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financial facelift

-CHRIS BOLIN/The Globe and Mail

Paige plans to retire from her $61,000-a-year job in the education field next month so she wants to make sure she is on sound financial footing. She has a mortgage-free condo in Calgary and no debts. Paige will be 66 this fall.

She has a modest pension from her current employer as well as a small pension from a previous job. Together, these plans will pay her about $1,145 a month, so she has some concerns about whether she can maintain her current lifestyle. She will also collect Canada Pension Plan and Old Age Security benefits.

Paige wonders whether she should convert some of her registered retirement savings plan to a registered retirement income fund (RRIF) as soon as she retires and begin withdrawing money to supplement her pension and benefit income.

"What kind of investment mix would be good for my RRIF?" Paige asks in an e-mail.

Paige's living expenses are very low – only $45 a month for dining out and drinks, $100 for sports and hobbies and zero for entertainment and gifts.

Her single largest expense is her condo fees.

We asked Heather Franklin, a fee-for-service financial planner in Toronto, to look at Paige's situation.

What the expert says

When Paige quits work, her pensions and government benefits will give her nearly $32,000 a year before tax, Ms. Franklin says. In addition to the $1,145 a month from her two pensions, she will get $922.46 in Canada Pension Plan benefits and $563.74 in Old Age Security, for a total of $2,631.20 a month or $31,575 a year. She will be in the lowest income tax bracket so she will get to keep more of her money.

If necessary, Paige can supplement this income by withdrawing small amounts from her RRSP, Ms. Franklin says. There is no need for Paige to convert her RRSP to a RRIF as soon as she retires. Rather, she can do this at age 71 and begin making minimum withdrawals at age 72.

Thanks to her modest lifestyle, Paige should have enough income after she retires to maintain her standard of living, the planner says. She paid her mortgage and outstanding bills off in December, 2014. This left her with some extra money, which she has been directing to savings. Her current lifestyle spending is $22,320 a year.

Paige does not have a tax-free savings account, Ms. Franklin notes. She should open one and shift the money she has in a savings account to the TFSA, which could double as an emergency fund, the planner says. She should maintain a fund large enough to cover three to six months of expenses.

Money held in a TFSA can be withdrawn tax-free when required and re-contributed the following year, the planner says.

Paige's RRSP money should be left to grow as long as possible, the planner says. "Actuarial tables indicate that she may well live to be 90." Ms. Franklin assumes a return on investment of 5 to 6 per cent a year and an average annual inflation rate of 2 per cent.

Paige's investments are well diversified – 65 per cent equity and 35 per cent fixed income – but they are "housed within mutual funds that carry fairly high management expenses," the planner says. "She might consider moving her investments to a lower-cost provider."

Although Paige may deplete her savings by age 90, she will still have the equity in her condo to fall back on, Ms. Franklin says.

Paige's housing costs are low – only $815 a month – but this number will likely rise in line with inflation as the years go by, the planner notes. Another risk to her financial security is a possible special assessment by the condo board to cover maintenance or renovations.

If this were to happen, Paige could tap the emergency fund in her TFSA to cover the costs, Ms. Franklin says. When Paige's vehicle needs replacing, she could consider car sharing or renting rather than buying.

Ms. Franklin does express some concern about Paige's low spending, especially on personal items such as travel and leisure. "Can one assume that this will continue during retirement?" she wonders.


Client situation

The person: Paige, 65

The problem: Can she maintain her standard of living after she retires?

The plan: Make only small withdrawals from RRSP to supplement income if necessary. RRSP funds should be left to compound as long as possible. Open a TFSA as an emergency fund.

The payoff: Her savings last to age 90, after which she will still have her pensions, her government benefits and her condo.

Monthly net income (current): $3,940

Assets: Bank deposits $20,000; RRSP $195,000; condo $300,000; estimated present value of pension plans $325,000. Total: $840,000

Monthly disbursements: Condo fees, including heat $605; property tax $125; property insurance $35; hydro $50; vehicle costs $170; groceries $300; clothing $50; charity $10; vacation, travel $100; dining out, drinks $45; grooming $40; sports, hobbies $100; dentists $30, vitamins, supplements $20; telecom, TV, Internet $185; group RRSP and pension plan contributions $910. Total: $2,775. Surplus: $1,165

Liabilities: None

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