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Financial Facelift

Cutting expenses to land on Easy Street Add to ...

Amara is 61 with two grown children. She's planning to work another seven to nine years at her job in human resources and wonders whether her savings will be enough to support her comfortably for the rest of her life if she retires at 68 or 70.

Her job pays well - $150,000 plus a bonus that varies with the company's profits - but she has no company pension plan so she's concerned about investing to her best advantage. Amara recently bought a rental condominium that she hopes will help fund her retirement, but first she has to pay down the $250,000 she borrowed to buy it.

Amara figures that when she retires she will need an annual income of $50,000 after tax - a big drop from what she's spending now. Will this be enough? she wonders.

"What should I do differently while I'm still working?" she asks in an e-mail.

We asked Kurt Rosentreter, a senior financial adviser at Manulife Securities Inc. in Toronto, to look at Amara's situation.

What the expert says

For a single person with no mortgage, no dependants, and earning up to $170,000 a year (with bonus), Amara can save far more than the $550 a month she is putting in her company's stock purchase program, Mr. Rosentreter says. Her budget shows a surplus of more than $5,000 a month, enough to achieve all her retirement goals, including paying off the money she borrowed to buy the rental condo.

Still, her expenses now are fairly high so he wonders whether her $50,000 retirement income target is realistic.

If she can save more and hold expenses down, Amara will be able to retire comfortably by age 70, he says. She has $400,000 in savings now. If she saves $25,000 a year for the next seven years, and her money grows at a conservative 4 per cent a year, she will have amassed $723,830 in a combination of pre-tax and after-tax assets by the time she retires, he says.

If she draws out 6 per cent of her balance a year, which will deplete her capital slowly, she can count on about $42,000 of annual cash flow from the portfolio, he calculates. Add to this her Canada Pension Plan benefit, which could be as high as $15,000 a year if she doesn't draw on it until age 70, and Old Age Security of more than $5,000 in today's dollars, and her total pre-tax income will be about $62,000. After tax, this income will be close to her $50,000 a year goal.

If she succeeds in repaying the condo loan, her rental income should put her on Easy Street and with luck, both the rent and property value will rise over time in line with inflation.

"It will come down to how much she is willing to compromise lifestyle over the next seven years through far greater savings and debt pay-down, which will then benefit the up to 30 years of retirement she could face after age 70," the planner says.

He suggests Amara prepare a budget of future retirement expenses, remembering to include periodic costs such as new vehicles, home repairs, vacations and gifts. "All of these periodic costs can make retirement far more expensive than first thought."

Critical to Amara's success is her investment strategy: It should be conservative, Mr. Rosentreter cautions.

"She is facing retirement in less than 10 years, is carrying debt, is not a sophisticated investor, is behind in her savings, and her stage of life (being over 60) warrants a 'be careful' investment strategy," he says. He suggests Amara limit her stock market exposure to no more than half of her portfolio and perhaps less.

He suggests a diversified selection of dividend-paying index exchange-traded funds or dividend-paying stocks for the stock market portion of her holdings. This could be augmented by an F series fund or two for global equity or emerging market exposure. There is no fee to a salesperson for F shares.

Laddered guaranteed investment certificates and perhaps some real return bond ETFs (where the coupon is adjusted for inflation) could comprise the fixed-income portion of her savings.

Being single, in her 60s and planning to work until age 70, one of Amara's greatest risks is disability, Mr. Rosentreter notes.

"She needs to make sure her disability insurance is top notch - a tight definition of disability in the policy, benefits that pay to age 65, tax-free benefits and a benefit level as close to her current income level as possible." He suggests she look beyond her employer's policy for extra coverage if needed - including whether she can extend coverage beyond age 65.

Client situation:

The Person

Amara, 61

The Problem

Arranging her finances now so she can live comfortably when she retires seven to nine years from now, including repaying the money borrowed to buy her rental condo.

The Plan

Save $25,000 a year for the next 10 years and strive to pay off the line of credit on the rental property by the time she retires.

The Payoff

Enough money to live comfortably for the rest of her life without having to take undue risk in the financial markets.

Monthly net income



Bank account $5,000; RRSPs $410,000; employer stock plan $20,000; principal residence $400,000; rental property $275,000. Total: $1,110,000.

Monthly disbursements

Company share purchase program $550; groceries, beverages, eating out $700; clothing $300; cleaning $75; condo fees $325; property taxes $215; insurance $45; utilities $200; telecom, TV $200; vacation $150; entertainment $50; auto lease $560; auto expenses $250; life insurance $45; group insurance $110; donations $40; gifts $200. Total: $4,015. Saving capacity: $5,085.


Line of credit for purchase of rental property $250,000

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