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Financial FaceliftJohn Ulan For The Globe and Mail

When he got the contract with a Western Canadian mining company in 2010, Jack saw it as his last job. He'd work hard for three years and then retire.

Well, it was his last job alright, but not in the way he intended. At 61, not long after joining the company, Jack fell ill and was diagnosed with a chronic disease. By last spring, his employer's insurance company approved his long-term disability claim for at least two years. He also is getting Canada Pension Plan disability insurance.

Jack, who is on his own again with three adult children, is in a drug trial that might offer a cure for his disease. At this point, though, he is unsure whether he can return to work when his disability insurance expires in 2013. If not, he will be effectively retired with no company pension.

"I need to rethink how I will retire with the resources I currently have," Jack writes in an e-mail. While he has substantial savings and no debt, Jack is hoping to leave a sizable estate for his children. He has been living modestly to help achieve that goal.

His main problem is how to arrange his savings and investments to generate enough of a return to supplement his income when his disability insurance runs out and he is left only with Canada Pension Plan and Old Age Security benefits. Jack is a conservative investor, leery of stock markets and securities salespeople.

"My interest is to live off what I can make as income from my various investments without depleting the capital because I want to leave as much as possible to my children," he writes.

We asked Gordon Stockman, vice-president at Efficient Wealth Management Inc. in Toronto, to look at Jack's situation.

What the expert says

At the moment, Jack is okay financially because his long-term disability insurance of $42,696 a year (before tax) exceeds his expenditures of $22,188 (after tax), Mr. Stockman says. Jack is also getting $8,904 of CPP disability insurance, which he can continue to collect until he turns 65 and begins getting regular CPP benefits.

After his disability insurance expires, Jack's income will fall short of his expenses. From age 65 onward, his expenses will outpace his income by $5,000 a year and growing, Mr. Stockman calculates.

"The good news in all of this is that Jack should pay no income taxes until he begins drawing on his RRSP/RRIF," which will be mandatory in the year he turns 72.

How he invests his $462,134 of savings is crucial to achieving his goal, the planner notes. As it stands, Jack has 19.4 per cent of his portfolio in Canadian equities, 2 per cent in foreign equities, 48.2 per cent in fixed income and 30.4 per cent in cash and cash-like investments, including short-term guaranteed investment certificates.

Although Jack considers himself a conservative investor, "part of being conservative is being well diversified," Mr. Stockman says. He suggests Jack shift his holdings to 35 per cent equities, with 13-per-cent Canadian, 13-per-cent U.S. and 9-per-cent international. The balance could be invested 53 per cent in fixed income and 12 per cent in cash or cash-like holdings such as one- and two-year GICs. Mr. Stockman suggests he hold interest-bearing investments in his RRSP and TFSA, and stocks in his non-registered account to take advantage of the latter's lower tax rate.

"This type of portfolio will see Jack through all his goals; of protecting his assets for transfer to his children at death as well as providing adequate liquidity for however he chooses to live in the future."

Thanks to his savings, Jack can live much better in the future than he might think, the planner says. At age 65, with only CPP and OAS, Jack would qualify for about $250 a month in Guaranteed Income Supplement if he can keep his other taxable income to near zero. This would close 60 per cent of the gap between his income and expenses. The other $2,000 (per year) needed to pay the bills could come from liquidating his non-registered assets.

"It would be important to ensure that his non-registered assets produce little annual income and mostly capital gains, since every dollar of taxable income reduces the GIS by 50 cents," Mr. Stockman says. GIS benefits would stop once Jack began withdrawing money from his registered retirement income fund at age 72.

If, instead of penny pinching, Jack wanted to spend a little more on himself, he is in a good position to do so and still leave a good-sized estate – assuming he earns at least 4.5 per cent a year on his investments. He could begin by spending $450 a month more, increasing that number gradually as he gains confidence that his new portfolio is achieving its long-term target, the planner says. He estimates Jack could raise his spending by as much as $700 a month without depleting his estate (in nominal dollars), which is worth about $700,000 including his condo.


The person

Jack, 61

The problem

How to cope financially with what will likely be a forced early retirement and still leave a substantial estate for his children.

The plan

Build a more balanced and diversified portfolio with a view to earning an average annual return of at least 4.5 per cent. Leave RRSP intact until age 72 and try to arrange finances to qualify for some Guaranteed Income Supplement.

The payoff

The financial security that comes with knowing he can raise his spending by up to $700 a month in retirement without depleting his estate.

Client situation

Monthly net income

$3,375 plus $742 CPP Disability


Cash and short-term deposits $78,154 (non-registered); TFSA $15,778; RRSP $368,202; condo $240,000. Total: $702,134.

Monthly expenses

Housing $626; transportation $132; groceries, clothing $445; gifts $250; charitable $10; dining out, sports, subscriptions, haircuts $210; vitamins $10; telecommunication, cable, Internet $160; professional association $6. Total: $1,849.



Special to The Globe and Mail

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