News

In Toronto, a couple we'll call Billy and Irma are headed into full retirement. Billy, 59, works in high tech for a large company and plans to remain there until he turns 65. Irma, 64, has retired and receives a pension from her former employer. They have $9,858 to spend each month after tax and ought to feel secure with $1.63-million in net worth and no dependents to support.

In the current climate, however, in which seemingly no financial asset is safe, they worry that their previous experience with such flops as Nortel is just an appetizer for worse things to come. Moreover, they worry that Billy's company pension won't keep pace with inflation.

“We have limited savings, no investment savvy, and we worry that we won't be able to live comfortably when my husband retires,” Irma explains. “We want to travel without worrying about the impact of that cost on our savings. We also have to replace our nine-year-old cars in the next few years.”

WHAT OUR EXPERT SAYS

Facelift asked Toronto-based financial planner Dan Stronach to work with Billy and Irma. In his view, there are problems: “They hold far too much cash, carry debts they could easily discharge, have far too much equity and too little fixed-income assets in their RRSPs, and spend more than they should given their concern that their investments will continue to shrivel.”

Their fear that they are liable to wind up poor is understandable. Indeed, that could happen with their present asset allocation. They have 75 per cent of their various registered retirement savings plans and defined-contribution pension plans in stocks. But they have other assets, including a $500,000 house and a $275,000 cottage, which could be monetized through sale, the planner notes.

Selling one or the other would reduce their costs. They have two cars but could do with just one when they retire; and they have entertainment expenses, including $786 that they will have spent in 2008 on CDs and DVDs, that they could trim. Still, the larger financial issues need attention.

They could sell sufficient stock to pay off the debt, take a tax loss against a few gains they could realize, and reduce their equity exposure in the process, Mr. Stronach says.

Then they should review their present investment process. Billy's employer, a major company, has a stock savings plan for employees. He buys shares from the company at a 5-per-cent discount to market price. That discount amounts to a decent annual return in a normal market and is superb in the present bear market. The company also contributes $17,000 a year to his defined contribution pension plan.

Let's assume that Billy starts withdrawing money from his registered retirement income fund at age 66 in June, 2015, and Irma begins her RRIF at age 71, and assuming that their investments generate 5 per cent a year before inflation, running at 2 per cent a year, and that the Canada Pension Plan and Old Age Security are indexed at 2 per cent a year. Then, in their first year of joint retirement, they will have two OAS payments that total $13,944, two CPP benefits that total $23,655, company pension income of $34,081, investment income of $11,066, and combined RRIF income of $43,471.

Their total income would be $126,217 in future dollars.

After tax, they will have $95,479 to spend, the planner estimates. If they save none of this cash flow, they would run out of financial assets by their age 90, but they would still have their house and cottage, which could be sold. Before getting to the point of selling one home, they could economize, the planner notes.

Their nearly six-figure future disposable income ought to be more than enough to sustain the couple in retirement. For now, however, they have a budget problem. They have been spending more than their present income. In 2008, their disbursements will total $118,296, including non-cash items like depreciation on their cars.

The couple's investment portfolio is heavily weighted with common stock in Billy's company. He buys shares advantageously, but holding shares in his employer's business is adding to his risk rather than diversifying it. He could consider selling shares over time and using proceeds either to buy common stock in other companies or, better, to buy such fixed-income assets as bonds, bond exchange-traded funds or bond mutual funds. He could also use preferred shares that are priced well below redemption prices and that are backed by strong company earnings.

Economic downturns end, and the present one will, too. Anxiety is understandable, but Billy and Irma need not be too anxious about their finances. With a few adjustments to spending and a transfer of some equity assets to fixed income, they should have a secure retirement, Mr. Stronach says.

“This is a couple that disdains learning about finance,” Mr. Stronach says. “This decision to know little actually adds to their risks. Given that they don't want to improve their ability to manage their affairs, they should put serious effort into finding a trusted adviser and portfolio manager who will do what they will not.”

Interested in a free Financial Facelift? If so, contact andrewallentuck@mts.net