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financial facelift

-Peter Power/The Globe and Mail

When Stuart first applied for a Financial Facelift last year, he was feeling uneasy because the company he worked for had run into financial difficulty. Celia was unemployed. They had a home in small-town Ontario and about $80,000 in debts. He is 56, she is 61.

"I've been piling away RRSP [contributions] into mutual funds and have no idea if that's the right thing to do," Stuart wrote at the time. Soon after, he lost his well-paying job. He used his severance to pay off debts and they hunkered down to face an uncertain future.

This summer, they sold their home and moved closer to Toronto, to a modest rental house. The landlords agreed to pay for utilities if Celia would babysit their children. All Celia and Stuart pay is $500 a month in rent. Now, Stuart has another job and they've turned their attention to saving for his retirement in a decade or so. Celia is looking for part-time work.

"Our retirement goal is to use the new place as a summer residence and hopefully go south for the winters," Stuart writes in an e-mail. Their retirement spending goal is $60,000 a year, or $5,000 a month, after tax. Short term, they need a new vehicle and hope to take a vacation twice a year.

"How should I invest the $270,000 from the sale of our house?" Stuart asks. "What's the best way to invest any surplus income?"

We asked Marc Henein, an investment adviser at ScotiaMcLeod in Mississauga, to look at Stuart and Celia's situation.

What the expert says

Stuart and Celia are in a much better financial position now that they have cut their expenses and virtually eliminated their debt, Mr. Henein says. As well as the money from the sale of their home, they have about $220,000 in registered retirement savings plans.

"Their goal is to have Stuart work for 10 more years then retire, enjoying winters down south and summers at home with their family," the adviser says. The first thing they should do with their cash is to set up tax-free savings accounts and contribute the maximum, which in their case would be $62,000. This money should be invested for growth, Mr. Henein says.

"If Stuart and Celia make full use of their contribution room to the TFSAs for the next 10 years and the accounts grow in value by 5 per cent a year, they will be worth about $227,000," he adds. If Stuart continues to contribute $1,000 a month to their RRSPs for the next 10 years, and enjoys the same 5-per-cent growth rate, the RRSPs will be worth about $320,000.

Together, the RRSPs and TFSAs could generate income of $27,500 a year once Stuart has retired. Canada Pension Plan and Old Age Security benefits should generate roughly the same amount, creating a combined income of nearly $58,000 before tax, the adviser says.

"Once they are over 65, they will be able to split their government pensions and RRSP income, which will bring down their taxes significantly, to the point where they should net nearly $4,000 a month after tax," the adviser says. They also are entitled to a combined $1,000 a month in overseas government pensions (before tax) once they turn 66, so if all goes well, they should be close to achieving their $5,000 a month spending target.

The money in their joint non-registered account, including their house sale proceeds, should be invested in dividend-paying equities to take advantage of the dividend tax credit, Mr. Henein says. To balance this, they should hold fixed-income securities in their RRSPs.

The couple's funds are invested with two different firms. The adviser suggests they combine their investments with one firm to lower the fees.

"Having nearly $500,000 of investments, they should not pay more than 1.5 per cent of their overall portfolio" in management fees, he says. In their current RRSP portfolios, they own several mutual funds with an average fee of 2 per cent a year. "To make matters worse, these fees are not deductible," Mr. Henein says.

To lower their costs, they should set up a fee-based arrangement for their non-registered portfolio so the fees will be tax deductible, he adds.


Client situation:

The people: Stuart, 56, and Celia, 61

The problem: How to get back on track for a comfortable retirement with limited savings and no company pensions.

The plan: Set up tax-free savings accounts and contribute the maximum. Continue with RRSP savings and invest both plans with a view to earning an average annual return (interest, dividends and capital gains) of 5 per cent a year.

The payoff: Their savings, plus their Canadian and overseas government benefits, should provide them with a secure retirement.

Monthly net income: $7,460

Assets: Home sale proceeds $270,000; cash in bank $5,000; his RRSP $110,000; her RRSP $110,000. Total: $495,000

Monthly disbursements: Housing (rent and insurance) $540; transportation $690; groceries, clothing $580; car loan $250; vacation, travel $500; dining, drinks $250; sports, pets, grooming $120; life insurance $150; telecom, TV $110; RRSPs $1,000; group benefits $100. Total: $4,290

Liabilities: Loan $9,000

Read more from Financial Facelift.

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