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Translator shouldn't put down his dictionary just yet

Brad’s target retirement income is $80,000 a year after tax, which makes his dream of hanging up his hat soon – look a tad ambitious.

Graham Hughes for The Globe and Mail/graham hughes The Globe and Mail

Brad has done quite well for himself working as a translator, but at 61, he is beginning to think about scaling back his workload in a couple of years. His assets total about $1.9-million, including his Montreal condo valued at $500,000. He also has about $228,800 of debt.

He recently won a major government contract that is bringing in roughly $90,000 a year and he makes another $27,000 a year freelancing. When the government contract comes up for tender again late in 2013, Brad is thinking about bidding jointly with a colleague and sharing the work. If he could afford to, he might just pass on bidding entirely.

Although he has no company pension, Brad has an insurance product that he hopes will provide him with an income of at least $24,500 for life beginning at age 65. He will also be eligible for Canada Pension Plan and Old Age Security benefits totalling about $610 a month at age 65.

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Brad's target retirement income is $80,000 a year after tax, which makes his dream of hanging up his hat soon – that is, not bidding the government contract – look a tad ambitious. Fortunately, he has a substantial investment portfolio, much of it owned by his holding company, which is where he earns his translation income as well. His main question is how to invest his savings to provide the most income in the most tax-efficient way. But he also wonders how long his savings will last.

We asked Adam Weinstock, a portfolio manager and senior wealth adviser at ScotiaMcLeod in Pointe-Claire, Que., to look at Brad's situation. Mr. Weinstock was aided in his analysis by his colleague Pierre Renaud, senior financial planner for ScotiaMcLeod in Quebec.

What the experts say

Most of Brad's investments are either in his registered plans or his holding company, Mr. Weinstock notes. "The key to a secure retirement for Brad will be the ability to draw funds out of his holding company in the most tax-efficient nature in the long run."

First, though, he must pay down his debts. Paying off the mortgage alone would save him $16,000 a year. Mr. Weinstock advises Brad to direct all his savings from now until he retires to paying down debt.

For his portfolio, the adviser suggests three main investment types: high-quality, dividend-paying corporations with a track record of increasing their dividends, bonds and guaranteed income certificates, and preferred shares. To take advantage of future interest rates increases, Brad could "ladder" his bonds and GICs, so that 20 per cent of his holdings mature in each of the following five years. Meanwhile, the stocks with their dividends would offer a hedge against inflation.

Given Brad's moderately aggressive tolerance for risk, he could position much of his non-registered portfolio exclusively in dividend growth companies, Mr. Weinstock says. About $298,000 of his $813,000 in non-registered assets is in the Manulife Income Plus product, leaving $515,000 to buy a basket of stocks.

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If he bids jointly for the government contract in 2013, Brad's income will drop by about $45,000 a year from age 63 to 65. That would leave him with $45,000 plus his ongoing $27,000 in freelance income, or $72,000 before taxes. By that time, with a 5-per cent-growth rate, his portfolio will have grown to slightly less than $600,000, which would generate $30,000 a year in income, bringing his total gross income to $102,000.

Because that's not enough to generate after-tax income of $80,000 a year – his target – Brad would have to draw on his capital to cover the shortfall. Mr. Weinstock estimates he would need to take only 2 per cent to 3 per cent of his capital each year (to age 65) to bridge the income gap. Brad can take this money as salary, dividends or a combination of the two, Mr. Weinstock notes.

Can he afford not to bid on the contract when it comes up for renewal in 2013? Yes, but there will be financial consequences, Mr. Weinstock cautions. Mr. Renaud concluded the following: If Brad earns only $27,000 a year from the time his contract expires in 2013 to age 70, drawing down his holding company assets to produce the desire $80,000 in after-tax income would force him to dip into the principal of the Manulife funds in 2020 and to sell his property in 2025. Even at that, Brad would deplete his savings by 2042, when he was in his early 90s.

"If this is not appealing to him, then taking on the [government translation]contract for those extra three years would improve his situation," Mr. Renaud says. "He would still eventually need to sell his house and dip into the Manulife Income Plus principal, but he could delay both those eventualities by almost five years."


The person

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Brad, 61

The problem

With no company pension, has Brad saved enough to last him a lifetime if he bids jointly on the government contract in 2013 and works on it for another three years? Or could he pass on the contract entirely, doing only freelance work bringing in about $27,000 a year until he retires fully at age 70? Also, how should he invest?

The plan

Ideally, he will bid jointly on the contract and work a bit longer, giving him the wherewithal to achieve his desired income level of $80,000 a year after tax into his late 90s. Meanwhile, he should shift his portfolio to put a greater emphasis on income, with a big chunk going to dividend-paying stocks.

The payoff

A substantial income buffer against unforeseen financial events, with all the security and independence that brings.

Monthly net income

$7,000, variable


Bank $2,000; non-registered savings $813,000; TFSA $18,000; RRSP $576,000; residence $500,000. Total: $1.9-million.

Monthly disbursements

Mortgage $1,364; taxes $359; property insurance $85; hydro $84; condo fees $200; groceries $560; dry cleaning $30; loan payments $500; charitable gifts $300; vacations and travel $75; dining out $300; drinks, pocket money $475; subscriptions $30; dentist $20; vitamins, supplements $20; health, dental insurance $100; disability and/or critical illness insurance $650; telecom, cable, Internet $300; RRSP $1,250; other savings $300; professional association $42. Total: $7,044


Mortgage $211,000; line of credit $16,600; credit cards $1,200. Total: $228,800

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