Lifestyle | Financing early retirement and sabbaticals

When already in your thirties, you have a good annual budget devoted to travel and when, to do more, you plan sabbatical years as well as an early retirement, you have to make sure that you will not run out of funds to go at the end of his dreams.

Martine Letarte
special collaboration

The situation

Jonathan* (38) and Thibault* (34) left their native France to settle in Quebec in 2013. Jonathan earns a salary of $60,000 in the public service and benefits from the Government Employees Retirement Plan and public bodies for a year. Thibault works in the private sector at the same salary and has an annual bonus of around $10,000. Jonathan intends to retire at 55, and Thibault, at 53, then they want to buy a car and a trailer to travel across Canada and the United States.

Until then, they plan to take two sabbaticals, probably in 2028 and 2034, to travel and spend time with their family in France.

Together they save about $30,000 a year and starting in 2027, when their mortgage is paid off, they plan to increase the amount to $50,000.

They wonder if they will have enough money to do everything, or if they should revise certain elements of their planning.

Advice

Are retirements at 53 and 55 realistic?

Jonathan and Thibault are true travel enthusiasts and they intend to do more and more with their sabbatical years and their early retirement. To assess whether these projects are realistic considering their financial situation, Marie-Ève ​​McLean, financial planner at Proactif, financial services, began by looking at their retirements at ages 55 and 53 without taking into account sabbaticals.

She mentions that it must however be considered that, since they arrived in Quebec in 2013, they will not have as much of the Régie des rentes du Québec and the Old Age Security pension as if they had spent all their career here.

By respecting the standards of the Institut québécois de planification financière, she therefore made a forecast considering that they will live to age 94, with inflation of 2% per year and a balanced portfolio that has an annual return of 3 .2%.

“Their assets would be exhausted when Jonathan would be 85 years old and Thibault, 81 years old,” says Marie-Ève ​​Mc Lean.

However, there are different scenarios that could enable them to do so. For example, reducing their standard of living to $51,500 per year. Or both work until age 56.

The financial planner also stresses that their investor profiles should be properly assessed. “If their profiles are rather growing, the potential return could approach 5%, which would allow them to achieve their objectives without reducing their lifestyle. »

Are gap years realistic?

If we take the scenario wanted at the start and add the two sabbatical years, the couple would come to the end of their assets at 79 and 83 years old.

“I had to reduce the couple’s savings a little the years before the holidays, because their capacity will be reduced while Jonathan will have a lower salary due to deferred salary holidays, explains Marie-Ève ​​Mc Lean. This will affect the long-term growth of the investments. »

She then looked at the scenario of taking just one year off, in 2034, as that would give them more years to save once the house was paid for.

“For this to work, both would have to retire at 55 and cut their living to $58,000,” she says.

She also points out that they could decide to take two six-month sabbaticals. “The savings, because of the compound return, would be less affected in the long term, and they would still leave twice,” she says.

To fund a gap year, many dip into their Registered Retirement Savings Plans (RRSPs), but that wouldn’t be the solution for this couple, who need $20,000. “First, because Jonathan will have a salary, so even the first dollars taken out of the RRSP would be taxed,” says Marie-Ève ​​McLean. Also, because their RRSPs are maximized and if they withdraw amounts, they will not regain their contribution room, unlike the TFSA [compte d’épargne libre d’impôt]. They should therefore favor the TFSA, or the home equity line of credit, based on its interest rate compared to what they think they can get in return in their TFSA. »

Investments and other possible solutions

Marie-Ève ​​Mc Lean also invites Jonathan and Thibault to review their investments.

“They are very little diversified, for example with Thibault, who invested everything in the Fonds de solidarité FTQ, which is composed mainly of Quebec stocks, she points out. In addition, this fund has strict rules that prevent the withdrawal of sums to finance a sabbatical year. »

Finally, other strategies could be considered by the couple to finance their projects. For example, instead of rushing to pay for their condominium, spouses could do the opposite: pay it off more slowly to save more.

“It’s not a strategy for everyone, but it could be interesting because mortgage interest rates are low and, depending on their investor profile, they could have a higher return on their investments. students. But they should be comfortable with the risk involved and give up the peace of mind of being debt free. »

She points out that they could also sell their condo once they buy their trailer when they retire to travel.

“This decision would give them the liquidity to do all their projects without changing their initial scenario of retirement and sabbatical years,” she says.

But, one thing is certain, their projects have great financial repercussions, and they must plan them rigorously.

“Their budget must be really solid, because we’re talking about having to live about 40 years without income,” she says. They have to be cautious, especially since we don’t know what the future holds, and forecasts do not indicate that stock market returns will be as high in the coming years as what we have seen recently. »

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

Are you planning a project that requires a wise use of your money? Do you have financial problems?