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Nellie and Brad have done well for themselves, raising two children, paying off their home and amassing a tidy nest egg for their later years.

Yet nagging fears that they may not be able to maintain their lifestyle have kept Brad working at his $110,000 a year finance job even though he will turn 76 this fall. Nellie is 70. Neither has a work pension.

"Can I retire next year and have $80,000 after tax indexed to inflation?" Brad asks in an e-mail. In addition to Brad's salary, they both get Canada Pension Plan benefits, some investment income and earnings from their share in a rental property.

Money worries have Brad eyeing his investment portfolio critically. Their RRSP/RRIF investments are managed by a major investment dealer for a fee of 1.5 per cent a year. "I think this is too much," Brad says. Last year, their portfolio earned 3.4 per cent after fees, a number Brad finds disappointing.

His e-mail echoes a question on the minds of investors across the country: "How can I do better without more risk?"

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

What the expert says

With a portfolio of $1.26-million, Brad and Nellie are doing better than most retirees, Mr. MacKenzie says. As well, they are getting a regular performance report from their investment dealer showing them how much they have made and comparing their returns to the appropriate benchmarks.

"After fees, they've beaten the relative return benchmarks," he says.

The problem is that their asset mix – 30 per cent stocks and 70 per cent bonds – was selected without enough attention to their real objectives: to protect their purchasing power from inflation, maintain their current lifestyle and leave something to their children.

To meet their goals, they would need to earn at least 3.5 per cent net after fees, the planner says. Given today's low interest rates, they are unlikely to make that much with their current asset allocation. Instead, over the medium term they can expect perhaps 2.75 per cent.

If they spend $80,000 a year after Brad retires, their savings will be gone by the time Nellie is about age 90, the planner calculates.

"That is not the time when a senior citizen wants to face change and hardship." Indeed, the worry will begin long before the money is gone. "As she sees her capital shrinking, she will be sick with worry long before age 90." High inflation would just make the situation worse.

Nellie and Brad would do well to revisit their goals, asking themselves some questions. For example, do they want to avoid stock markets up and downs or the erosion of purchasing power by inflation?

"It is unlikely you can avoid both risks," Mr. MacKenzie says. "For many retirees, it is just impossible to avoid stock market risk and also earn enough to spend the way they want to spend. They have to make a choice." It helps if people understand how much their type of portfolio fell in value in previous financial market drops and how long it took to recover, he adds.

To achieve their goals, Nellie and Brad can choose a more aggressive asset mix, shifting to a 50 per cent holding in blue-chip, dividend-paying stocks and 50 per cent bonds. This mix might be expected to yield a return of about 4 per cent a year after fees, the planner says. If they decide to stay with their current asset mix, they should reduce their spending by $10,000 a year in today's dollars.

Mind you, if they decide to move more heavily into stocks, they should be ready for their portfolio to drop by 15 per cent to 25 per cent in the next market crash, Mr. MacKenzie says. Could they resist the urge to panic and sell?

As for the management fee, "in our experience most money managers will manage a (largely bond portfolio) of this size for about 1 per cent per annum," Mr. MacKenzie says. Even if Brad and Nelie shift to a 50 per cent asset mix, they should still be able to reduce their annual fee by a quarter of a percentage point – enough over the years to pay for most of their annual vacation expense.


Client Situation

The people

Nellie, 70, and Brad, 75.

The problem

Have they amassed enough savings for Brad to retire next year given their spending target of $80,000?

The plan

Sit down and decide whether they can stand more risk in their portfolio – which means adding more stocks – or whether they should pare their spending plans instead.

The payoff

Feeling more in control of their destiny, having investments they are comfortable with and knowing they may need to lower their expectations to achieve peace of mind.

Monthly net income



Stocks $20,000; RRSP/RRIF his $620,000; hers $620,000; residence $500,000; other real estate $250,000. Total: $2.01-million

Monthly expenditures

Property taxes $600; maintenance $520; other housing expenses $775; transportation $450; groceries $1,250; clothing, dry cleaning $400; gifts $250; charitable $340; vacation, travel $650; other $80; dining, entertainment, clubs, subscriptions, grooming $745; dentists, drugstore $115; telecom, TV, Internet $335; professional association $90; group benefits $20. Total: $6,620



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