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(Rafal Gerszak for The Globe and Mail/Rafal Gerszak for The Globe and Mail)
(Rafal Gerszak for The Globe and Mail/Rafal Gerszak for The Globe and Mail)

Financial Facelift

Rushing into retirement has its risks Add to ...

At 52, Fannie is tired. She has a good job as a sales manager earning $90,000 a year before taxes but she doesn't think she can keep up her current pace of working 15-hour days.

"The work I do is great and I cannot imagine doing any other line of work at this time," Fannie writes in an e-mail. But she needs a rest. Her $400,000 Vancouver co-op apartment is fully paid for and she has $350,000 in a registered retirement savings plan. Being frugal, Fannie dares to hope:

"Have I saved enough money to retire on or before Dec. 31, 2011?" she writes in an e-mail. "If not, what do I need to do to retire within the next two years?"

Unfortunately, Fannie has no company pension plan and only $500 in the bank. Still, she says she lives on less than $22,000 a year after tax. She figures she'd need about $30,000 a year when she retires to cover future expenses that are not included in her monthly budget - things like car repair and replacement, and vet bills for her beloved cats - but she'd settle for less.

Her car is new and her housing costs are a modest $680 a month (heating, hydro, maintenance fees, property tax and home insurance); cable and phone bills add another $155 a month.

We asked Heather Franklin, an independent financial planner based in Toronto, to look at Fannie's situation.

What the expert says

Fannie has not saved enough money to quit work entirely within two years, Ms. Franklin says. To meet her retirement income goal of $30,000 a year after tax, Fannie would have to save another $225,000, Ms. Franklin estimates. That would lift her total savings to $575,000. Frugal though she may be, it will still take Fannie a few years to save that much and she could do so more easily at a well-paying job.

If she worked for another eight years to age 60, Fannie's $575,000 in savings - plus her Canada Pension Plan benefits and Old Age Security at age 65 - would be enough to last her until she was 90 years old. After that, if she needed extra money for health care or assisted living, for example, she would have to sell her apartment.

The planner's calculations assume a 6 per cent average annual rate of return on investments and a 2 per cent inflation rate. Ms. Franklin notes that to make 6 per cent a year, Fannie would have to invest a portion of her savings in dividend-paying blue-chip stocks that increase in value over time.

If Fannie quits work at year-end, as she would like to do, she would run out of money in 10 or 15 years, Ms. Franklin estimates. How long Fannie's money lasts would depend on her portfolio's performance.

The alternative of selling the co-op some time soon to supplement her savings does not appear to be a realistic alternative because renting in the Vancouver area can be quite expensive, the planner points out. Fannie's co-op expenses and property taxes are "very reasonable," she says. "She is unlikely to find anything as cost-effective."

To save the additional $225,000 by the time she is 60, Fannie would need to tuck away $25,000 to $27,000 a year (which would grow at the assumed 6 per cent a year), using some but not all of her current monthly budget surplus of $3,245 ($38,940 a year). At age 60, Fannie could begin collecting reduced CPP benefits of about $8,000 a year and draw the balance from her RRSP.

In the meantime, she needs to build an emergency fund to see her through dire situations, including illness or accidents. This money would come from her monthly surplus and would be over and above her retirement savings. "A short-term issue shouldn't put your retirement savings at risk," Ms. Franklin says.

Fannie asked the planner how soon she could retire if she continued to live on less than $22,000 a year after tax when she retires. In that case, she could probably quit in five years, Ms. Franklin calculates. But she advised against it mainly because Fannie would have to draw heavily on her savings in the years before she qualified for CPP at age 60.

In planning her retirement, Fannie must keep in mind that the cost of living is likely to rise over the years, including co-op maintenance fees, property taxes, medical, dental and veterinary costs. At some point, Fannie will need a new vehicle, another future expense that must be planned for.

Instead of quitting work for good, Fannie might want to consider changing jobs or even working part time, the planner suggests.

Finally, Fannie's current discretionary expenses for things such as travel and dining out are "extremely low," the planner says. "Can one assume that this will continue during retirement?" Given the absence of entertainment, gifts, vet bills, courses and hobbies in her budget, Fannie is very likely underestimating her expenses, Ms. Franklin says.



Client situation



The person



Fannie, 52



The problem



What to do so she can retire at the earliest possible moment.



The plan



Work and save for another five to eight years to ensure a modest standard of living in retirement and a degree of financial security.



The payoff



A realistic understanding of how much one needs to retire comfortably and the tradeoffs that are necessary to escape the working world early.



Monthly net income



$5,040



Assets



Bank account $500; co-op apartment $400,000; RRSP $350,000. Total: $750,500



Monthly disbursements



cable $115; groceries $600; heating $70; hydro $40; dental $50; phone $40; co-op maintenance $465; property tax $85; home insurance $20; car insurance $140; car maintenance $10 (new car); vacation $85; dining out $40; drugstore $35. Total: $1,795. Surplus (savings capacity): $3,245



Liabilities



Line of credit $6,000.



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