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financial facelift

CHAD HIPOLITO/The Globe and Mail

In their first Financial Facelift three years ago, Arthur and Elenita were looking forward to selling their Toronto house and moving back to Vancouver after Arthur retired. He was 51, she was 38. Together they were bringing in about $170,000 a year but neither had a company pension.

At the time, Vancouver house prices were soaring and Arthur wasn't sure they'd be able to find a suitable place. The planner, Norm Collins of Collins Financial in Halifax, was doubtful as well. Last fall, Financial Facelift contacted Arthur and Elenita to see how their plans were progressing.

"Our plan was for me to retire early, sell our Toronto house, move to Vancouver and downsize to a co-op apartment," Arthur writes in an e-mail. "Elenita would continue to work to age 60," he adds. Turns out they couldn't wait to make the move.

"In the spring of 2015, for lifestyle reasons, we decided it was time to return to B.C.," Arthur writes. They sold their Toronto house for $801,000 and moved to Victoria, where prices are lower than in Vancouver, buying a condo in a two-unit building for $575,000.

Today, Elenita works from home – "she was able to take her job with her" – and Arthur quickly found work, albeit at a lower salary. Now, he is 54 and she is 41.

Their previous Financial Facelift "was a great help in getting in touch with our finances and testing our expectations for the future," Arthur writes. Today, they figure they're on track to retire without having to sacrifice their current lifestyle. They welcomed the opportunity to bounce that off a financial planner.

We asked Marc Henein, an investment adviser and financial planner at Scotia Wealth Management, to look at Arthur and Elenita's situation. Mr. Henein holds the Certified Financial Planner designation.

What the expert says

Arthur hopes to retire in 2025, when he is 63, and Elenita 10 years later in 2035, when she will be age 60, Mr. Henein says. "Their goal is to maintain their current lifestyle."

Their monthly outlays are about $8,100, which includes $1,900 to their mortgage principal and $1,600 of RRSP contributions. They earn $8,450 a month after tax, so they are living within their means.

Because of their age difference, Arthur and Elenita will have a phased retirement. The first stage will be 2025 to 2027, when Arthur will have quit working but will not yet be collecting Old Age Security.

Based on their payment schedule and a 2.2-per-cent mortgage rate, they will have their $284,000 mortgage loan paid off in about 14 years, or 2031. So mortgage payments will continue after Arthur has retired.

They have about $375,000 in RRSP savings and $45,000 in TFSAs. With RRSP contributions of $1,600 a month and an assumed annual rate of growth of 5 per cent, their RRSPs will be worth about $725,000 by the time Arthur retires in 2025. With no additional savings and the same 5-per-cent rate of growth applied to the TFSAs, they will be worth about $66,000.

Assuming Elenita's income is constant after Arthur retires in 2025, she will bring in about $4,100 a month after tax. Without the RRSP contribution, their monthly household expenses would be about $6,500. Arthur's Canada Pension Plan benefits will likely be close to the maximum of $1,000 a month, pretax.

Therefore, their portfolio will need to produce $1,400 a month, or $16,800 a year, which is about 2.3 per cent of the projected value of their RRSPs by the time Arthur retires. His total income will be $28,800 and his tax rate about 15 per cent. He will need to pull out another $5,700 a year to pay his taxes. "This phase of retirement is very realistic," Mr. Henein says.

The second phase is from 2027 to when Elenita retires in 2035. "This time period is even better for Arthur and Elenita as Arthur will be receiving Old Age Security," the planner says. Arthur's OAS benefits will be nearly $600 a month, further reducing the draw on their RRSPs to 1.3 per cent.

If they have paid off the mortgage by then, they will not need to draw on their RRSPs (or registered retirement income funds) to cover their expenses.

"Where the numbers are a bit more challenging is when Elenita retires in 2035," Mr. Henein says. "The good news is the mortgage will be paid off."

Their monthly cash flow requirement will be $4,650. Their government benefits will be $1,600 a month for Arthur (CPP and OAS) and about $400 of CPP benefits for Elenita. Withdrawing the $2,650 a month shortfall from their investment portfolio is a realistic goal, equating to a drawdown rate of about 4.5 per cent, Mr. Henein says. The drawdown may accelerate as income taxes owing will increase, he adds. The couple's total income of $55,800 can be split so their income tax bracket will be in the same 20-per-cent range, requiring about $11,000 a year to pay their tax bills.

Once Elenita turns 65, she will get a bit more than 75 per cent of the full OAS benefit. She will have been in Canada for 32 years by then. "This brings the drawdown rate from the investment portfolio to 4 per cent," Mr. Henein says. Their savings are forecast to last to Elenita's age 90, at which point there will still be the residence to fall back on.

"Their ability to earn income until their proposed retirement ages is crucial for this plan to work," Mr. Henein says. Elenita must be comfortable with working another decade after Arthur retires.

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Client Situation

The people: Arthur, 54, and Elenita, 41

The problem: Can Arthur retire at 63 without endangering their standard of living when they retire?

The plan: Arthur retires as planned but Elenita works for another decade after that.

The payoff: A clear idea of how to plan for the future.

Monthly net income: $8,450

Assets: His TFSA $40,000; her TFSA $5,000; his RRSP $335,000; her spousal RRSP $40,000; estimated residence value $730,000. Total: $1.15-million

Disbursements: Mortgage $1,900; property tax $250; utilities, insurance $320; maintenance, garden $250; transportation $315; groceries $800; clothing $100; gifts, charity $200; vacation, travel $1,000; dining, drinks, entertainment $1,000; grooming $100; club $75; pets $50; subscriptions $20; cellphone, TV $160; RRSP $1,600. Total: $8,140

Liabilities: Mortgage $284,000 at 2.2 per cent

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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