Q: I am a 57-year-old widowed medical secretary earning $43,000 annually plus survivor pension of $560 monthly. I do not have a mortgage or car payments or any other debt. My children are grown and on their own. I have approximately $500,000 in RRSP and non-registered. My home is valued at approximately $700,000. My question is could I possibly be able to retire comfortably at 60 years of age?—Kathy
A: You and a lot of other people wonder if they are ready to retire, Kathy. Some know they can’t and they definitely aren’t there. Others are on the cusp. Yet others definitely can, but don’t realize it.
Whether you are able to retire comfortably kind of depends. Here are some of the questions you should be asking yourself:
1. How much money do I spend each month?
2. Will I spend more or less in retirement?
3. What are some of the sporadic expenses I need to budget for beyond my day to day costs?
4. What rate of return should I expect on my investments?
5. Can I expect any financial windfalls in retirement, like a home downsize or inheritance?
6. Can I expect any extraordinary costs in retirement like support for kids or parents?
7. How long will I live?
8. Do I want to plan to live off of investment capital or draw my investments down to zero?
9. Am I comfortable using some of my home equity in retirement or do I want to always live in my home, debt-free?
All of the above questions impact your initial question of whether you can retire comfortably at 60. So like I said, it kind of depends.
I’ve made some assumptions, Kathy, to help give you a rough answer to your question. My assumptions are:
-You retire at age 60.
-You live until age 90.
-Your expenses are $35,000 a year—equal to your current after-tax employment income—will increase at 2% inflation until age 80, at which point your expenses drop by 10% thereafter.
-You spend $5,000 every 5 years on extraordinary home repairs or renovations, indexed at 2% inflation.
-You replace your car every 10 years, starting in 5 years, at $25,000, indexed at 2% inflation.
-You’re entitled to full CPP and OAS pensions.
-Your investments return 5% annually.
-You never downsize your home.
Based on the above, I project your current $500,000 of savings will be depleted to about $58,000 by age 90, but your house will be worth about $1.9 million, assuming 3% real estate price appreciation.
So can you retire at age 60? I’ve mapped out a scenario where you can retire today. But are my assumptions valid? Are they reasonable for you? Or are there other considerations or modifications?
Anyone can retire at any age, depending on the fact pattern and the lifestyle they expect to have thereafter. You need to decide whether that lifestyle is reasonable and whether the assumptions are fair.
A retirement plan can help you make reasonable forecasts to help make today’s financial decisions. Things most definitely won’t work out the way a retirement plan projects, because it’s just a forecast at a point in time. Any number of things may change or happen differently and make the plan irrelevant. But it gives you a general sense and you can then do sensitivity analysis and consider various scenarios to help make your choices.
Retirement planning is more art than science. You can use it to paint a picture of the future and make lifestyle decisions based on financial data. You can make retirement approximations on your own to help frame your retirement decision-making. Or you can consider working with a professional financial planner to build a plan.
Ask a Planner: Leave your question for Jason Heath »
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.