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David Stobbe/The Globe and Mail

Lana and Zack's story is an increasingly familiar one: people in their 50s with well paid but stressful jobs who can barely wait to leave the work force. He is 51, she is 50. They own their house outright and have no debt.

"We are eagerly working toward what we hope will be early retirement," Lana writes in an e-mail. "We are healthy and take good care of ourselves, but our jobs are very stressful," she adds. He's in education, she's in health care. "So in three to six years, we would like to leave our present jobs behind and move on to the next stage of life."

The "next stage" they aspire to includes travelling and "living the good life," spending two or three months each year in a warmer climate. Zack may look for a part-time job.

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Luckily for them, they both have defined benefit pension plans.

Zack and Lana have two children, 22 and 25. They'd like to help the younger one through university. Apart from that, their main concern is to save as much as possible in the next five years so they can buy a place down south.

We asked Ross McShane, director of financial planning at McLarty & Co. Wealth Management Corp. in Ottawa, to look at Lana and Zack's situation.

What the expert says

In preparing his forecast, Mr. McShane assumes Zack retires in June, 2019, and Lana in September, 2018, with lifestyle expenses of about $83,000 a year. The planner allows $30,000 every five years for vehicle replacement starting in 2020. Zack will get a pension of $7,056 a month ($84,672 a year) to age 65, including a bridge benefit that will end when he turns 65 and starts collecting Canada Pension Plan benefits. From then on, his pension will be $5,687 a month, partly indexed to inflation.

Lana will get a pension of $2,982 a month ($35,784) to age 65, falling to $2,405 after she begins collecting CPP benefits.

The planner includes $20,000 a year for four years of university education, plus $200,000 for Lana and Zack to buy a vacation home in five years. He assumes a rate of return on investments of 4.5 per cent a year and an inflation rate of 2 per cent.

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His conclusion: Yes, they can retire early and enjoy a comfortable lifestyle.

"Pension splitting at retirement will lower combined taxes payable and preserve Old Age Security benefits that will start at age 67," Mr. McShane says.

Yes, too, to the vacation property. They can pay for it by setting aside cash flow surpluses over the next five years. Over and above contributions to their tax-free savings accounts, Zack and Lana should be able to save up about $150,000. The money for the second property "could be invested within their non-registered account," the planner says.

Lana could use up her $29,268 in RRSP room and then withdraw the money when they retire for the balance of the property payment, he says. Or they could tap the funds in their TFSAs.

When they buy the second home, their costs will rise. Mr. McShane has not factored this into his analysis, but notes that they do have a growing surplus of capital, and couples typically spend less in their later years.

Zack and Lana also wonder how they should structure their investment portfolio. For their short-term goal of buying a vacation home, preservation of capital should be paramount, he says.

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"A portfolio in cash in the form of a daily-interest account, a short-term bond ladder and a small portion in equities is prudent," Mr. McShane says. If they will be paying U.S. dollars for the second home, they could consider investments denominated in greenbacks, he adds.

As for their long-term goal of saving for retirement, Zack and Lana should take full advantage of their unused TFSA room. "Their RRSPs and TFSAs should focus on equities given the guaranteed nature of their pensions," Mr. McShane says. When they quit working, their pensions and benefits will more than cover their recurring expenses. "Therefore, their RRSPs and TFSAs should be viewed as longer-term money that is designed to provide additional funds for non-recurring expenses."

He suggests they avoid holding U.S. dividend-paying stocks inside their TFSAs because there is a non-recoverable withholding tax on the dividend. "Instead, these should be held inside their RRSPs," he says.

A portion of the registered portfolio may be needed to fund the vacation property and should therefore be invested for the short term.

***

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Client Situation

The people: Lana, 50, Zack, 51, and their two children, 22 and 25.

The problem: Can they take early retirement and buy a place down south without sacrificing their lifestyle or financial security?

The plan: Save for the vacation home over the next five years, retire as planned, take advantage of pension splitting and invest their long-term savings mainly in stocks.

The payoff: A road map to a worry-free retirement.

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Monthly net income: $13,680

Assets: Cash in bank $11,000; his TFSA $32,000; her TFSA $7,500; his RRSP $39,500; her RRSP $30,300; RESP $27,355; residence $450,000. Total: $597,655.

Monthly expenditures: Property taxes $290; insurance $85; utilities $270; garden $135; Internet $210; food $1,030; clothing $820; personal care $130; life, disability insurance $255; miscellaneous personal $40; entertainment, dining $460; clubs $50; hobbies $80; gifts $240; charitable $75, miscellaneous discretionary $375; travel, vacation $1,390; auto insurance $180; maintenance $175; fuel, oil $425; miscellaneous transportation $200; pension contributions $1,950. Total: $8,865.

Liabilities: None

Read more from Financial Facelift.

Want a free financial facelift? E-mail finfacelift@gmail.com Some details may be changed to protect the privacy of the persons profiled.

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