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Harsh medicine: Doctor’s retirement goals demand multi-step approach

Harriet, who will turn 61 soon, describes herself as a single-parent doctor with no hope of retirement. That may seem odd given she brings in $276,000 a year.

Amber Bracken/The Globe and Mail

Harriet, who will turn 61 soon, describes herself as a single-parent doctor with no hope of retirement. That may seem odd given she brings in $276,000 a year.

"I have been a physician for 30 years, first as a family doctor, then as a [specialist], now as a senior medical leader," Harriett writes in an e-mail. "I make a lot of money and am in the top 10 per cent by anyone's definition," she adds.

"Despite this, and despite the fact that I am relatively frugal, have incorporated [as a self-employed professional], contribute to an RRSP and have some investments in my corporation, my money manager and I have decided that if I retire at 70, I will just have to jump off a bridge at 80," Harriet writes. "Either that or take up smoking and heavy drinking."

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Harriett's biggest expense has been the $50,000 or so a year (it varies) she has been shelling out to her two children – now in their mid-20s – to help them with their higher education. The corporation has paid this money out in dividends so it does not show up in Harriet's monthly expenses. Because she takes dividends rather than salary, Harriet does not qualify for Canada Pension Plan benefits.

Her goal is to retire at age 70 with a budget of $75,000 a year after tax.

We asked Stephanie Douglas, a portfolio manager at Avenue Investment Management in Toronto, to look at Harriet's situation. Ms. Douglas holds the chartered investment management (CIM) designation.

What the expert says

If Harriet goes ahead with her plan to retire at age 70 and spend $75,000 a year, she will run out of savings in her early 80s, Ms. Douglas says. Assuming a 30 per cent tax rate, Harriet would need about $108,000 a year gross. She bases her calculations on a life expectancy of age 90.

"At this withdrawal rate, Harriet's investable assets would be depleted in her early 80s," she says. Assuming a 30-per-cent tax rate, Harriet would need about $108,000 a year gross. If the condo is included in the analysis, Harriet would completely run out of assets by age 85. This is based on the assumption that Harriet gets a 3-per-cent net return from a blended portfolio of mutual funds (her current investment strategy) and of a 2.1-per-cent inflation rate.

Ms. Douglas assumes that Harriet's mortgage will be paid off in 2020.

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Harriet is saving about $24,000 a year. In nine years, she will have investable assets of about $1-million. She would need $1.5-million to support her desired lifestyle. "This would mean she would need to save roughly $70,000 a year for the next nine years."

Ms. Douglas offers 10 suggestions to improve Harriet's financial position.

  • One, she may want to sit down with her accountant and review her income strategy to make sure it is suitable. She is still nine years away from retiring. If Harriet took some or all of her income as salary rather than dividends, she would be entitled to CPP.
  • Two, Harriet should defer Old Age Security benefits to age 70. If she waits until then, she will get 36 per cent more OAS, “which means her monthly payments would increase to $948.63.” This assumes her income will be below the clawback threshold ($73,756 a year in 2016).
  • Three, Harriet can cut her retirement spending target to about $55,000 a year before tax, rising in line with inflation. While cutting back so drastically may seem difficult, she will no longer have mortgage and line of credit payments.
  • Four, Harriet should review her fund-of-funds portfolio, which is “overdiversified.” Harriet is paying a management expense ratio of 1.72 per cent, “a high fee especially considering the portfolio’s allocation of 40-per-cent fixed income,” Ms. Douglas says. She should shift the fixed-income portion of her portfolio from government bonds to high-grade Canadian corporate bonds for their better returns.
  • Five, Harriet might want to track her spending to see exactly where the money goes. She can account for $10,506 of the $13,500 she nets each month, although some of that may be going to her children. As well, she could cut back on her clothing and grocery bills.
  • Six, Harriet should stop supporting her children. With the older child now working, Harriet should encourage the younger one to take out a loan or get a part-time job to help pay for his education.
  • Seven, “consider working part-time for a few more years past age 70” to preserve her capital.
  • Eight, Harriet should focus on paying off her $50,000 credit line – on which she is paying 4.7 per cent interest – as soon as possible.
  • Nine, Ms. Douglas suggests Harriet contribute to her tax-free savings account whenever possible. (She withdrew the balance last year to cover expenses.) As it stands, all of Harriet’s investable assets are taxable on withdrawal. “She could use her TFSA as an emergency account where the funds will grow tax-free. If she needed to withdraw extra funds in any year, it would not affect her taxable income.”
  • Ten, Harriet could drop one of her two life insurance policies. She has term insurance with her corporation as beneficiary. The coverage will fall by 50 per cent at age 65. “I suggest Harriet cancel her term insurance now so she can either save the money for retirement or pay down her line of credit,” Ms. Douglas says.


The person: Harriet, age 60

The problem: Can she achieve her goal of retiring at age 70 with $75,000 a year after tax?

The plan: Work longer, save more or cut her retirement spending target. Review her portfolio and let the child who is still studying foot some of the education bill.

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The payoff: With some hard work, Harriet can get closer to achieving her goal.

Monthly net income: $13,500

Assets: Condo $400,000, RRSPs $420,000, cash $5,000, corporate cash $20,000, corporate account $158,000. Total: $1-million

Monthly distributions: Mortgage $1,200; condo fees $200; home insurance $50; transportation $320; groceries $1,000; clothing $1,000; line of credit payment $1,250; gifts $450; charitable donations $150; vacations $500; dining, drinks, entertainment $800; beauty $300; club memberships $20; sports and hobbies $200; health and dental insurance $200; telecom, TV, Internet $200; life insurance $450; disability and critical illness insurance $215; RRSP (through corporation) $2,000. Total: $10,505 Unallocated surplus: $2,995

Liabilities: Mortgage $268,000; line of credit $50,000. Total liabilities: $318,000

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Some details may be changed to protect the privacy of the persons profiled.

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