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- (Christinne Muschi For The Globe and Mail)
- (Christinne Muschi For The Globe and Mail)

FINANCIAL FACELIFT

Woman who loves travel could be knocked off course by fund fees Add to ...

Ruth has lived modestly, invested her savings and paid off her debts.

Now, at age 52, she wonders when she can retire.

She earns $58,800 a year before tax, an amount that varies depending on how many days she works. In addition, she gets $10,000 a year for life, a bequest from a relative. Ruth has joint custody of her teenage daughter, for whom she gets some child support.

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Glancing at Ruth’s monthly budget, one number stands out – $600 for vacation and travel, or $7,200 a year. To spend so much, she pinches pennies in other areas.

“I probably spend even more on travel some years,” Ruth writes in an e-mail. “It’s what I love to do the most.”

As long as she is working, she has no intention of scaling back.

“Once I retire, I hope to travel, but maybe to places where I can travel on more of a budget; let’s say $400 a month,” she adds. “It may be high, but my expenses for most other things are low.”

Indeed, excluding travel, she spends a modest $2,240 a month, or $26,880 a year.

Ruth is mortgage-free, so her housing costs are only $680 a month, with $300 of that being property tax.

For the next little while, all of her extra money will go to some much-needed maintenance and repairs on her Montreal-area house.

Her goals: To ensure her savings are invested wisely and to retire, if possible, before age 67.

We asked Heather Franklin, an independent Toronto financial planner, to look at Ruth’s situation.

What the expert says

First, the investments. For Ruth, getting the best return possible is important, Ms. Franklin says.

Unfortunately, Ruth holds mutual funds with deferred sales charges and high management expenses “that are handicapping the performance of her investments,” the planner says.

Depending on the penalties for selling early, “extricating herself from these mutual funds and changing her investment strategy might be a viable option,” she says. The deferred sales charges expire in four years.

Ruth could then begin to build a balanced portfolio (some stocks, some fixed income) of low-cost mutual funds with strong performance records and/or low-cost exchange-traded funds, which track the performance of various stock and bond indexes.

New contributions should be directed immediately to such low-fee investments.

The planner recommends Ruth keep working until she is age 65 because she has no work pension and so must rely heavily on her savings.

In preparing her retirement forecast, Ms. Franklin assumes that Ruth continues to contribute to her RRSP and TFSA at the current rate, that her average annual return on investments is 5 per cent and that she lives to age 90. Inflation is assumed to average 2 per cent a year.

At age 65, Ruth will begin collecting Quebec Pension Plan benefits. Her lifestyle spending of $2,640 a month (current spending plus $400 for travel) will leave her with a shortfall that will have to come from her savings. By then, her TFSA will have grown to about $115,000, the planner estimates. Withdrawals will not be taxable.

At age 67, Ruth will begin collecting Old Age Security benefits, which will trim her monthly shortfall. Still, by age 72, Ruth may well have exhausted her TFSA savings. She will begin making mandatory minimum withdrawals from her RRSP, which by then will have been converted to a registered retirement income fund.

Ms. Franklin estimates the minimum withdrawal (assuming the RRSP will have grown to $475,000) will amount to $35,000 in the first year. That, plus Ruth’s $10,000 bequest and her government benefits (all of which are taxable), should provide her with enough money to live comfortably for the rest of her life.

Living costs will be higher by then because of inflation, and health care costs could throw a wrench in Ruth’s budget. If unexpected expenses arise, she will still have her house to fall back on.

Client situation

The person

Ruth, 52

The problem

When can she retire?

The plan

Continue with her current savings, retire at age 65 and travel on a reduced budget.

The payoff

A clearer view of her financial future and how she can help make it secure.

Monthly net income

$4,230

Assets

TFSA $36,000; RRSP $221,000; RESP (for daughter) $51,000; residence $425,000. Total: $733,000

Monthly disbursements

Property tax $300; utilities, insurance $180; maintenance and improvements $200; transportation $310; groceries $465; child care $25; clothing $105; gifts, charity $40; vacation, travel $600; personal discretionary (dining, entertainment, clubs, sports, grooming) $340; dentist, drugstore $110; connectivity (telecom, cellphone, Internet) $125; RRSP $815; RESP $90; TFSA $450; professional association $40. Total: $4,195

Liabilities

None

Want a free financial facelift? E-mail finfacelift@gmail.com

Some details may be changed to protect the privacy of the persons profiled.

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