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Late bloomer has time to catch up

Della Rollins/Della Rollins/THE GLOBE AND MAIL

At 35, single, with a six-figure salary and a little money in the bank, Carol is starting to take financial planning seriously. She admits she's a bit of a late starter on the savings front.

Pricey Toronto real estate is partly to blame. A couple of years ago, she dipped into her registered retirement savings plan (RRSP) and borrowed from her father to buy a condominium.

Soon, though, once a few small debts are cleared up, Carol will be in an enviable position: She'll be able to save up to $2,400 a month.

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As an accountant, Carol (not her real name) appreciates her first priority must be taking advantage of her $50,000 or so in unused RRSP room.

She has a small locked-in pension from a previous employer that she'd like to manage herself and a growing RRSP to direct, so she would like some tips on how to invest. Her goal is to retire at age 58, about the time her mortgage is paid off.

What our expert says

Facelift asked Warren Baldwin, regional vice-president of T.E. Wealth in Toronto, to help Carol with a financial plan. His findings are surprising: Even with her good salary and bonus, an estimated 7 per cent rate of return and 23 years to go before her targeted retirement age, Carol will still be a tad short, an amount she will have to make up.

First, she needs to get her investment direction well established and structure an asset mix that will continue to work for her for many years. Mr. Baldwin suggests Carol should be a growth investor, with 25 per cent of her portfolio in Canadian fixed-income investments, 25 per cent in Canadian equity investments, 25 per cent in U.S. equity investments and 25 per cent in international equity investments.

She can best achieve this by buying low-cost mutual funds, index funds or exchange-traded funds, being cautious about commissions or management expense ratios, which will eat into her long-term returns.

Carol is spending $70,000 a year after tax to maintain her lifestyle. This includes a blended mortgage payment of about $1,300 a month, including property taxes.

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By the time she retires, Carol is likely to have paid off her mortgage. Naturally, some of her other expenses will decline when she retires as well, but not as much as some would argue. For example, she will likely still need a car. Our assumption is that she will likely need to spend about $50,000 a year.

In projecting Carol's assets and expenses into retirement, we have assumed that the average annual rate of return on her investments is 7 per cent and that inflation continues to run along at 3 per cent a year.

For now, Carol should focus her savings on her RRSP, taking advantage of her carry-forward room. She can then build her after-tax savings as well as continue to contribute to her tax-deferred savings plans right up to retirement.

In 2032, at age 58, her expenses of $50,000 a year (based on 2009 dollars) would be the equivalent of almost $100,000 a year. Her RRSP savings would be nearly $2-million and her assets outside her RRSP about $500,000.

"If Carol lives to age 90 she can just about make ends meet without selling her condo," Mr. Baldwin says. Alternatively, the equity in her condo might be used later in her retirement for the additional costs of a retirement home or medical care.

She can certainly fine-tune her savings structure over the next several years by optimizing her RRSP contributions. If she is comfortable using a line of credit for emergencies, she could use her rainy-day funds to pay a little extra against her mortgage.

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Eventually her savings of between $1,500 and $2,500 a month, plus her net after-tax bonus, would surpass her allowable RRSP contributions. She could then decide to pay down her mortgage as quickly as possible to cut her interest costs.

Carol has no will or powers of attorney. These documents should be drawn up relatively quickly to make sure that her assets are properly handled in the event of an estate situation, Mr. Baldwin suggests. At the same time, she should give consideration to designating beneficiaries on her RRSPs, tax-free savings accounts and group insurance policies.While Carol is on target to achieve her retirement goal, she's still a few thousand dollars a year short, an inconsequential amount in the grand scheme of things given how much her circumstances could change over the next 25 years.

She can easily offset this by more effectively employing her assets. For example, she could pay down her mortgage ahead of schedule and retire any other expensive debt early, keeping to a minimum the use of high-interest debt in future.

Eventually, her tax-free savings account should become an integral part of her portfolio management structure rather than simply a parking lot for cash. In the meantime, she needs money to pay down the small debt to her father, her RRSP Home Buyers' withdrawal and her car loan.

Carol's awareness of her status as a "late starter" is an excellent platform on which to build her future financial security. She has worked hard to purchase her condo and now she can focus on restructuring her financial picture to best achieve her long-term goal of a comfortable retirement.

Client Situation

The Person:

Carol, age 35, an accountant

The Problem:

How to build and manage her nest egg

The Plan:

Catch up with RRSP contributions and sock away up to $2,400 a month

The Payoff:

A comfortable retirement from work at age 58 

Monthly after-tax income:

$7,100 


Pension plan $30,000; TFSA $1,000; mutual funds $7,000; condo $320,000; car $40,000 Total: $108,000 

Monthly disbursements:

Mortgage, property tax, maintenance about $2,000; car payment $585; gym $40; car and condo insurance $190; cable, Internet $100; living costs (food, clothing, entertainment, discretionary) $2,125; payment to father $600; savings $1,500; Total: $7,100


Mortgage $256,000; car loan $39,500; loan from her father $7,000; RRSP homeowner loan $25,000; Total: $327,500

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