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Brent Foster/The Globe and Mail

Alex is 61, Roxanne 58, so retirement is on their minds – but when?

Like many people, they really don't know how much income their savings and investments will generate. So their hearts were lifted when they read a newspaper article with the headline, "Retirement Is Cheaper Than You Think."

Encouraged, they wrote: "Our question to you is, will we have enough money for both of us to retire when I am 60 in September, 2014?" Alex would be 62. Their goal is to generate retirement income of $55,000 a year after tax.

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With no defined benefit pension plan, "income is difficult to predict," Roxanne adds. Expenses are a little more predictable. When they are no longer working, they plan to cut back to one car. Their telecommunication expenses will drop when Roxanne is no longer working part-time from home.

Over the years, Roxanne and Alex have done well, building assets surpassing $1-million, including their $260,000 southwestern Ontario home.

"We have raised a family of four sons, the youngest of whom has just finished university," Roxanne writes. "All are financially independent." She and Alex want to ensure they are financially independent, too. She wonders about various retirement strategies and investments that might raise their income slightly or at least make it more predictable.

We asked Warren MacKenzie, founder of Weigh House Investor Services in Toronto, to look at Roxanne and Alex's situation. Weigh House is an independent financial planning firm that does not sell investment products.

What the expert says

Alex and Roxanne are a typical couple contemplating retirement, Mr. MacKenzie says – they have typical concerns and unfortunately, they're making typical mistakes.

"They are focused too much on the less important issues and not enough on those issues that will make the biggest difference in their long-term financial security," the planner says.

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Roxanne and Alex will likely be okay because they've been frugal and saved and invested over the past 30 years, Mr. MacKenzie says. "But they'd have a lot more money today if they had not paid so much in fees" – more than 2 per cent a year currently on a portfolio that is 60-per-cent cash and fixed income.

"With these fees and this asset mix, Alex and Roxanne can expect to earn about 3 per cent (a year on average) and they will run out of money in their old age," the planner says. Their savings would be spent when Roxanne is 89. "Part of the problem is that if they see their assets dwindling, they will start to worry long before they actually run out."

If, in contrast, they build a balanced, well-diversified portfolio of low-cost securities, and rebalance it regularly, they can expect to earn 4.7 per cent a year on average, he says. In that case their savings will last until Roxanne is 101.

"Bottom line, they can retire when they wish to if they spend less, but at the desired level of spending they need to either work longer or improve the return on their retirement nest egg."

Alex and Roxanne wonder whether they should defer for as long as possible taking government benefits or drawing on their RRIF. "It doesn't matter," the planner says. "If they do not manage their $772,000 investment portfolio wisely, they will have to work longer or they will run out of money."

For example, if Roxanne delays taking Old Age Security benefits until age 70, and if she lives to age 90, she will be ahead by about $16,000 before income tax, Mr. MacKenzie says. "Alternatively, if they reduce their investment management fees to a more acceptable 1.25 per cent (a year), the advantage will be about $50,000 before tax."

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Not only do the couple's investments bear high fees, most do not have even a three-year track record, and since inception they have all underperformed compared to their benchmarks.

The investment process is more important than products, the planner says. "Alex and Roxanne should be focused on a disciplined investment process that determines the initial asset mix and a strategy to rebalance." As it stands, they are not being provided with performance information that shows how well (or poorly) they are doing relative to the benchmarks.

They have too much money invested in complicated structured products, they have very little global diversification and they have too little inflation protection, Mr. MacKenzie concludes. Given the size of their portfolio, they would be better off hiring an investment counselling firm to manage their money for a set fee, he adds. Investment counsellors have a fiduciary duty to their clients that goes beyond the "suitability" standard used by securities sales people.

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Client Situation

The people

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Alex, 61, and Roxanne, 58.

The problem

Can they retire in two years and live off their savings plus CPP and OAS?

The plan

Raise their investment returns and lower the fees they are paying by hiring an investment counsellor to manage their money in a low-cost, diversified and balanced portfolio.

The payoff

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They will be more likely to meet their retirement spending target without having to work longer than planned.

Monthly net income

$10,820

Assets

Bank deposits $4,000; company stock $42,300; TFSAs $12,200; individual and group RRSPs (his) $310,600; (hers) $403,800; residence $260,000. Total: $1.03-million

Monthly expenditures

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Property tax $300; maintenance $150; property insurance $65; utilities $230; gardening $65; transportation $730; groceries $700; clothing $150; line of credit $1,600; gifts, charitable $300; vacations, travel $900; golf $400; grooming, clubs, dining out, entertainment, sports, subscriptions $480; dentists, drugstore $40; telecom, Internet, TV $260; RRSP $1,950; TFSA $900; other savings (Alex's group RRSP) $1,350; professional association $120; group benefits $30. Total: $10,720.

Liabilities

$62,000

Read more from Financial Facelift.

Want a free financial facelift? E-mail finfacelift@gmail.com

Some details may be changed to protect the privacy of the persons profiled.

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