Lifestyle | Early retirement despite job loss?

Mélissa* and Carl*, both aged 49 and parents of students aged 16 and 18, are professionals in the banking sector who are considering a retirement plan after they turn 55^e birthday. However, a recent job loss calls the project into question.

The situation

In preparation for this early retirement project, Mélissa and Carl have benefited over the years from their good income and a comfortable but well-managed lifestyle to build up significant financial assets for retirement.

But a recent job loss suffered by Carl has caused a questioning of their financial capacity to carry out this project.

“This is the first time that my spouse finds himself on employment insurance, with a benefit income that promises to be two-thirds lower ($30,000 annualized) compared to his previous employment income of $95,000. $ per year, says Mélissa.

“Even if we believe we have accumulated a good amount of retirement savings [1,6 million], we are now questioning our financial capacity to retire early after age 55, instead of 60 or 65. »

Mélissa knows that the future life annuity from her retirement plan – the couple’s only one – that she would obtain at age 55 would be reduced by half to around $70,000 per year compared to the full amount she would obtain at age 65.

Also, Mélissa and Carl project that their lifestyle at the start of early retirement could be reduced by a few tens of thousands of dollars compared to its current level of approximately $140,000 per year.

This reduction in lifestyle would come mainly from the end of mortgage and car loan payments ($46,000 per year in total), as well as the end of expenses for orthodontic care and maximum contributions to their RESP. child aged 16, which totals $10,000 per year.

Furthermore, among their retirement plans, Mélissa and Carl would like to be able to restore their travel budget to around $20,000 per year. This budget has been slashed since Carl’s job loss.

Also, Mélissa and Carl are considering selling their house after a few years of retirement, when their two children have left the nest.

“We plan to use the capital from this sale to purchase a small house in the resort region and a pied-à-terre in the city,” says Mélissa.

But for the moment, she and her partner are seeking advice on the feasibility of their project, despite the loss of income suffered by Carl for an indefinite period.

If so, how could the couple adjust their priorities over the next few years before retirement begins?

The situation was submitted to André Lacasse, financial planner and financial security advisor at Lacasse Financial Services, in Saint-Hubert on the South Shore.

Advice

André Lacasse notes that the project appears “financially viable” based on the income and lifestyle planned for the couple’s retirement.

“Thanks to their good savings habits and their reasonable lifestyle despite their relatively high family income, they were able to accumulate nearly $1.6 million in retirement savings,” explains Mr. Lacasse.

“In addition to Mélissa’s good retirement plan, such an amount of retirement savings assets, if well managed and disbursed throughout their retirement, should allow them to support the train until a very advanced age. of living which they expect to be around $125,000 per year. »

Despite this favorable diagnosis at first glance, André Lacasse brings some drawbacks to the project.

While waiting for Carl to return to an income comparable to the previous one, André Lacasse points out the large gap in income and retirement savings assets between the spouses.

“As de facto spouses, even for a long time, it is very important for Carl in particular that the couple keeps their cohabitation contract and their inheritance documents up to date with a notary,” recalls Mr. Lacasse.

Secondly, considering the enormous reduction in Mélissa’s retirement pension in the event of retirement at 55, André Lacasse suggests that the couple carefully consider the long-term costs of their early retirement plan.

“According to Mélissa’s retirement plan statement, her life annuity from age 55 would be approximately $67,000 per year, while it would be around $89,000 from age 60 and around $115,000 after age 65, explains André Lacasse.

“In other words, to advance her retirement by a few years, say from 60 to 55, Mélissa would deprive herself of almost $30,000 per year in retirement income. And this, until the end of his days! This is a considerable shortfall that they must analyze carefully before confirming their project. »

Verification made with Mélissa: “We are thinking about it after seeing the extent of this reduction in my retirement pension. For the moment, we are not closed to the idea of ​​delaying our project for a few years,” says Mélissa.

In the meantime, underlines André Lacasse, Mélissa and Carl still have five to ten years ahead of them to refine their financial preparation.

In Mélissa’s case, Mr. Lacasse suggests that she channel her savings capacity as a priority towards her TFSA rather than her RRSP.

“We already know that Mélissa will have fairly high retirement income. However, adding RRSP withdrawals which will be taxable rather than non-taxable TFSA withdrawals could trigger a “recovery tax” linked to federal pension payments. [PSV] », summarizes André Lacasse.

In the case of Carl, who does not have a retirement plan with his employer, but who has a good amount of independent retirement savings, Mr. Lacasse suggests that he direct his savings capacity found with his next job towards his RRSP rather than towards your TFSA.

“During these few years before retirement, Carl will not have time to accumulate many assets in a new employer-sponsored retirement plan. On the other hand, he would be able to optimize the tax advantages linked to RRSP contributions during his last years of fully taxable employment income,” summarizes André Lacasse.

As for optimizing his TFSA, Carl would have a quick tax advantage by transferring the assets into his non-registered investment account ($48,000). This financial asset would thus go from a taxable return to a tax-free return in TFSA.

Finally, after the start of their retirement, and as they approach their 65^e birthday, André Lacasse suggests that Mélissa and Carl consider these two other important elements.

On the one hand, considering their financial comfort at the start of their retirement, they should refrain from requesting their public pension benefits before age 70.

“Such a postponement of a few years is enough to significantly increase the amount of lifetime benefits, which can prove very useful at an advanced age, in the event of loss of autonomy,” recalls André Lacasse.

Furthermore, 65 is Mélissa’s age of eligibility for splitting her taxable annuity income in favor of her spouse Carl.

“Splitting taxable income is particularly tax efficient for elderly spouses with a large income gap,” explains André Lacasse.

* Although the case highlighted in this section is real, the first names used are fictitious.