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Lofty goals, high anxiety as retirement beckons

In their mid-50s, Alicia and Sean have reached a stage in their lives when they can afford a few luxuries.

They earn good salaries working at an Alberta university, and both have defined benefit pension plans 60-per-cent indexed to inflation, so their retirement is secure. Their home is paid for and they have money set aside in registered education savings plans to help with the post-secondary education of their children, age 15 and 20.

"After lengthy post-secondary educations, a later start to careers than many and raising two children, we are now in a position to put aside significant sums of money," Sean writes in an e-mail. While he's confident their plans are on track, Alicia is not so sure. "I'd like some reassurance Sean knows what he's doing," she adds.

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They'd like to buy a $270,000 ski chalet not too far from their city home, but can they afford it? they wonder. Do they have enough money saved for their children's education? And can they retire in seven years and do the travelling they want to do?

We asked Frank Wiginton, a Toronto-based financial planner and author of the e-book Financial Planning - Helping You Sail Successfully into the Future, to look at Sean and Alicia's situation.

What the expert says

"Alicia and Sean are like many in their mid-50s approaching retirement. They feel like they have a handle on their finances but really aren't sure," Mr. Wiginton says. "They can really prosper from having a proper comprehensive financial plan prepared."

Alicia and Sean can certainly afford the ski chalet, which comes fully furnished, the planner says. He suggests they put 20 per cent or $54,000 down and take a mortgage of $216,000. Another $13,000 or so could go to closing costs, moving and "making the place their own."

They want to pay down the mortgage as quickly as possible without sacrificing their lifestyle, so a 15-year amortization might suit them well, he says. At an average mortgage rate of 5.5 per cent, they would be paying $21,160 a year.

As to the education savings, they already have $42,000 in RESPs and one of the children is halfway through her undergraduate degree. "Simply continuing to save the maximum in the RESP should be more than sufficient to meet the education financial needs," Mr. Wiginton says. Because their parents are professors, each of the children is entitled to three free courses a semester.

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Given their pension income and savings, Alicia and Sean can comfortably retire in seven years when Alicia is 62 and Sean is 61 without having to curb their lifestyle expenses and even have the extra $10,000 a year they want to spend on travel, Mr. Wiginton. says. From age 62 to 65, they will each get pension income of about $75,000. That amount will drop at age 65 when the bridge benefit of the pension is reduced and they begin collecting Canada Pension Plan and Old Age Security benefits.

Given their high taxable income, between 10 per cent and 20 per cent of their OAS benefit will be clawed back, the planner notes.

Their pension plans allow the option of taking a lump sum in cash and transferring it to a locked-in retirement account rather than taking a monthly payment for life, Mr. Wiginton observes. "This privilege can open up many tax and financial planning opportunities, including more control over retirement income and taxation."

They way it stands, when the first spouse dies, two-thirds of their pension benefit goes to the surviving spouse. Payments stop entirely when the second spouse dies, leaving nothing for the children. "Should they decide to commute one or even both of the pensions to LIRAs, those funds could outlast them and form part of their estate for their children or favourite charities," Mr. Wiginton says.

Mind you, this would leave them with the task of investing the money - something they haven't had much luck with in the past because they had high-cost, low performance mutual funds. Sean earned a scant 1 per cent a year over the past decade and Alicia 3 per cent. They have since switched to a balanced portfolio with an investment adviser made up of guaranteed investment certificates and exchange-traded funds. If properly invested, they should be able to achieve a 6-per-cent return, Mr. Wiginton says. He cautions against GICs because they expose investors to inflation risk and possibly even negative real returns (after subtracting inflation).

Because their tax rate in retirement will be pretty much the same as it is now, Mr. Wiginton suggests Sean and Alicia contribute no more to their RRSPs and instead use tax-free savings accounts to provide any additional income in retirement or to transfer this wealth tax free to their children by naming them as beneficiaries of the TFSAs.

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The people

Sean, 54, Alicia, 55, and their two children, 20 and 15.

The problem

Determining whether they can afford a ski chalet, get their children off to a good start and still have a generous travel budget when they retire in seven years.

The plan

Buy the chalet with 20 per cent down and a mortgage loan amortized over 15 years. Keep contributing to children's RESPs and consider taking commuted value of at least one of their pensions.

The payoff

A secure retirement, the pleasure of owning a vacation property, plenty of money for children's education and an ample travel budget.

Monthly net income



Bank accounts, GICs, jointly held stocks $42,000; Sean's TFSA $15,000; Alicia's TFSA $15,000; Sean's RRSP $53,400; Alicia's RRSP $57,300; RESPs $42,000; residence $480,000; defined benefit pension plans (estimate) $1.48-million.

Total: $2.18-million

Monthly disbursements

Property tax $210; utilities $400; home insurance $95; maintenance $580; Car insurance $125; fuel $400; maintenance $430; groceries, household $970; clothing $200; loan payments $240; gifts $200; charitable donations $1,250; vacations and travel $570; other $470; dining out, entertainment $635; pet expenses $100; sports, hobbies, gym $690; subscriptions $75; telecom, cable, Internet $220; educational needs $100; other savings $4,600.

Total: $12,560


Loan $7,800

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