Louisa works in the health-care field earning about $95,000 a year. She is 57 and single with a 14-year-old daughter. Her main asset is her Toronto house, which cost $198,000 in 2002 and is now valued at $600,000.
Louisa began her career overseas, where she worked for 18 years, returning to Canada in 1997. As a result, she is eligible for a foreign pension, the value of which will depend on the currency exchange rate at the time.
She has about $54,000 tucked away in a registered education savings plan for her daughter. "Do I complete the remaining two years of my daughter's education fund or stop at this point, letting her lean on her own resources when she enters university?" Louisa asks.
Like most people her age, Louisa also wonders how best to pay off her mortgage and invest her savings. Although she likes her job, she wonders when she can retire. She has a pension plan at work and is willing to continue working part time after she retires.
"Can I retire at age 65 and generate enough income to ensure I don't outlive my capital?" Louisa asks. Her retirement spending goal is $60,000 a year after tax.
We asked Ross McShane, director of financial planning at McLarty & Co. Wealth Management Corp. in Ottawa, to look at Louisa's situation. Mr. McShane holds several professional designations, including chartered professional accountant (CPA) and certified financial planner (CFP).
What the expert says
The first order of business is for Louisa to have a will and power of attorney drawn up by a lawyer, Mr. McShane says. At the moment, she has neither. Because she has a dependent child, she also needs life insurance coverage, perhaps through a term insurance policy. "These two items are top priority." At the same time, she can review her beneficiary designations.
For Louisa, "aiming for $60,000 after tax in today's dollars is a stretch," Mr. McShane says. With inflation, that would be about $70,000 in 2024 dollars – the year she plans to retire. Her two work pensions, plus her Canada Pension Plan and Old Age Security benefits, will add up to about $75,000, or about $55,000 a year after tax, so she will have to draw on her investments to make up the balance.
To ensure she does not outlive her savings, Louisa can do a number of things, the planner says. She could draw on the equity in her house later on, lower her retirement spending expectations, cut her spending now, work longer or pass along some of the higher education costs to her daughter. If, for example, she were to cut her retirement spending target to $4,000 a month, she would not need to depend on the equity in her house.
At the moment, Louisa is facing a monthly struggle to meet her expenses and debt repayment, Mr. McShane says. That's because she is paying off some personal debts. "These loans are due to be paid off in 2017, freeing up $900 per month," the planner says.
Louisa has asked whether she should contribute to her RRSP or pay off her mortgage. If she contributes to her RRSP, she will benefit from the tax deferral but when she begins withdrawing money, it will be taxed at the same marginal tax rate she is contributing at today and possibly erode her Old Age Security benefit. Instead, she should focus on paying down her mortgage and seeking tax-free growth in a TFSA. Once the mortgage has been paid off, she "will have a window of opportunity to fund her tax-free savings account as she has $46,500 of room," he says.
The planner suggests Louisa continue to contribute to her daughter's RESP until she is 17 because the 20 per cent Canada Education Savings Grant "provides an excellent return on your money." The government contributes 20 per cent of every dollar of the first $2,500 saved each year, to a maximum of $7,200 for each child.
"However, once the RESP is depleted, Louisa should consider passing along some of the university costs to her daughter as a way to free up cash flow that can be put toward her retirement goal," the planner says. "It isn't unreasonable to expect your child to have some skin in the game."
For the money in her RRSP, Louisa might want to consider investing in equities given that her other income sources are guaranteed pensions. "A low-cost exchange-traded fund (ETF) would be a suitable solution as diversification is required."
In his calculations, Mr. McShane makes a number of assumptions: a 4 per-cent rate of return on Louisa's investment portfolio; 2 per-cent inflation; retirement in 2024 at age 65; rental income of $400 a month; defined benefit pension plan benefits of $33,000 a year (in 2024 dollars), indexed to inflation; and foreign pension income estimated at $2,100 a month in Canadian dollars starting in August, 2023.
The person: Louisa, 57
The problem: Can she retire at 65 with $60,000 a year for life?
The plan: Pay off the mortgage, then shift to TFSA savings. Consider spending less now or spending less after she retires from her job. Get daughter to shoulder some education costs.
The payoff: A realistic road map to a financially secure retirement.
Monthly net income: $5,940 (includes $400 rental income)
Assets: TFSA nil; RRSP $22,500; estimated present value of her defined-benefit pension plans $635,000; RESP $54,850; residence $600,000. Total: $1.3-million
Monthly outlays: Mortgage $1,300; accelerated loan payments $900; RESP $125; pension plan contributions $630; property taxes $220; property insurance $130; maintenance $40; utilities $315; grocery store $755; clothing $75; health care $105; cable, cellphone $120; tutoring $200; entertainment, dining $115; hobbies, activities $200; gifts, donations $40; travel $20; household help $240; miscellaneous $120; transportation $290. Total: $5,940
Liabilities: Mortgage $119,200 at 3.64 per cent; personal loans $31,530. Total: $150,730
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