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financial facelift

-GLENN LOWSON/The Globe and Mail

As they look back at their careers in the public service, Bob and Barbara know how they want to spend the rest of their lives. Their goal is to move closer to their children and grandchildren, which means moving to a more expensive town.

When Bob retires from a stressful and demanding job in emergency services two years hence, they want to travel the world "within a budget," Barbara writes in an e-mail. She already has retired. He is 58, she is 59.

"Can we afford to move to a more expensive real estate market?" Barbara asks. "If so, what can we reasonably afford to spend?" A house in the new location would cost at least $700,000, she adds. "If we make this BIG decision, how would it affect our retirement income?" Should they move soon or later? she wonders.

They also ask about their investment strategy. Because Bob changed jobs a couple of times, he was able to cash in his pension at one point and then – when he got a new job – hand it over to be managed by his work pension plan, which allows for additional voluntary contributions. Once he retires, they wonder in which order they should draw on their savings.

We asked Warren MacKenzie, a principal at HighView Financial Group in Toronto, to look at Barbara and Bob's situation.

What the expert says

"It's not uncommon to find people like Barbara and Bob who have more than enough income and capital, but who need to have an independent person prove it to them with a financial plan," Mr. MacKenzie says. "Financial security is a state of mind."

The two have achieved financial independence, the planner says. Barbara has an indexed pension of $68,000 a year. When Bob retires at age 60, he will get a partly indexed pension of $23,000 a year. They will get about $14,000 of Canada Pension Plan benefits between them when Bob retires, and at age 65 they will begin collecting Old Age Security benefits.

Their combined investments total more than $1-million, and their after-tax spending goal is $83,000 a year.

By the time Bob retires, they will have $1.1-million of capital, which will grow by $55,000 a year assuming an average rate of return of 5 per cent. Their pension income (including CPP) will total $105,000 and they will pay about $27,000 in income tax.

Here's how it works out: The growth in their portfolio of $55,000 and their pensions of $105,000 will give them gross income of $160,000. Subtract from that income taxes of $27,000 and their lifestyle spending target of $83,000 a year and they will have a surplus of about $50,000 a year, the planner says.

With that much money, "the answer is yes, they can afford to buy a more expensive house and move closer to their family." If they paid cash for the new house, they will still have a surplus of about $40,000 a year.

Barbara and Bob ask whether they should move now or after Bob retires, the planner notes. "Given that they have enough cash in their non-RRSP accounts to make up the difference in price between the two homes, and given that they are paying income tax on the earnings from this capital, it seems to make sense that they would move sooner rather than later," he says. (The new home would be within driving distance.)

Their portfolio's heavy weighting in stocks is "not unreasonable" considering they have the security of indexed pensions in addition to the $650,000 invested in Bob's employer's pension plan, Mr. MacKenzie says. (The planner suggests that if they make a decision to buy the home they should immediately move $200,000 out of equities and put it into a money market fund.)

"One problem with their investment portfolio is that they are not receiving a performance report, which shows how they are doing compared to the proper benchmark," he says. Without that, "they have no way of knowing whether or not their adviser is adding value."

There is also no detailed investment policy statement or any evidence that a disciplined investment process is being followed, Mr. MacKenzie says.

As to how they should draw on their capital, "the general rule is to first use up the pools of capital that have the most restrictions attached," the planner says. "This would mean first taking the maximum from his locked-in retirement account, and then enough from her RRSP to minimize the future clawback of Old Age Security benefits, and finally, funds from their non-RRSP accounts."


Client situation

The people Bob, 58, and Barbara, 59.

The problem Can they afford to move closer to their children, take a trip around the world and maintain their current lifestyle when Bob retires?

The plan Go ahead and buy the more expensive home because they have already achieved financial security.

The payoff Peace of mind.

Monthly net income $9,540.

Assets Cash and short-term $11,200; stocks $233,000; his LIRA $650,000; his TFSA $36,000; her TFSA $36,000; her RRSP $95,000; estimated present value of his pension plan $453,000; estimated present value of her pension plan $1,400,000; residence $550,000. Total: $3,464,200

Monthly disbursements Property tax $525; utilities insurance $415; maintenance and repair $800; garden $200; transportation $805; grocery store $1,000; clothing $250; gifts, charitable $525; vacation, travel $600; dining, drinks, entertainment $450; grooming $300; pets $275; sports, hobbies, subscriptions $25; drugstore $50; life insurance $210; telecom, TV, Internet $255; professional association $150; car loan $600; TFSAs $800; pension plan contributions $200. Total: $8,435

Liabilities Car loan $29,000 at 4.3 per cent (to be paid off immediately)

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