Case Study 10: Should Bob Work Longer and Retire Later?

A Case Study on How Working Longer Can Impact Your Retirement Savings

Bob is 57 years old and plans to retire at age 60 with retirement savings totalling $320,000. However, with the recent stock market volatility, his portfolio is now worth $200,000. Bob is now questioning whether he should work a few more years to rebuild his retirement savings. But how many more years should Bob work? And how much difference will those extra few years of working make towards his savings? Using BMO’s Retirement Transition Illustrator, Bob can easily determine what will happen to his savings if he decides to work for a few more years on either a casual, part-time or full-time basis. The Illustrator assumes no additional savings are made during these years of part-time or full-time work.

Bob’s Income Needs During Retirement
Bob determines that he will need an income of $1,500 per month, or $18,000 annually from his $200,000 retirement savings to maintain his current lifestyle. This amount is in addition to the money he will receive from his CPP/OAS* and company pension

Scenario #1: What happens if Bob decides to stick with his plan of retiring at age 60?
To achieve his goal of retiring in three years and drawing $18,000 per year from his retirement savings, the Illustrator shows that Bob will need to save $22,904 per year, for the next three years (from age 57 to age 60). His retirement savings will then amount to $319,719 and he will be able to withdraw $18,000 per year from his savings when he retires at age 60. However, due to his current income and expenses, Bob isn’t certain he can save $22,904 each year for the next three years. If this is the case, then he may want to consider working a few more years on either a casual, part-time or full-time basis.

Scenario #2: What happens if Bob decides to work a few extra years and retire at age 63?
Bob could work a few more years and earn enough money so that he won’t have to withdraw money from his current retirement savings until age 63. This will impact how much money he will need to save in the next three years, between age 57 and 60. The Illustrator shows that he will now require $270,802 in retirement savings. Bob can reach this savings goal if he saves $8,552 per year, for the next three years (between age 57 and 60). The annual amount he needs to save from age 57 to 60 is significantly less than the amount he would need to save if he stopped working at age 60 ($22,904).

Scenario #3: What happens if Bob decides to work a few extra years and retire at age 65?
If Bob works until age 65 on either a full-time or part-time basis and can delay withdrawing from his retirement savings until 65, he will not have to direct any additional money towards his retirement savings between age 57 to age 60. His current retirement savings of $200,000 will be enough to meet his income goal of $18,000 per year commencing age 65. Bob will actually have extra income (cash that he won’t have to save towards his retirement savings goal) that he could use to pay down debt, do home renovations, or save towards a vacation fund!

What Are Your Plans?
Whether you decide to save more or work longer, these are important decisions that could have a big impact on your retirement savings. To learn more about building a retirement plan, contact a BMO investment professional today!

*Canadian Pension Plan / Old Age Security