager with the federal government.Justin Tang/The Globe and Mail
Fiona is 51 years old and earns $150,000 a year as a manager with the federal government. Her husband, Sylvester, is 55 and earns $176,000 a year working in tech. They have a mortgage-free house and three young adult children.
Fiona is among the thousands of federal government employees who have been offered what some might view the opportunity of a lifetime: early retirement with an indexed, defined-benefit pension with no penalty. She’s thinking of taking it.
“We’d like to know if we could still continue to support our three children – with education and down payments for houses – and travel,” Fiona writes in an e-mail.
Both she and Sylvester also have part-time jobs, hers paying $50,000 a year and his $40,000. Sylvester has more than $3-million in investments, including a group RRSP at work. “Would I need to find an additional income stream for a few years?” Fiona asks.
Their other goals are fluid – renovating their house, buying a more centrally located one, a second house or perhaps a cottage.
Their retirement spending goal is $155,000 a year after tax.
We asked Janet Gray, an advice-only certified financial planner with Money Coaches Canada, to look at Fiona and Sylvester’s situation. Ms. Gray is based in Ottawa but works with clients across Canada.
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“For many Canadians, early retirement is the goal: Work hard, save diligently and some day stop,” Ms. Gray says. But as this couple’s financial plan illustrates, “Can we retire?” and “Should we retire now?” are very different questions – and the gap between them can cost hundreds of thousands of dollars.
Fiona and Sylvester have a combined investment portfolio of $3.6-million spread across RRSPs, TFSAs and non-registered accounts.
“Their plan has been modelled under two scenarios: Scenario 1, in which Fiona takes the early retirement incentive and exits the work force in December, 2026; and Scenario 2, in which she works full-time until August, 2030.” Husband Sylvester retires in 2030 in both cases.
Both scenarios assume an annual inflation rate of 2.1 per cent and a net investment return after fees of 4.4 per cent. They also assume a life expectancy of 98 for her and 93 for him.
Both Fiona and Sylvester have indicated they will continue to work at their current part-time jobs for the foreseeable future.
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“The numbers tell a compelling and maybe cautionary story,” Ms. Gray says.
Scenario 1: Fiona retires in December, 2026, under the early retirement incentive.
Fiona’s pension begins immediately at $67,764 a year, falling to $56,364 once she turns 65 and the bridge benefit ends. At age 65, she gets Canada Pension Plan benefits of $16,800 annually, estimated at 75 per cent of the maximum – a consequence of leaving the work force early and having fewer contributory years. She also gets Old Age Security benefits.
The plan is estimated to be 119-per-cent funded relative to projected cash flow needs; that is, they have more than they need. That represents a success rate of 71 per cent based on investment returns and inflation for a variety of historical periods.
The projected estate, consisting of home plus financial assets after subtracting estimated income tax, would total about $2.5-million, $900,000 for the principal residence and roughly $1.56-million in financial assets, both in today’s dollars.
Scenario 2: Fiona works until August, 2030.
“Four additional years of employment make a material difference,” Ms. Gray says. Fiona’s pension rises to $79,000 a year before age 65, and $65,200 after. Her CPP benefit climbs to $18,700 – estimated at 85 per cent of the maximum – reflecting higher contributions from 2026 to 2030 and more opportunity to save.
“The plan is now 130-per-cent funded, the success rate improves to 80 per cent, and the projected financial estate grows to about $2.4-million from $1.56-million, an increase of more than $800,000 compared to Scenario 1.”
The success rate metric is particularly important to understand, Ms. Gray says. She modelled the couple’s withdrawal strategy against historical periods of stock market returns, bond returns and inflation.
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At 71 per cent, Scenario 1 means that in roughly three out of 10 historical periods, the money runs out before the end of plan. “At 80 per cent, Scenario 2 is meaningfully more resilient – but still not certain.”
In both scenarios, their RRSPs are maximized until retirement, and TFSA contributions are maximized annually pre- and post-retirement. “These are reasonable assumptions, but modest by historical standards; the plan is not built on optimistic assumptions but on realistic ones,” the planner says.
The couple’s spending needs are projected in today’s dollars. From 2026 to 2033, they plan to spend $155,000 a year after tax. That rises significantly – to $205,000 – from 2034 to 2040, reflecting peak-retirement lifestyle spending and potential travel. Their needs then taper back to $155,000 a year through to 2055, and drop to $130,000 from 2056 onward.
“Meeting those needs will require careful co-ordination of pension income, government benefits, and portfolio withdrawals, particularly in the years before CPP and OAS begin,” Ms. Gray says.
“There is, of course, certainty in their lifelong pension plans, CPP and OAS, but spending is a factor that needs to be monitored along the way to ensure there are sufficient funds for larger costs in the future.”
Several significant expenses are included in both scenarios and deserve attention, Ms. Gray says. A $600,000 home renovation is planned for 2027, funded from Sylvester’s non-registered account, which is now worth $650,000. “This single expenditure nearly depletes that account in year one of retirement.”
The couple also plans to give each of their three children funds to maximize their first home savings account, or FHSA, contributions between ages 26 and 30 – a combined total of $120,000 in today’s dollars spread from 2030 to 2038. “This is a generous act of intergenerational wealth transfer, but it reduces the assets available to sustain the couple’s own retirement,” the planner says.
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The bottom line?
“For Fiona and Sylvester, both scenarios are viable on paper,” Ms. Gray says. “But the difference between a 71-per-cent and 80-per-cent success rate is not trivial, particularly when the downside is facing spending cuts in your 80s or 90s.”
The four years Fiona gains in Scenario 2 have a significant effect: higher pension income, a better CPP benefit, four more years of savings, and four fewer years drawing down the portfolio. “The higher estate value reflects all of that, compounded over decades.”
As for possibly acquiring a second property or cottage, it could be feasible, with scenario 2 leaning toward the more favourable outcome, Ms. Gray says.
The lesson is familiar but worth repeating, she says: Every year of additional work near retirement is disproportionately valuable. “The question is whether the personal cost of those years – in time, health and quality of life – is worth the financial gain. That is a calculation no spreadsheet can make for you.”
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Client situation
The people: Fiona, 51, Sylvester, 55, and their three children, 17, 20 and 21.
The problem: Can Fiona take early retirement without jeopardizing their other financial goals?
The plan: Fiona considers working for another four years to improve their chances of financial success.
The payoff: A better understanding of the potential risks.
(Income, expenses, assets and liabilities provided by the applicants.)
Monthly after-tax income currently: $19,500.
Assets: Cash $6,000; his non-registered investments $650,000; her TFSA $272,000; his TFSA $293,000; her RRSP $158,000; his RRSP $2,211,000; registered education savings plan $310,000; residence $900,000. Total: $4,800,000.
Estimated present value of her defined benefit pension: $1,540,000. That is what someone with no pension would have to save to generate the same retirement income.
Monthly outlays: Property tax $700; water, sewer, garbage $120; home insurance $150; electricity $200; heating $120; car insurance $500; fuel $350; maintenance, oil changes $450; parking, transit $350; groceries $2,000; clothing $500; line of credit $1,200; other loan $275; vacation, travel $4,200; dining out, drinks, entertainment $1,900; personal care $100; pets $250; drugstore $25; life insurance $150; communications $350; TFSAs $1,200; pension plan contributions $1,250. Total: $16,340.
Liabilities: Line of credit, other loan $348,000.
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Some details may be changed to protect the privacy of the people profiled.
