Staggered Retirement

Article excerpt

She wants retirement now, and he would like to work longer; can this mismatch work?

Maria can't retire quickly enough. The office worker in her early 50s could retire next year on her pension, but she is not sure it will be enough.

"What I would like to figure out is I've been thinking of retiring well before my official retirement date just because I would like to do something different," says the government worker who grosses $60,000 a year.

Perry, in contrast, is a tradesman in his mid-50s and he has no plans to retire for another five years.

"I'll probably never really fully retire," says Perry, who earns about $120,000 annually before taxes. "I will likely semi-retire."

The couple still has 10 years remaining on their mortgage, owing about $111,000 on a home worth $350,000. But they plan to make extra payments to be mortgage-free in five years.

It shouldn't be a major challenge for them.

They're savers, often maximizing their RRSPs and TFSAs every year.

Maria has about $122,000 in her RRSP -- she's been saving since her 20s -- while Perry has $160,000 in his. At the moment, they only have about $7,000 in their TFSAs, because they recently bought a new car.

If Maria retires next year, her pension will be $2,851. If she waits three more years, her pension would be $3,671.

Yet, Maria doesn't plan to fully retire. She would find another, less stressful job, but she's worried how that may affect their current lifestyle, including spending about $10,000 a year on vacations.

"If I get another job after I retire, it would be for something to do," she says. "If I need the money, I may as well stay at this job."

Retirement planner Karen Diamond says Perry and Maria are in a good position today, but it could always be better.

"In an ideal scenario, prospective retirees have no debt, a good blend of both registered -- RRSPs, pensions -- and non-registered savings adequate to support their lifestyle, insurance in place to manage risks and a solid understanding of what their desired retirement lifestyle will actually cost," says the certified financial planner with Diamond Retirement Planning in Winnipeg.

Taking all that into account, they clearly haven't addressed all these issues. Still, early retirement does appear to be a viable option for Maria, especially given Perry plans to work much longer so he will have more time to build up his retirement savings and pay off the mortgage.

But Diamond says she does see a red flag in their plan.

Their estimates suggest even if they plan to pay off their mortgage over the next five years -- $15,000 a year in extra payments -- and contribute $20,000 to Perry's RRSP annually while he is working full-time, they would have more than $30,000 a year in unaccounted cash flow if Maria were still working full-time. "So, where is that money going now?"

Diamond says she suspects they may have underestimated their actual spending, including large expenditures such as home repairs.

"They need to carefully track where their money is going and be able to strike a fairly accurate forecast of what their actual needs will be," she says.

In fact, the big costs in retirement, including vacations, pose a major risk to their plans because most of money needed to cover those costs will come from registered accounts, which are fully taxable.

"Not only will they pay tax on those extra dollars at their highest marginal tax rate, but once they reach age 65, they could also be subjecting themselves to the loss of tax credits and benefits such as OAS, effectively being 'double-taxed' on that income," she says. …