Larry plans to retire in the spring of 2026 at the age of 54.CHAD HIPOLITO/The Globe and Mail
Since his first Financial Facelift in 2009, Larry has been longing to leave his now $144,000-a-year high-tech government job and “chase what I love, although I haven’t yet found out what that is,” he said at the time. But he stayed for the defined benefit pension, “and I’m in a position now where I’m thankful for that,” Larry writes in an e-mail.
He plans to retire in the spring of 2026 at the age of 54. Between now and then, he hopes to save $3,000 a month to fund the gap between spring 2026 and spring 2027, when his defined benefit pension kicks in. He’ll be entitled to $74,200 a year.
His goals? To finally travel and spend strongly – while he is youngish and healthy, Larry writes. Keen as he is, he’s also a little concerned about the financial ramifications of possibly being downsized imminently.
Larry’s retirement spending goal is $72,000 a year after tax, although he’d like to spend more and wonders if he’d have to get a part-time job to do so.
We asked Ian Calvert, a certified financial planner and principal at HighView Financial Group, to look at Larry’s situation.
What the Expert Says
Larry has a number of financial goals, but his first and perhaps most important is an early retirement date, Mr. Calvert says. Larry is planning to retire in April, 2026, at the young age of 54. He plans to save aggressively with the limited working time left and then live off his pension and retirement savings.
Larry has a net worth of $1,117,500 broken down as follows: $650,000 in his condo, $84,000 in cash and GICs, a tax-free savings account of $113,500 and an RRSP of $270,000. He has no liabilities.
“A comfortable retirement at age 54 is a remarkable accomplishment,” the planner says. Compared with a more typical retirement at 65, though, Larry is giving up another decade of saving – and, for many people, their highest earning years – as well as another 10 years of paying into Canada Pension Plan and his work pension plan.
“With a retirement date set for spring, 2026, Larry will have a unique year before his pension starts the following spring,” Mr. Calvert says. For 2026, Larry will have only a partial year of employment income, expected to be about $36,000 for three months.
“This presents a good opportunity to consider a larger withdrawal from the assets in his RRSP,” the planner says. “An optimal amount to withdraw would be $40,000.” This would all be taxable income. “The strategy is to take advantage of the unusually low-income year,” Mr. Calvert says.
With employment income of $36,000, $40,000 of taxable income from his RRSP, and a few thousand dollars worth of interest reported from his cash and guaranteed investment certificates, he would have an income of about $79,000 or $80,000. “This would keep Larry well within the combined tax bracket – B.C. and federal – of 28.2 per cent,” the planner says. “Then, when his pension starts in 2027, he should reduce the RRSP withdrawals to $20,000.”
Pension income of $74,220, a $20,000 withdrawal from his RRSP and small amount of other investment income would bring Larry’s taxable income to about $97,000 a year. Subtracting $19,000 in income taxes would leave him with about $78,000 after tax, in line with his spending target of $72,000 a year, indexed to inflation, with a small buffer. He would still be in a favourable marginal tax rate 28.2 per cent with income below $98,560.
To make this cash-flow plan work, Larry could either convert his RRSP to a registered retirement income fund or keep the RRSP structure; there is no forced conversion until the age of 71. “The real benefit of converting to a RRIF would be if Larry wanted to establish a monthly withdrawal from this account,” Mr. Calvert says. The RRIF is designed for withdrawals, whereas many financial institutions charge a de-registration fee for RRSP withdrawals. “This can add up if you complete several withdrawals during the year.”
This withdrawal strategy would “run nicely” from 2027 to 2036, when Larry turns 65, the planner says. At that time, he could begin drawing his Old Age Security and reduced CPP benefits. The latter benefit would be lower than it would otherwise be because he was only 54 when he stopped contributing to the plan.
Drawing government benefits would slow the rate of withdrawal from his assets. “At this rate of withdrawal, and assuming he can earn 5 per cent each year on his investments, his RRSP, tax-free savings account and other savings would be depleted by age 89 or 90,” Mr. Calvert says. Larry would still be collecting his work pension and government benefits. His condo could be worth about $1.6-million, assuming steady price appreciation of 2.5 per cent per year.
Larry wonders if he could increase his target spending to $85,000 per year. “He likes the idea of living in his senior years on his pension, government benefits and possibly condo sale proceeds, with his RRSP and other savings depleted,” the planner says. “This is certainly achievable, but he would be forced to liquidate his real estate much sooner.” At this rate of withdrawal, Larry would need to sell his condo in 2039 or 2040 – around the age of 70. Then he would have a few options for the proceeds, estimated to be about $900,000.
If he downsized to a lower-priced home, using most of the proceeds from the sale of his current condo, he’d need to tap into his home equity again at some point if he wanted to continue spending $85,000 a year, the planner says.
If Larry’s lifestyle needs remain constant at $85,000, and increased each year with inflation, he would need $28,000 from his savings at age 70 in addition to his pension and government benefits.
Alternatively, he could consider renting instead of buying, using the real estate proceeds to generate predictable income to supplement his pensions. If his goal is to deplete his assets, he could use the real estate proceeds to comfortably increase his spending or move to a high-end retirement home in his later years, Mr. Calvert says.
Larry asked how possibly being downsized soon would affect his financial goals. “Although this would lower his expected savings and the ultimate longevity of his assets, with his retirement date about 14 months away, it wouldn’t be too disruptive to his retirement plan because he still has his pension and current asset base,” the planner says.
Client Situation
The person: Larry, 53.
The problem: Can he afford to quit working in the spring of 2026?
The plan: Go ahead and quit. Take advantage of the low-income time between when he leaves his job and when he begins collecting his pension to draw down his RRSP.
The payoff: Financial freedom.
Monthly net income: $8,500.
Assets: Cash in bank $62,000; GICs $22,075; TFSA $113,530; RRSP $270,025; residence $650,000. Total: $1,117,630.
Estimated present value of his DB pension: $1,640,000. That is what someone with no pension would have to save to generate the same income.
Monthly outlays: Condo fees $650; property tax $210; home insurance $75; electricity $60; transportation $180; groceries $620; clothing $100; gifts, charity $160; vacation, travel $1,165; other discretionary $400; dining, drinks, entertainment $1,520; personal care $40; club memberships $260; pets $175; sports, hobbies $50; subscriptions $70; other personal $320; health care $70; phones, TV, internet $180; RRSP $700; TFSA $700. Total: $7,705. Surplus goes to saving.
Liabilities: None.
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