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Financial Facelift

Out of the uniform, into retirement Add to ...

Five years ago, when they approached Financial Facelift the first time, Tony and Cleo had a $200,000-plus mortgage, $40,000 in car loans and a $26,000 loan from their parents. Today they have $60,000 left on their mortgage, which they plan to pay in full by next year, and a $27,000 car loan at 0.9 per cent.

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"We were living from paycheque to paycheque," Tony said in an interview from his Nova Scotia home. "We had very little savings." The planner advised them to build an emergency fund. Instead, they paid down debt. "We looked at our home as a forced savings program," Tony explains.

The couple were fretting about how to provide each of their three children with $50,000 for post-secondary education and to get a start on life. They were relieved when the planner explained how they could do this over time, through registered education savings plans, help with living costs while the children were in college and even contributing monthly to an RRSP for their oldest daughter, who is out on her own now.

Today, Cleo and Tony - both 48 - have more planning options than many Canadians thanks to Tony's gold-plated RCMP pension plan. Tony is hoping to quit his job this fall, take a less stressful but lower paying one in the public service and then quit work entirely in seven years when he is 55. Cleo, who has been working for a federal agency for five years, plans to continue in her current job until they both retire in 2018.

They are sending $500 a month to their second child, 18, who is away in college. Their main concern is that they have enough money set aside for Tony to change jobs and to put their young son, age 8, through university as well.

When they hang up their hats, Tony and Cleo plan to sell their city home and move into the family cottage, which they hope to have finished by then at an additional cost of $100,000. They figure they'll need $72,000 a year after tax when they retire.

We asked Ross McShane, director of financial planning services at McLarty & Co. Wealth Management in Ottawa, to look at Cleo and Tony's situation.

What the expert says

Tony and Cleo will have their mortgage paid in full by 2012, freeing up another $42,000 a year in cash flow, Mr. McShane says. As much of this extra money as possible should be tucked away in tax-free savings accounts, using their four years of unused contribution room until the money is needed to finish the cottage. The balance should be invested in their non-registered accounts.

In the meantime, Tony can easily afford to make the transition to a lower-paying, less stressful job by 2014 and retire completely in 2018. All the while, the couple will continue contributing to an RESP for their youngest child. Because they still have some unused Canadian Education Savings Grant room for their son, should take advantage of it by increasing the annual RESP contribution to $5,000 before the year their son turns 18, the planner adds.

Although their RRSP room is minimal because of their pension plans, Tony should take advantage of his unused contribution room while he is still in the top tax bracket, Mr. McShane says. Cleo's unused room is not as important given her lower tax bracket.

Cleo and Tony face a two-year gap between the time they need $100,000 to finish their cottage and when they sell their home in 2018, Mr. McShane notes. They can draw on their non-registered savings or TFSA to cover the cost. In the meantime, the money designated for the cottage should be invested conservatively given the short time horizon.

When Tony retires, he will get a $64,760 retiring allowance, with $18,000 eligible for rollover to an RRSP and the balance in cash. Together, Cleo and Tony will get a combined $96,000 a year in today's dollars from their government pensions. That, along with a portion of their non-registered portfolio income, will be ample to cover their lifestyle expenses. They can reduce the tax bite by splitting Tony's pension income with Cleo.

When they reach 65, their pensions will be reduced to consider integration with Canada Pension Plan benefits. OAS will also kick in at this point, but a portion of it will be clawed back because of their high income. They will not need to draw money from their RRSPs until the mandatory age (72) at which time they must begin withdrawing funds from their registered retirement income funds.

"By 2018, with the proceeds from the sale of the home, the retiring allowance and the existing RRSPs, their portfolio will total about $700,000 and will require careful attention," Mr. McShane cautions. Tony and Cleo "can achieve their goals nicely without having to take unnecessary risk."

He suggests they shift away from their high-cost mutual funds when their portfolio is large enough for a professional money manager whose fees are tax deductible. In the meantime, he recommends they invest in exchange-traded funds or low-cost mutual funds.

Mr. McShane assumes an average annual return on investment of 5 per cent and a 2-per-cent inflation rate.





CLIENT SITUATION



The people



Tony and Cleo, both 48, and their children.



The problem



Can Tony afford to switch jobs, and retire at age 55 with a son who is only 8 years old now?



The plan



Switch jobs, pay off the mortgage, finish the cottage and sell the city home. Keep contributing to son's RESP.



The payoff



Less stressful work and ultimately, financial security, thanks mainly to their defined-benefit pension plans.



Assets



Bank account, term deposits $1,500; RRSPs (mutual funds) $95,000; home $400,000; cottage $75,000; RESP $30,000. Estimated present value of combined DB pensions: $1.4-million. Total: $2-million



Monthly net income



$11,330



Monthly disbursements



RRSP $350; pension plans $1,350; groceries, drinks, takeout $800; lunch, dining out $250; clothing, dry cleaning, personal $300; medical, drugs, dental $100; child care, household help $350; tech tools and toys $100; pet care $150; gifts $200; mortgage payments $3,500; property taxes $350; house insurance $75; heating, hydro, water $350; telecom, cable, Internet $200; repairs and maintenance $250; furniture, appliances $100; vacations $200; reading, music, movies $100; courses, hobbies, sports $300; children's activities $150; auto loan $500; auto expenses $350; daughter's college living expenses $500; life insurance $200; RESP $200; group insurance $120. Total: $11,395.



Liabilities



Car loan $27,000; mortgage $60,000. Total: $87,000.





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