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financial facelift

-Jeff Vinnick/The Globe and Mail

At age 52, after three decades of marriage, Priscilla is setting out on her own.

She has a good job in management, earning $100,000 a year. As well, she has a defined contribution pension plan with a recent market value of $59,000 to which she contributes 5 per cent of her salary each year, a number that is matched by her employer.

Although her divorce settlement will contribute to her financial security, Priscilla doesn't have a lot of ready cash. She'd like to buy a condo or small house if she could. A house in the Vancouver suburb where she lives would cost upward of $700,000. As it stands, she is renting in a desirable location.

"I am considering continuing to rent, but maybe I should purchase a condo," Priscilla writes in an e-mail. "I would like to retire by the time I am 60 and I love to travel." She wonders whether she should continue to invest in her registered retirement savings plan or switch to non-registered investments instead.

We asked Heather Franklin, an independent, fee-for-service Toronto financial planner, to look at Priscilla's situation.

What the expert says

Priscilla has an interesting conundrum, Ms. Franklin says. While she seems to have sufficient net worth to buy a home, most of her investments – nearly 85 per cent – are in a locked-in retirement account (LIRA) and an RRSP. Withdrawing money from her RRSP would add to her tax liabilities at a time when her income is relatively high, the planner says.

"While it seems counterintuitive for Priscilla to spend so much on rent [$2,850 including utilities and Internet], purchasing a home when she is eight years away from retirement is not the correct answer," she says. "The cardinal rule is to be mortgage-free during retirement."

If she did buy, Priscilla's mortgage payments would be quite large, so if interest rates were to rise, "her payments on a fixed income will be problematic." The planner estimates Priscilla has about $118,000 in liquid funds that she could use for a down payment. Add to that, she would be buying in "a very expensive and frothy real estate market."

Instead of buying, Priscilla may consider moving to a less expensive rental at some point, the planner says.

Priscilla should take full advantage of her work pension plan to benefit from her employer's matching contributions, Ms. Franklin says. She should also contribute the maximum to her tax-free savings account.

As for the RRSP, Priscilla already has substantial retirement funds, so the planner recommends she stop making RRSP contributions.

"Perhaps allocate some money to a vacation fund, build an emergency fund and consider adding to her non-registered investment account," the planner says.

For her investments, Priscilla could consider investing part of her TFSA funds for growth and leaving part liquid for an emergency fund, although a separate emergency fund large enough to cover six months' expenses would be better. The RRSP and locked-in retirement fund could be invested for the longer term in a balance of fixed income and solid, blue-chip stocks that pay dividends and are diversified geographically.

By the time Priscilla retires at age 60, her RRSP will have grown to about $325,000, assuming a 5-per-cent growth rate and 2-per-cent inflation. That amount will be lower if she invests mainly in fixed-income securities. Her LIRA will have risen to about $750,000. The planner suggests Priscilla draw from the LIRA first, which she will have converted to a life income fund, or LIF.

"She must remain mindful to balance the amount withdrawn so as to minimize any potential clawback of her Old Age Security benefits," which she will get when she is age 67.

LIFs have minimum and maximum amounts that can be withdrawn at certain ages, Ms. Franklin notes. At age 60, Priscilla could withdraw a minimum of 3.3 per cent, or about $24,000 a year, and a maximum of 6.85 per cent, or about $51,000.

"She can always supplement this withdrawal with monies from her non-registered account," the planner says. Priscilla could also begin collecting reduced Canada Pension Plan benefits at age 60.

At age 67 (less two months), she would begin collecting Old Age Security benefits. At age 71 or earlier, she could convert her RRSP to a registered retirement income fund and begin withdrawing funds from there as well.

"These monies should maintain her for 30 years to age 90 or so," the planner says.


Client Situation:

The person: Priscilla, 52

The problem: Can she afford to buy a house in suburban Vancouver?

The plan: The house looks out of reach because so much of her assets are locked up. At some point, she might want to move to a lower-priced rental. Direct more savings to her non-registered portfolio rather than her RRSP.

The payoff: The means to pursue her retirement goals, including travelling.

Monthly net income: $6,765

Assets: Stocks $86,000; LIRA $616,000; TFSA $32,000; RRSP $259,000; market value of pension plan $59,000. Total: $1.05-million

Monthly disbursements: Rent including utilities and Internet $2,850; tenant insurance $35; transportation $250; groceries, clothing $500; vacation, travel $250; personal discretionary (dining, drinks, grooming, pets, subscriptions) $450; disability insurance $150; telecom $180; RRSP $1,625; pension plan contributions $415. Total: $6,705

Liabilities: None

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