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financial facelift

-Darren Calabrese/The Globe and Mail

Louisa is 55 with a well-paying but stressful job and good benefits. She has a house in downtown Toronto, a mortgage and a 21-year-old daughter she is helping get established in the working world.

A year or so ago, Louisa and her ex-partner wrapped up their affairs, splitting everything 50-50. Louisa bought out his share of the house, leaving her with a mortgage of $394,000. She rents out her basement apartment to help cover costs.

Her overwhelming goal is to retire from work.

"I have a chronic illness and my dream would be to be able to retire at 60 and live a lower-stress life to give me more years on the planet," Louisa writes in an e-mail. "I'm worried about the future," she adds. "I left all the investment decisions to my ex and now find I have no clue how to better invest what I have to make the most of the time left before retirement." She suspects her mutual fund fees are too high.

She has a defined-contribution pension plan at work but has not been in the job long enough to accumulate much. She'd be leaving behind a $120,000-a-year salary plus a bonus – tied in part to her employer's performance – that has averaged $30,000 a year.

We asked Charles Chan, a fee-only financial planner at E.E.S. Financial Services Ltd. in Toronto, to look at Louisa's situation.

What the expert says

To retire comfortably, Louisa will have to work full time up to and including age 62, Mr. Chan says. She can quit when she is 63. The reasons are fourfold: Her pensions are relatively small (she is entitled to a pension of about $340 a month from a previous employer), she has a mortgage, she wants to help her daughter and she will incur out-of-pocket costs for medical expenses after she retires because she will no longer be covered by her employer's insurance.

The planner assumes Louisa supplements her daughter's income to the tune of $7,200 a year for the next 10 years, and that she continues to rent out her basement apartment for $17,400 a year, rising by 1 per cent annually. He's increased her budget for household repairs and maintenance to $5,000 a year "to bring it closer to reality" and also to be used as a buffer.

After Louisa leaves her job, she'll have to pay about $3,000 a year in medical expenses, Mr. Chan estimates. He assumes her mortgage rate continues at 2.94 per cent for five more years and then rises to 5 per cent for the duration. He has her paying an extra $10,000 a year on the principal from now to age 62. Louisa will have the mortgage paid off at age 76.

Once the mortgage is paid off, her investments, pensions and government benefits "should get her through to age 85," Mr. Chan says.

Louisa's income in her first year of retirement will be as follows: $18,842 in rental income; $8,530 in Canada Pension Plan benefits; investment income of about $15,000; and $39,126 in RRSP withdrawals, for a total of about $81,500 before tax – about $62,000 after tax.

That's against basic living expenses of $39,645 a year, plus mortgage payments (now $21,600 a year excluding the extra prepayment but the interest rate could be higher), for a total of $61,245.

By the time Louisa is 63, she will have about $390,000 in non-registered investments and $515,000 in registered investments (her RRSP and defined contribution pension plan). That assumes she contributes the maximum to her work pension plan and RRSP, and earns an average of 5 per cent a year. The maximum contributions to both plans, including employer's share, would be $24,930 a year for eight years.

Louisa has the option of investing her bonus with her employer, which would help her reach her goal more easily than if she invested herself, the planner says. Her employer has a record of solid investment returns.

Her investment priorities would be in the following order: first, her work pension plan because the employer match is like free money; her bonus because of her employer's solid returns and the worry-free investment management; and her RRSP to take advantage of her high tax bracket, as she will be in a lower tax bracket after she retires.

Any surplus could go either to a tax-free savings account or to her mortgage, the planner says. "Paying off the mortgage would be a better option for her because she wouldn't have to worry about what to invest in."

If Louisa is uncomfortable retiring with a mortgage, she could draw on her non-registered investment portfolio to pay it off, Mr. Chan says. Alternatively, "if she can generate better returns (growth and income) with her non-registered portfolio than the rate she is paying on her mortgage, it would make more sense to keep the investments."

He suggests Louisa sit down with an investment adviser to determine her risk tolerance and investment needs. "If she feels her mutual fund fees are high, exchange-traded funds might be an option for her."



The people: Louisa, 55, and her daughter, 21.

The problem: Can she retire in five years?

The plan: Continue working, retiring at age 63.

The payoff: A comfortable retirement income, including the ability to help her daughter.

Monthly net income: $10,500 (includes bonus and rent).

Assets: Cash in bank $18,560; mutual funds $80,170; invested bonus $35,000; TFSA $1,365; RRSP $138,000; residence $1,000,000; defined-contribution pension plan $29,000; estimated present value of defined-benefit plan with previous employer $63,000. Total: $1.36-million.

Monthly disbursements: Mortgage (including prepayments of $10,000 a year) $2,645; property tax $475; water, sewer, garbage $85; home insurance $110; hydro $300; heating $200; house maintenance and repair $415; garden $50; other household $265; transportation $150; grocery store $500; help for daughter $600; clothing, shoes $150; charitable $50; vacation, travel $200; personal discretionary $250; telecom, TV, Internet $215; pension plan contributions $300. Total: $6,960 Surplus $3,540 (to savings and investments)

Liabilities: Mortgage $394,000.

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