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Peter Power/The Globe and Mail

Chelsea and Chad are getting ready to wind down their working careers and retire soon. He is 61, she is 60. They have two grown children.

Both have administrative jobs bringing in a combined $170,000 or so, depending on Chad's bonus. Chad has a company pension that will pay him $14,000 a year. They have some savings, a house in the Hamilton area with a mortgage, and a townhouse that they rent out.

Their longer-term goals are to travel and do volunteer work.

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"When can we retire, maintain our current lifestyle, travel once or twice a year and still leave an inheritance for the kids?" Chad asks in an e-mail. Their retirement spending goal is $6,000 a month after tax.

Ideally, they'd like to retire in a couple of years. In time, they plan to sell their house and downsize to a condo. They would like to leave the rental property to one of their children.

We asked Warren MacKenzie, founder of Weigh House Investor Services in Toronto, to look at Chad and Chelsea's situation. Weigh House is a fee-only financial advisory firm that does not sell financial products.

What the expert says

Chad and Chelsea want to spend about $72,000 a year when they retire and still leave an inheritance (cash or real estate) worth about $500,000 to each of their two children, Mr. MacKenzie notes. With a net worth of almost $1.8-million, including their home and an investment property, and projected investment returns of less than 4 per cent a year after fees, they will fall short of their goals if they retire early, he says.

Chad would have to work full time to the age of 65, plus a couple of more years part time, to accomplish all they hope to, the planner says.

"By that time, assuming some growth in their investments, plus Chad's pension, they will have enough to achieve their goals," Mr. MacKenzie says, "but they won't have enough to withstand big investment losses or to endure long-term underperformance from their investment portfolio."

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Their income in the first year of retirement would be $14,000 from Chad's pension, $12,000 in rental income, $28,000 for combined Canada Pension Plan and Old Age Security benefits, $30,000 in RRSP withdrawals and $6,000 from other savings, for a total before tax of $90,000.

They enjoy their home and would like to stay there for another 10 years or so, after which they would sell the house, pay off the mortgage, buy a condo and add about $100,000 to their investment portfolio.

Currently, the combined value of the couple's registered retirement savings plans and tax-free savings accounts is about $715,000.

"With this amount invested, and a life expectancy of 30 years from 2015, an improvement in their investment returns of one percentage point a year would increase their net worth sufficiently so that they should be able to leave an inheritance with a value of about $500,000 to each of their children," Mr. MacKenzie says.

Other ways to leave the desired estate would be to spend less or buy a joint and last-to-die whole life insurance policy that would pay $1-million to their heirs when they die. The policy would cost about $35,000 a year for 10 or 11 years, depending on the returns.

To keep income taxes to a minimum when they retire, starting at 65, Chad and Chelsea should plan to split their Canada Pension Plan benefits and Chad's private pension income. They should also take some early withdrawals from their RRSPs so that a portion of their RRSPs are taxed at a lower rate than when they are forced to take large withdrawals from their registered retirement income funds at the age of 72.

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As for their investments, there are opportunities for improvement. They have an investment policy statement, but it seems to be designed more as a sales and marketing tool than as a guide outlining a disciplined investment process, Mr. MacKenzie says. Chad thought that the projected return of 6 per cent in the investment policy statement was after fees, but the fine print shows that after fees and costs, it was only about 3.6 per cent.

They have about 70-per-cent exposure to equities, more than their risk tolerance would indicate. As well, their entire portfolio is in a "corporate class" fund structure. These funds often come with higher fees, which may be justified if there are capital gains taxes to be deferred, the planner says. But there is no benefit to using them in a tax-sheltered plan such as an RRSP.

**

Client situation:

The people: Chad, 61, and Chelsea, 60.

The problem: Can they retire soon, maintain their lifestyle and still leave a substantial inheritance?

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The plan: As it is, they will fall short of their goals. They need to take a hard look at investment fees, consider working longer, spending less or taking out an insurance policy with their children as beneficiaries.

The payoff: A road map of the planning necessary to accomplish all they want to.

Monthly net income: $9,850

Assets: Bank account $5,000; TFSAs $15,000; his RRSP $375,000; her RRSP $325,000; estimated present value of his pension plan $125,000; residence $600,000; rental property $450,000. Total: $1.9-million

Monthly disbursements: Mortgage $725; property tax $495; water, sewer, garbage $325; home insurance $80; hydro $325; heating $250; maintenance $50; garden $80; transportation $495; groceries, clothing $580; gifts $250; vacation, travel $400; dining, drinks, entertainment $600; sports, hobbies $550; grooming $120; pets, other $105; life insurance $155; telecom, TV, Internet $250; RRSPs $250; pension plan contribution $560; group benefits $65. Total: $6,710. Surplus: $3,140.

Liabilities: Residence mortgage $160,000 at 5 per cent.

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Read more from Financial Facelift.

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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