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Michelle Siu for The Globe and Mail

Michelle Siu for The Globe and Mail/michelle siu The Globe and Mail

Louise works long hours in the food service industry with no employee benefits, so it's no wonder that at 57 and single again, she is beginning to think about retiring. She earns $12 an hour working anywhere from 30 to 45 hours a week.

"Some months I find it hard to balance my budget," Louise writes in an e-mail. When she retires, she wants to take a trip or two a year "without going to the poor house," she writes. She has about $205,000 in savings and investments.

"Quite frankly, I am scared," she adds. "I don't want to have to depend on my kids or my siblings in my old age."

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Louise occasionally has to dip into her savings just to make ends meet. A few months ago, when she was in between jobs, she borrowed about $8,000 on a line of credit to cover her living expenses, including car insurance and rent on her Kitchener-Waterloo-area apartment.

"I would love to retire or semi-retire at 60, but I have no benefits and a poor-paying job," Louise says. Her short-term goal: "To hang on to what I've got."

We asked Ross McShane, director of financial planning at McLarty & Co. Wealth Management Corp. in Ottawa, to look at Louise's situation.

What the expert says

Louise has reason to be concerned, Mr. McShane says. As it stands, her after-tax income of $17,820 a year does not cover her expenses.

In 2012, Louise will run a deficit of $8,981, including $4,000 for a planned trip to Italy, $500 for car tires, $300 for the dentist and $500 for the optometrist. Every five years or so, she will need $2,500 for hearing aids.

The way she's going, Louise will have used up her non-registered portfolio of $40,213 and her registered retirement savings plan of $16,497 by the time she is 65. From age 66 to 71, she will have to draw on her locked-in retirement account to cover a cumulative deficit of more than $35,000. Income from her LIRA would erode and perhaps eliminate any guaranteed income supplement (GIS) she might otherwise receive. Worse, she'd run out of savings by the time she is 88. Mind you, GIS would kick in at that point, helping to cushion the income drop, and her lifestyle expenses may well be lower, so she may be able to stretch her savings out a few more years.

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Fortunately, Louise has a number of planning opportunities: She can earn a little more, spend a little less and lower her goal for retirement income from $24,000 after tax to say, $22,000, Mr. Shane says. The key from age 65 on is to generate as much cash flow with as little taxable income as possible in retirement – and to take full advantage of the GIS.

First, he recommends Louise dip into her non-registered investment portfolio immediately to repay her line of credit. She is paying 5.75 per cent on the loan, "which is difficult to achieve after-tax on an investment portfolio," he notes. This will also free up cash flow.

Next, he suggests she transfer $15,000 from her non-registered portfolio to a tax-free savings account before year end and another $5,000 in 2012. "This will turn taxable income into tax-free income."

From age 60 to 63, she should withdraw about $5,000 a year from her RRSP, with any surplus funds going to her TFSA. She should delay converting her LIRA to a Life Income Fund for as long as possible to take advantage of the GIS. Since LIF withdrawals must begin at age 72, she will no longer be entitled to GIS benefits.

Mr. McShane's assumptions include Canada Pension Plan benefits of $516 a month at age 65, Old Age Security benefits of $524 a month and GIS of $400 a month, which will vary from year to year based on income. He also assumes a return on investment of 5 per cent and an inflation rate of 2 per cent.

If Louise can earn another $3,000 to $5,000 a year, or eliminate her cash flow shortfall through a combination of higher earnings and lower spending, her prospects will be good, Mr. McShane says. She will have her non-registered portfolio and her TFSA to supplement her CPP, OAS and GIS income from age 65 to 71, so she will be able to leave her LIRA intact. She will have enough money to last until she is 95.

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Key to Louise achieving her goals is her investment return. She appears to be paying 2.3 per cent in management fees on her mutual funds, "which is excessive and eroding her return," Mr. McShane says. Using low-cost mutual funds and exchange-traded funds would lower her costs by three-quarters to one percentage point, saving her $1,500 to $2,000 a year. Her portfolio should be about 45 per cent in fixed income and 55 per cent in equities.


The person

Louise, 57

The problem

How to get budget in balance and prepare for retirement – early if possible, and with some travel – on a modest salary and limited savings.

The plan

Work to age 65, consider a part-time job to earn $3,000 to $5,000 a year and/or spend less. Draw on RRSP before age 65 and arrange financial affairs to take advantage of income supplement if possible in early retirement years. Alternatively, prepare for big drop in income late in life.

The payoff

The security of knowing she will be able to pay her own way into her late 80s or perhaps even early 90s.

Monthly net income



Investment portfolio $40,213; RRSP $16,497; locked-in retirement account (defined-contribution pension plan) $148,277. Total: $204,987

Monthly disbursements

Rent $737; utilities, home insurance $123; auto expenses $178; groceries $250; clothing $100; debt repayment $125; gifts, charitable $40; vacation, travel $100; personal $50; dining out, entertainment $60; pet expense $20; subscriptions $5; dentist $35; prescriptions $100; vitamins, supplements $35; telecom, Internet, cable $136. Total: $2,094


Line of credit $7,923

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