Mercedes is at a critical point in her life. She and her husband divorced last year, so the household has gone to one income from two.
“I find myself constantly worrying that I won't have enough money to support my family,” Mercedes, who is 38 and works as a project manager, writes in an e-mail. She has a 10-year-old daughter.
“This experience is exacerbated by my being an immigrant (I came to Canada alone) and always having had to rely only on myself.”
She is very conservative when it comes to investing, having watched her father lose a bundle in emerging markets in the early 1990s.
At work, Mercedes has a defined-benefit pension plan, but she would like to change jobs and wonders if she dares leave it behind. She also fears she and her daughter would suffer a big cut in their standard of living if child support payment were to stop for some reason.
We asked Mike Macdonald, vice-president at Weigh House Investor Services in Burlington, Ont., to look at Mercedes' situation.
What our Expert Says
At first glance, Mercedes is facing a bit of a cash crunch. Including her savings, she's spending $500 a month more than she is earning. Mr. Macdonald says that to solve that problem, she could lower her savings or debt reduction plans to lessen the stress on her budget.
Overall, however, if Mercedes continues to earn her current income, receive support payments and maintain her lifestyle, she will have a solid pension valued at about $75,000 annually when she retires, a house free and clear of debt, and sufficient investments to cover planned educational expenses, Mr. Macdonald says.
Her disciplined approach will ensure she has enough money to meet her goals. The estimated value of her estate when she dies will be $1.8-million, with about $1.3-million being the value of her home.
Given the long time before she will retire, and assuming inflation is at 2.5 per cent, projections must be taken in the context of escalating expenses, he notes. Annual living expenses will be well over $100,000 a year by the time Mercedes reaches 95 years of age.
But by shunning the stock market, she risks losing purchasing power to inflation, he cautions. If Mercedes was to invest instead in a portfolio of 50-per-cent cash and fixed income and 50-per-cent broadly diversified equities, she could expect to see an average annual return of about 6 per cent over the 30-plus years until she retires and begins to draw down her savings, he estimates.
Her long time horizon would allow her to wait out the inevitable market swings, and the equity investments would provide some protection against inflation. By adding equities to her portfolio, hence getting higher returns, her estate would be expected to increase from $1.8-million to about $2.5-million.
If she changes jobs, Mercedes would have to invest more aggressively than her current cash holdings in order to enjoy similar benefits to her existing defined-benefit pension plan, Mr. Macdonald says.
“One of the most difficult things in this scenario is the increased stress of managing her own investments and, more specifically, managing the risk of poor market performance as she approaches retirement,” he says. Also, the indexing feature in her pension plan could be of great value if the cost of living rose steeply for a period of time.
Still, Mercedes has the ability and discipline to succeed if she quits her job for a similar or better paying career, Mr. Macdonald says. With a 6-per-cent average annual return on her investments, she would accumulate an estate valued at $2.3-million.
