Lucinda recently moved to a higher-paying job in healthcare and decided this was a good time to review her savings and investments. She thinks she saves too much.
She used her $150,000 divorce settlement to buy a condo in Toronto, which subsequently doubled in value. She borrowed $100,000 to invest, paying it back more quickly than she expected thanks to a small inheritance. The result is that at 46, she's well set financially with substantial assets and no debt.
"What am I saving for?" Lucinda asks rhetorically. "So far my life hasn't worked out the way I expected, so I'm not making specific plans," she writes in an e-mail. "I want to have the financial independence to do what I want as it presents itself - maybe retire early, travel. You just never know what opportunities will come along."
In her new job, she earns about $90,000 before taxes. She spends about $3,700 a month.
"If I want to maintain the same standard of living after retirement, how much do I really need to save?" she asks.
We asked Warren Baldwin, regional vice-president, T.E. Wealth in Toronto, to look at Lucinda's situation.
What the expert says
Lucinda is very well-positioned financially for her age and stage in life, Mr. Baldwin says. Her goal of retiring at age 65 with a comfortable level of retirement income is easily achievable. In reviewing Lucinda's finances, Mr. Baldwin assumes she will retire at age 60.
"It is always better to have an option to retire early," he notes. This way, if a health or job issue cuts short her employment, she will already have a plan in place.
At age 60, Lucinda's defined-benefit pension plan would pay $30,532 a year, indexed for inflation, he estimates. She requires $35,000 a year of after-tax income in retirement to maintain her current lifestyle.
Lucinda's assets include $94,000 in her registered retirement savings plan and $593,000 in her taxable investment portfolio, with about 80 per cent in equities. Mr. Baldwin suggests a balanced asset mix of 40-per-cent fixed income, 20-per-cent Canadian equities, 20-per-cent U.S. equities and 20-per-cent international equities.
The planner acknowledges Lucinda's concern about saving too much, but cautions that saving less means spending more, which "can become a slippery slope." Thanks to her savings, Lucinda is making rapid strides toward long-term financial security, he says. If she were to get used to spending more, it could undermine her ability to retire early.
By the time Lucinda quits work at age 60, her $35,000 of after-tax expenses will cost $46,000 because of inflation. Her taxable portfolio will have risen to slightly less than $1.5-million and her RRSP to $350,000. Mr. Baldwin's forecast assumes a 5-per-cent average annual return on investment and a 2-per-cent inflation rate.
Her government pension and Canada Pension Plan benefits would cover most of her expenses, Mr. Baldwin says. So unless she wanted to splurge every now and then, she would not have to draw much money each year from her savings, allowing her nest egg to continue growing.
By the time she is age 90, the planner calculates, Lucinda's investments will total $3.3-million - and she'll still have her condo as well.
The planner recommends Lucinda get a detailed review of her investments to come up with a suitable asset mix, taking into account the increasing importance of her pension, which can be viewed as part of the fixed-income component of her assets.
Her estate structuring, too, could use some direction, he says. For example, Lucinda has named her sisters as beneficiaries of her pension. If she were to die, her sisters would get the value of her pension and her estate would get the tax bill for the inclusion of the pension's value in income that year, Mr. Baldwin says.
"A review and a detailed financial plan would give her a much more effective structure … and ensure that she has a blueprint to better manage her assets in future."
Knowing how much to save and putting her savings to work in the most effective way.
Keep right on saving to avoid slipping into the habit of spending so much that her financial freedom is jeopardized.
Financial freedom regardless of what happens in future.
Monthly net income
RRSP $94,000; investment portfolio $593,000; condo $300,000, present value of pension plan $65,000; cash in bank $6,000. Total: $1.06-million.
Savings/investments $1,000; RRSP $250; employer pension plan $630; groceries, drinks, takeout $200; lunch $50; clothing $40; medical, drugs, dental $300; gifts $30; condo fees, property taxes $550; home insurance $10; telecom, cable, Internet $135; vacations $150; books, music $10; hobbies $15; transportation $105; charity $200. Total: $3,675. Savings capacity: $3,015.
Special to The Globe and Mail
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