How to plan for retirement in five or 10 years

Here is my financial profile:

• I have a house worth about $700,000, with $150,000 still remaining on the mortgage, which I plan to pay off aggressively within the next three years. I am making doubled-up payments of $4,000 per month.
• No other debt.
• RRSP savings: Approximately $160,000
• Annual salary: $110,000
• Projected annual pension: Retirement at age 60 will be $38,000 per year, and retirement at age 65 will be $44,000 per year.
• CPP: I will not get maximum but I should be in the upper range.

I am trying to figure out when I can retire and what my next steps are.

—Joan

How to make a five- or 10-year retirement plan—and when to retire

Hi Joan, I like your question. I always find it exciting working with Canadians as they prepare for their retirement. Let me give you a few steps on how you might tackle your question, and then I will provide you with a couple of links to fee-only advisors.

1. Identify your current lifestyle

Understand your current lifestyle first, before starting to think about your retirement lifestyle and income needs. Begin by listing all of your current expenses and note how those expenses and activities may change over time. 

A lot of people don’t know what they will be doing in retirement or what things will cost. People’s lives change and so does the world around them. Looking at what your lifestyle expenses and activities are and projecting them for the future is a good starting point, because I know nobody dreams of reducing the current lifestyle they enjoy. 

2. Organize and review key financial planning documents

Net worth and cash-flow statements are the key documents to understanding your current position. And their respective projections will give you key insights as to how things may look in your future. 

The net-worth statement lists a total of your assets minus your liabilities. At your retirement, either 60 or 65, your projected net worth statement shows you will have no debt, a house and a registered retirement savings plan (RRSP).

Most of your money will be tied up in your home. Is your plan to leave that money to your children? If not, when would you want to access that money and how? When you’re engaged in the planning process, experiment with different solutions as to when and how to access the money in your home. For example, will you want to sell, rent or borrow? And, of course, when?

All of your readily available money is in your RRSP which is 100% taxable when you make withdrawals. It is understandable that you don’t have a tax-free savings account (TFSA) yet. And, if you’re going to receive an inheritance, it may be best to preserve the TFSA room to accept some of the inheritance. 

3. Look at your cash flow

Things do get more interesting when looking at your cash flow statement. You’re earning $110,000 annually. In the table below I have listed your annual outflows, including Canada Pension Plan (CPP) and Employment Insurance (EI), as well as income tax based on you living in Ontario:

Joan, when you look at the table what do you see? 

Your lifestyle expenses, the money you’re using to run your home, put gas in the car, buy groceries, etc., and hopefully have some fun is only $26,399 a year. All the expenses listed below your lifestyle expenses in the table (CPP, EI, pension plan contributions) disappear once you retire, with the exception of taxes which will be greatly reduced. You’ve mentioned that your mortgage will be paid off.

Projecting ahead four years, when your mortgage is paid off, you’ll have an extra $48,000 a year to spend or save as you wish. You could save it, but what’s the point if you’re going to continue to live on $26,399 annually. I hope you see what is happening here. 

Exposing you to your future cash flow should cause you to pause and think about a balanced approach between living an active lifestyle today and saving for an active lifestyle in your future. 

Assuming you work to age 65, your income before RRSP withdrawals may look like the numbers presented in the table below. Here are the annual numbers are in today’s values:

The after-tax amount is $58,878 a year, which is more than two times your current lifestyle needs.

4. Estimate your retirement expenses, and do it again and again

I suspect you may now realize why taking the time to estimate your retirement expenses is important. Based on the numbers you’ve provided, the projections I’ve made here indicate you have more than enough money to retire. But in reality, that’s wrong, isn’t it? I’m sure you want to live a bigger lifestyle than $26,000 a year can afford. 

And, don’t shortchange yourself. Saying you want, say $60,000, after tax, is a cheat, and you’ll miss out on real learning opportunities that could be gained throughout the planning process. 

When you have all of your activities and expenses modelled, you can conduct some “what if” solutions to see what would happen when you make certain changes, such as kitchen renovations, more travel, frequency of vehicle purchases, part-time work and so on. It’s your lifestyle choices that have the biggest impact on your future finances, rather than any financial planning strategies or tactics a planner may suggest.

Finding a fee-only financial planner

To you find a fee-only planner, you can reference MoneySense’s Find a Qualified Advisor tool and Value of Simple’s directory. You can also search on Google or ask friends for recommendations. Hopefully, you’ll find an advisor with whom you have the right chemistry with, and you can both work on your plan together.

Joan, I know I didn’t tell you when you can retire. You have to decide how you want to live in your retirement first. Take that same drive and energy you have to aggressively pay off your mortgage to create the life you want to live. With your pensions you have a good base to create an exciting and active retirement lifestyle.

Allan Norman provides fee-only certified financial planning services through Atlantis Financial Inc. and provides securities-related business through Aligned Capital Partners Inc. (ACPI). ACPI is regulated by the Investment Industry Regulatory Organization of Canada (IIROC.ca). Allan can be reached at atlantisfinancial.ca or [email protected].

Read more from Ask A Planner:

• Tax-efficient retirement strategy options for Canadians
• How much to take out of your RRSP in your 60s
• Financial gifts: What you need to know before giving money or investments
• Financial planning in your 70s
• The best 5-year variable mortgage rates in Canada
• The best 5-year fixed mortgage rates in Canada

About Allan Norman, MSc, CFP, CIM

With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.

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