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At 61, Ruth's thoughts are turning to the day when she can quit her stressful job with its long hours and spend more time travelling, doing yoga, hiking and taking courses at the university.
While she is active and in good health now, Ruth had a health scare last year.
"An incident like that makes you think and reflect on what's really important in life," she writes in an e-mail.
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What's most important is being able to help her 21-year-old son, who graduates in July, to pursue a career in the theatre.
Ruth's main asset is her house in the trendy Kitsilano neighbourhood of Vancouver, which she figures is worth $1.35-million.
We asked Gina Macdonald, financial planner and portfolio manager at Macdonald, Shymko & Co. Ltd. in Vancouver to look at Ruth's situation.
What our Expert Says If she continues to work until she's 65, Ruth's income will still fall short of her retirement goals if she continues to live in her Kitsilano home. Without paying off her mortgage, Ruth will need $59,000 a year after taxes, the planner estimates. That number would fall to $42,000 if the mortgage is paid off.
Ruth's two indexed pensions will only give her about $696 a month. She will be eligible for full Canada Pension Plan and Old Age Security benefits of $17,414 a year, which will raise her monthly income stream to $2,147, or about $26,000 a year.
This does not even cover her housing expenses of $2,632 (mortgage, property taxes, insurance, utilities, telephone, repairs), Ms. Macdonald points out. As well, the interest rate on her 24-year, $230,000 mortgage could rise from the current 5.1-per-cent rate, requiring more than the $1,430 a month she currently pays.
With the mortgage, her income shortfall is $2,770 a month, about $33,000 a year. Even without the mortgage, she'd be short about $1,353 a month, about $16,000 a year.
The mortgage is clearly an obstacle.
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The Invest for Life series:
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If Ruth continues to rent out her basement suite at $933 a month, the shortfall (with the mortgage) would drop to $1,837, about $22,000 a year.
One option for Ruth is that she could apply for the B.C. Property Tax Deferral program, saving her another $458 a month and shaving the shortfall to $1,379.
Ms. Macdonald offers several possible solutions for Ruth to make up the shortfall.
First, Ruth could withdraw money from her registered savings to generate enough income to stay in her home. She would need to take about $22,000 a year in order to get after-tax income of $16,548. (This, plus her pension income of about $26,000, would raise her income to the desired $42,000). At a 3-per-cent rate of return in her RRSP account, she could do this for up to 13 years before she ran out of money - and the mortgage still would not be paid off in full. At that point Ruth would have to sell her home.
Other possible solutions include renting out more space in the house or even moving into the basement apartment until the mortgage is paid off or until she receives a possible inheritance.
Alternatively, Ruth could downsize to a house that costs no more than $850,000, which would leave enough money to generate an income stream (with her other income sources) of about $50,000 a year.
"The new house could have a basement suite to generate additional cash flow for travel goals and for big ticket replacements such as a new roof or new furnace," Ms. Macdonald says.
Critical to Ruth's success is a revamping of her investment portfolio, Ms. Macdonald notes.
"A 100-per-cent equity portfolio is inappropriate for a 61-year-old woman nearing retirement with limited resources."
Given the relatively small size of Ruth's RRSPs, Ms. Macdonald recommends a diversified portfolio of index funds because of their low cost and the diversification they offer. She also suggests a bond or GIC ladder, in which a portion of the fixed-income securities mature each year.
Finally, Ruth has the capacity to save about $1,000 a month as long as she continues working, which she can use to replace her 17-year-old car with a new used one, catch up with her $10,000 in unused RRSP room, open a tax-free savings account and make repairs to her house.
Client situation:
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The Person: |
Ruth, 61 |
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The Problem: |
How to finance an active retirement, including travel, and help her son in the early stages of his career |
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The Plan: |
Sell her house in Kitsilano, downsize to something less expensive and use the balance to generate cash flow |
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The Payoff: |
Time and money to do all the important things in life |
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Monthly income: |
After-tax salary $4,897; rent from basement apartment $933. Total $5,830 |
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Assets: |
House $1,350,000; RRSP $151,661; locked-in RRSP $67,403; RESP $13,803; savings $7,400. Total: $1,590,267 |
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Monthly disbursements: |
Mortgage $1,430; property tax $458; house insurance $180; car insurance $83; life insurance $100; cable, phone, cellphone, Internet $144; heat and light $150; house repairs and maintenance $85; gas, oil and car repairs $120; clothing $250; food, toiletries, household items $650; entertainment and gifts $150; massage/chiropractic/medical $500; son's living expenses away from home $500; subtotal $4,800; savings capacity $1,030. Total: $5,830 |
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Liabilities: |
Mortgage $230,000 |
Special to The Globe and Mail
