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Financial Facelift for Saturday, April 30, 2011. (Galit Yael Rodan for The Globe and Mail)/Galit Yael Rodan for The Globe and Mail))
Financial Facelift for Saturday, April 30, 2011. (Galit Yael Rodan for The Globe and Mail)/Galit Yael Rodan for The Globe and Mail))

FINANCIAL FACELIFT

The payoff for good saving habits Add to ...

When it comes to financial planning, Georgia has an advantage money can't bestow.

"My Dad taught me early to start saving for things," she writes in an e-mail from her modest home in Kingston, Ont. She started contributing to a registered retirement savings plan when she was 16 years old and continues to tuck away the maximum each year.

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Now 52, Georgia, a single mom with a 20-year-old daughter in third-year university, has been mortgage-free for 15 years.

"I realize I have been pretty lucky," she writes. Luck seems to have little to do with it. As a registered nurse, Georgia earns a decent salary ($82,700 before tax) and she will have a hospital pension when she retires.

But it takes good money management to pay for a child's schooling (she had $62,000 in a registered education savings plan), own a $300,000 house outright, amass $175,000 in RRSPs, $68,000 in non-registered investments, $11,100 in a tax-free savings account, $34,000 in an investment savings account and some common shares - all on a single salary and with no debt. Her secret: She lives within her means.

Now, after 26 years of full-time work in a stressful and sometimes physically demanding job, Georgia is looking to the day she can finally put her feet up.

"Can I retire at age 55 and keep the same house?" she asks. Part-time or casual nursing work is a possibility, she notes. "Will I run out of money if I live to be 90?"

We asked Sophie Salcito, an investment adviser and financial planner with the Vancity branch of Credential Securities in Vancouver, to look at Georgia's situation.

What the expert says

Thanks to her savings and her profession, Georgia has choices once she becomes eligible for early retirement, Ms. Salcito says. Her pension income at age 55 will be $37,511 after tax, "roughly two-thirds of her working life income - a nice ratio to have."

To show just how valuable Georgia's pension is, Ms. Salcito calculates its present value. At age 52, that value is about $588,990 with no indexing for inflation and $630,970 assuming average indexing of 1 per cent a year. (Cost of living increases are ad hoc and decided each year by the hospital pension plan.)

If she waited until age 65 to retire, Georgia would be able to save more and draw higher Canada Pension Plan benefits, Ms. Salcito notes. But as Georgia has pointed out, the job becomes increasingly difficult for people in their 60s.

The planner recommends Georgia consider part-time or casual work at the hospital once she turns 55.

"Transitioning into retirement, if you are able to, allows for a more gradual adjustment to a new lifestyle."

Ms. Salcito suggests Georgia begin drawing CPP benefits at age 60, at which time she will be eligible for about $585 a month. She should be sure to apply for the CPP child-rearing provision under which she can ask the government to remove her lowest eight contribution years when calculating her benefits, the planner says.

The planner has budgeted annual spending of $37,000 in retirement - more than she is spending now - with the extra money being available for emergencies or discretionary items such as travel expenses.

If Georgia retires at 55, she will supplement her pension income by drawing on her non-registered savings until she turns 60 and begins collecting CPP. At that point, the amount of savings she withdraws will drop.

Georgia will begin collecting Old Age Security at age 65 and for most years, her income will be below the point at which OAS starts to be clawed back. At age 71, she will convert her RRSP to a registered retirement income fund and begin making mandatory minimum withdrawals.

As the years pass, Georgia should keep an eye on the size of her RRIF to see whether it makes sense to withdraw more than the minimum amount, Ms. Salcito says. Leaving too large a RRIF when she dies could result in a big tax bill for her estate. Assuming her spending patterns don't change drastically, Georgia will have enough income to last her to age 90, the planner says.

By that time, her registered investments will be $209,000 and her non-registered investments, $18,440; she'll still have her house to fall back on. Ms. Salcito assumes an average annual return on investment of 5 per cent and an annual inflation rate of 3 per cent.

"Georgia has set herself on the path for early retirement due to a great pension and healthy savings habits," Ms. Salcito concludes. "Hopefully, Georgia has passed on the value of investing and saving to her daughter so the next generation is just as well taken care of."

_______________________________

Client situation

The person

Georgia, 52, and her daughter, 20

The problem

Calculating whether she can take early retirement at age 55 and have enough money to last until she is 90 without having to sell her home.

The plan

Take early retirement but continue working part-time to ease the transition. Begin collecting CPP at 60 and draw on savings as necessary to complement pension, which has no guaranteed adjustment for inflation.

The payoff

A smooth transition into full retirement and a comfortable and secure future.

Client situation

Monthly net income (after income tax, CPP, EI): $4,590

Assets

Present value of pension $630,970; home $300,000; RRSP $178,000; non-registered investments (bonds, mutual funds) $68,000; TFSA $16,890; left in RESP $23,000; ING savings account $48,715; cash in bank account $1,900; Sun Life shares $5,000; share of jointly held family cottage (about $93,000) excluded. Total: $1.27 million.

Monthly disbursements

Groceries $400; gym $60; utilities $200; phone, Internet $70; cable $45; property taxes $200; parking $60; car, house insurance $200; savings account $100; RRSP $250; house alarm $25; newspaper $18; other life insurance $16; CAA $9; expenses for shared family cottage $150; clothing $50; entertainment $50; licence fees $10; gifts $50; travel $50; miscellaneous spending money $200; union dues $80; pension plan $540; health, dental, disability insurance $112. Total: $2,945. Savings capacity: $1,645

Liabilities

None.

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