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- (Jeff Bassett For The Globe and Mail)
- (Jeff Bassett For The Globe and Mail)

FINANCIAL FACELIFT

No company pension, a tight budget (and a willingness to keep working) Add to ...

Greg describes himself as a “55-year-old divorced dad of three,” ages 6, 13 and 16. He earns a good income – $96,400 before tax – and likes his consulting work.

His long-term goal is to “enjoy a modest retirement that might gradually phase in by the time I am in my late 60s,” Greg writes in an e-mail. He has no work pension, $113,000 in savings and a mortgage on his Alberta home. Two of his biggest expenses are child support and keeping an apartment in the city where his children live so he can spend time with them.

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Greg plans to pay off his $90,000 mortgage as quickly as possible. “I want to be mortgage-free by the time I am 60 or 61,” he writes. Then he would scale back his work slightly (to $80,000 or so, before tax).

“I am in excellent health and feel this is a way to work longer while remaining healthy by carrying a lighter workload,” he adds.

At age 68, when his youngest child is age 19 and child-support payments cease, he would cut his workload in half (to about $40,000). “I really don’t have a burning desire to retire,” Greg writes. “If I have a paid-for house and the kids are grown, I am hoping I can live off a few thousand a month and do a little travelling.” While Greg may help with his youngest’s university costs if he can, he wants the children to pay most of the cost themselves, like he did.

We asked Keith Copping, a fee-only financial planner at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Greg’s situation.

What the expert says

Greg’s main challenges are his mortgage, his expenses for child support and renting a second place, Mr. Copping says. His strengths include his solid career, good income, flexible work situation – and $48,000 in cash.

If he wants to pay off the mortgage in six years, he could use $33,000 of his cash to pay it down, depending on the prepayment terms, which would leave about $57,000. By raising his monthly payment to $865 from $500 now, he could then have it paid off in six years, Mr. Copping says. Greg’s current budget shows a surplus of about $490 a month (once he’s paid off his $7,000 line of credit with a bonus he’s expecting), so he should be able to afford the higher mortgage payments.

This would leave him with about $15,000 ($48,000 less $33,000) as an emergency fund, which he could hold in his tax-free savings account.

In preparing his forecast, Mr. Copping assumes Greg is able to save $15,500 a year to age 68. He will begin collecting maximum Canada Pension Plan benefits at 65 and Old Age Security at 67. The planner assumes an average annual return on investment of 5 per cent, an inflation rate of 3 per cent and a lifespan of 92 years. If Greg stopped working at age 68, he would have gross income in today’s dollars of about $35,000 a year for life – perhaps $32,000 after tax, the planner estimates. That falls short of his target.

Greg’s retirement goal is to have $4,000 a month in after-tax income, Mr. Copping says. This implies gross income of about $59,000 a year.

“The shortfall of $24,000 a year ($59,000 minus $35,000) would need to be generated through employment income.” If Greg cuts his workload in half at age 68, he would gross about $40,000 a year, enough to make up the shortfall, Mr. Copping says. This will last only as long as Greg is willing and able to keep working.

“While for some the situation may seem impossible, Greg has a realistic outlook on how he may work toward semi-retirement,” Mr. Copping says. Greg’s willingness to keep on working well beyond age 65 – perhaps to 75 or later – is the key,” he adds, “and he has to maintain annual savings until age 68 as well.”

Greg is only 55. A lot can change between now and the time he plans to wind down – inflation, investment returns, work situation, health – so he will need to revisit his plan before making any big changes like cutting his workload, Mr. Copping says. When Greg does finally quit working, he may well have to cut his spending, but he will still have his house to fall back on.

***

Client Situation

The person: Greg, 55

The problem: Preparing for a financially secure, if late, retirement on a tight budget and without a company pension.

The plan: Use cash to pay down the mortgage, keep up the saving and gradually scale back the workload. Plan to work well beyond age 68.

The payoff: A solid understanding of the choices awaiting him in the years ahead.

Monthly net income: $6,020

Monthly expenditures: Mortgage $500; second residence $1,000; property tax, insurance $100; child support $1,100; travel expense $500; transportation $350; life, health insurance $80; groceries, clothing $400, telecom $200; entertainment, vacation $500; line of credit $490; RRSP $400; other saving $400. Total: $6,020

Assets: Cash $48,000; residence $285,000; RRSP/TFSA $65,000; equity in private company $80,000; RESP $20,000. Total: $498,000

Liabilities: Mortgage $90,000; line of credit $7,000. Total: $97,000

Read more from Financial Facelift.

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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