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(Michelle Siu/The Globe and Mail)
(Michelle Siu/The Globe and Mail)

Financial Facelift

Reaching their retirement target Add to ...

Ross is 58, Sharon 55. They have two children, 20 and 22, both in university.

Ross earns about $65,000 a year working as a skilled tradesman, while Sharon brings in $32,200 working in an office. They paid off the mortgage on their suburban Toronto home before their first child was born.

With retirement on the horizon, they are looking at their $690,000 or so in life savings and wondering whether they will have enough to allow Ross to quit working in a few years. They have no company pensions. Sharon, who stayed home with the children for 10 years, wants to retire about the same time as Ross so they can spend more time together.

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Their older child will be finished university in December, but the younger one has two more years to go. While they have money put aside for this, they are using part of Sharon's paycheque to pay for the younger child's rent and food while he is away at school.

As well, Sharon and Ross are worried about their investments and wonder how they can get a decent return without taking big risks.

"We lost considerable RRSP funds [in the 2008 stock market panic]and are unwilling to assume this risk so close to retirement," Sharon writes in an e-mail. "We have switched financial advisers twice within the past one-and-a-half years and are now very distrusting of them," she adds. Unfortunately, a big chunk of their money is locked up for another six years in mutual funds with deferred sales charges.

We asked Kurt Rosentreter, a chartered financial planner and senior financial adviser at Manulife Securities Inc. in Toronto, to look at the couple's situation.

What the expert says

From their combined net income of about $77,000 a year, Ross and Sharon are saving a remarkable $28,000 in their RRSPs and TFSAs, Mr. Rosentreter notes. They are also contributing $2,500 a year to a deferred profit sharing plan. This virtually assures they will be able to retire in five years without taking too much risk in their investment portfolio. Their target income in retirement is $50,000 a year after tax.

If they invest their savings conservatively - say 80 per cent in guaranteed investment certificates and 20 per cent in equity exchange-traded funds - and continue to tuck away the same amount each year, they will have about $1,038,000 in five years. That assumes an average annual return on investment of 5 per cent, quite possible if interest rates rise over the next few years.

When they retire and start to draw on this money, it will generate pre-tax cash flow of about $29,000 a year, assuming 3 per cent GIC interest and 2 per cent dividend income.

As well, they will get about $11,000 in Canada Pension Plan for Ross and $5,000 for Sharon. Old Age Security will add another $5,000 each a year, for a total of $26,000.

"So government cheques get them halfway to their annual total desired," the planner says. Their portfolio should provide the rest.

The planner's income estimate does not include potential growth in the value of their ETF investments, which can be expected to add to their available capital.

If they wanted more cash flow, they could spend some of the capital gains that they make periodically on the equity (ETF) portion of their savings, dip into capital and buy longer-term bonds when interest rates are higher, or consider buying a joint and last-to-die annuity indexed to inflation, the planner says.

As well, they could consider working part time after they retire from their current jobs.

"Wind down at age 65 but don't stop entirely because the cash from part-time work will go a long way to pay for the fun items in retirement that they may not otherwise have money for."

Finally, Mr. Rosentreter suggests the couple update their wills and look into getting more life insurance for Ross, the family's main income earner, than the $110,000 he now has through work.

"Since it appears the family may be reliant on his income for at least another five years, look to buy some term insurance just for that window of time and then drop it," he suggests. Ross should check the terms of his work disability insurance to ensure it is adequate.

Client Situation

The people: Ross, 58, and Sharon, 55, and their two children.

The problem: Sharon and Ross have done everything right - paid off their mortgage, saved a tidy sum, put their children through school and have no debts. Can they retire when Ross turns 65?

The plan: Retire as planned but continue working part-time. Shift 80 per cent of their portfolio to fixed income, and consider buying a life annuity with part of their RRSPs to help cover the expected income shortfall caused by unusually low interest rates.

The payoff: A secure, albeit modest, retirement, some extra money to travel and maintain the house, and much less fretting about investment risk.

Monthly net income: $6,420

Assets: His RRSP $295,000; her RRSP $247,000; TFSAs $31,000; residence $350,000; bank savings accounts $100,000; mutual funds $18,000; children's college fund $31,000; car replacement fund $15,000. Total: $1,087,000.

Monthly disbursements: Property tax: $330; insurance: $30; utilities: $180; maintenance: $250; furniture, appliance: $290; car insurance: $200; fuel, oil, maintenance, CAA: $360; entertainment, subscriptions: $105; pet expenses: $75; sports and hobbies: $60; miscellaneous personal: $195; medical, dental: $95; parking, transit: $100; groceries: $510; dining out: $165; clothing, dry cleaning: $210; gifts, donations: $185; vacations: $500; telephone, cable, Internet: $110; RRSP contributions: $1,540; TFSAs: $835; DPSP: $215; group benefits: $210. Total: $6,750

Liabilities: None

Special to The Globe and Mail

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