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Now that both of their children have started their careers, are married and purchased their first homes, Timothy,* 57, and Margaret, 53, are ready to retire. Ideally, they both want to leave the workforce in two years when Timothy can retire with his full defined-benefit pension after 30 years of work.

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“We’ve helped the kids with their weddings and down payments and want to start enjoying our next phase,” said Timothy. They plan to travel, spending winters in warm climates, and summers exploring Canada. Their desired travel budget in retirement is $20,000 a year. “Will we be able to maintain or increase this in retirement?” asked Timothy. “Or should we decrease it?”

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Timothy currently earns about $115,000 and Margaret earns about $94,000 before tax. In 2028 Timothy’s annual pension income will be $46,200 before tax and Margaret’s will be about $49,000. Their annual pension income will drop to about $23,000 and $35,000, respectively, when they each turn 65. Their target combined annual income in retirement is $84,000 after tax. Their current annual expenses are $40,000.

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Timothy and Margaret anticipate they will need about $7,000 a month after tax during retirement to maintain their current lifestyle — more than their pension incomes will provide. They wonder: What is the most tax-effective way to make up the shortfall and avoid government clawbacks? Should they tap into their RRSPs or apply for Canada Pension Plan (CPP) benefits? At what age would it be most advantageous to start collecting their government pensions?

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Most importantly, is retiring in two years feasible? Should they invest significantly in their mutual funds to make sure they can retire in 2028? If they do retire early, will their investments provide the income they need for the rest of their lifetimes?

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What the expert says

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The good news: Timothy and Margaret will be able to retire comfortably in two years thanks to living within their means and consistently making sound financial decisions, said Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management. “They don’t have huge incomes, substantial wealth or enormous pensions, but their discipline reflects the wisdom of an old proverb, which states that money accumulated little by little will steadily increase over time.”

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While their financial outlook is strong, Einarson said their focus now should be on developing a tailored retirement income plan that efficiently uses their current assets and pensions to address future cash flow needs. He recommended they start with a review of their retirement income goals.

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“Their desired retirement income of $84,000 a year after tax includes a $20,000 travel budget and buffer for extra expenses that may come up. If they retire in two years, their combined unreduced pensions alone will total about $67,000 after tax until Timothy turns 65 — well above their current annual expenses of $40,000. They can supplement cash flow needs and continue to invest in their TFSAs with RRIF (registered retirement income fund) income for the next 35 years.”