Sudden change of plan

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Joe had an "incident" at work that so frustrated him he quit on the spot - a risky thing to do when you're 59 and the economy is shaky.

"Did I screw up!" he writes in an e-mail. "I'm scared that I won't be able to survive and maintain a decent lifestyle."

Fortunately, Joe, who is single with no dependants, has managed to save a considerable sum over his working years despite his modest salary. He owns his condo outright and has no debts.

After he quit, he converted his registered retirement savings plan to a registered retirement income fund (RRIF) and his pension plan from a previous employer to a life income fund (LIF) and began drawing from his savings. He also has some common shares.

Joe figures he can get by on $24,000 a year after tax, less than the $36,000 he made working.

"Can I retire and maintain my lifestyle?" he wonders.

We asked Warren MacKenzie, president and chief executive officer of Weigh House Investor Services, to look at Joe's situation. Weigh House is a fee-only financial planning firm that does not sell investment products.

WHAT THE EXPERT SAYS

Joe has been a responsible saver all his working life, Mr. MacKenzie notes.

"While a spur of the moment retirement decision is never recommended, one of the major benefits of becoming financially independent is to have the freedom to do what Joe did."

Having said that, Mr. MacKenzie thinks Joe should look for another job right away for three reasons: Additional earnings will give him a larger financial cushion; he will meet new people and have time to plan properly for retirement; and if he can't find work, he may at least qualify for some employment insurance benefits.

If he does succeed in getting a job, he could turn his RRIF back into an RRSP, Mr. MacKenzie said. However, the rules require that Mr. MacKenzie withdraw at least the minimum amount from the plan during the year that was a RRIF. He can also turn the LIF back into a locked-in retirement account.

Next year, when he is 60, Joe's income will consist of $6,200 from his non-registered investment portfolio, $7,395 from the Canada Pension Plan, $11,955 from his RRIF and $1,344 from his LIF, for a total $26,904, keeping him apace with inflation.

When he turns 65 and begins collecting Old Age Security, Joe will be able to draw less from his non-registered investments.

Mr. MacKenzie assumes Joe will make an average annual return of 5 per cent a year on his $580,000 of investments (his total assets minus his condo) - 2.5 per cent after inflation. To do so, though, he will need to make some adjustments to diversify his portfolio.

About 86 per cent of his portfolio is in stock or other equity-type investments, too risky for someone on the verge of retiring. As well, most of his stocks are concentrated in only four sectors of the Canadian market, so he has little in the way of U.S. and international diversification.

While he was working, Joe might have been able to recover from a big drop in stock prices, but with little in the way of income, he couldn't do that now because he would probably panic and bail out at the bottom, Mr. MacKenzie said.

Joe anticipates selling his condo when he is 80 and moving into a retirement home, which would raise his costs by about a third. The planner estimates that in 20 years, the proceeds from the sale of Joe's condo, his Canada Pension Plan and his Old Age Security would be enough to pay for only seven years in a retirement home - likely not enough.

As for the immediate future, Joe hasn't been out of work long, so boredom is not yet a factor, Mr. MacKenzie notes.

"But for a man who has worked hard all his life, this may become Joe's most serious problem."

Client Situation

Special to The Globe and Mail

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