After a successful career in a changing industry, Mary threw in the towel last summer and struck out on her own as an independent consultant. The drop in income was shattering. She's 48, divorced with no dependents.
Mary figures she has enough business lined up to carry her through this year and next. She expects to earn $40,000 to $50,000 in 2018, down from about $110,000 this year.
She has $632,000 in investments at a major investment dealer for a flat fee, plus $40,000 in the bank to cover next year's expenses.
She owns no real estate and has no debt.
With so many changes afoot, Mary has questions: "If I never withdraw from my current nest egg, is it enough for me to retire on?" she asks in an e-mail. Ideally, she would stop contributing to her registered savings starting next year, retire partly at the age of 60 and completely at age 65. Her retirement spending goal is $42,000 a year after tax.
Mary wonders, too, whether she could "free up a chunk of capital" – say $50,000 to $100,000 – to start a business with partners, and/or $50,000 toward a shared vacation property? Or should she go back to school for a year at a cost of $20,000 to train for a completely different field?
Her other big question: Is she getting good value from her broker?
We asked Heather Franklin, an independent certified financial planner (CFP) based in Toronto, to look at Mary's situation.
What the expert says
Mary lives frugally and is cognizant of her spending, Ms. Franklin says. While Mary has some solid business contacts, she may have to tap her cash reserves over the next couple of years. As well, her rent takes up more than half of her living costs – the price of living in one of Canada's most expensive cities. So her retirement spending goal of $42,000 a year may be too low, the planner says.
If Mary semi-retires at 60, she would have to tap her savings to supplement her lifestyle spending. She could take early Canada Pension Plan benefits, but she would lose 36 per cent of the benefit, Ms. Franklin says. At the same time, she'd be running down her savings.
She'd be better off leaving her RRSP and TFSA intact and growing as long as possible.
Suppose she leaves her investments with the dealer, with no further contributions and no withdrawals. All dividends and interest are reinvested. The money grows by an average of 5 per cent a year with inflation of 1.5 per cent. Based on her holdings, her returns could be even higher.
At 65, Mary's portfolio will have risen to roughly $1-million, perhaps more, Ms. Franklin estimates. At a 5-per-cent withdrawal rate, Mary could draw at least $50,000 a year from her savings, plus she would have Old Age Security and CPP benefits. So she could probably cover her living expenses, depending on how much rent she has to pay. But she wouldn't have much of a buffer for such things as medical emergencies or assisted living. Mary would exhaust her savings at the age of 90, the planner estimates, and she has nothing to fall back on as she doesn't own any property that she could sell.
If Mary withdraws $100,000 some time soon to invest in a business partnership (all other things equal), she would run out of savings at 86, the planner estimates. The flip side is if she started a business partnership, she might be able to increase her earnings and thus be able to add to her savings.
Is her broker worth the $9,300 or so Mary is paying her a year?
This is a question Mary should endeavour to answer herself, Ms. Franklin says. Many investors are asking this very same question after receiving their CRM2 report (the second phase of the Client Relationship Model showing fees and performance) earlier this year.
Mary's accounts are professionally managed and her fees include operating charges, transaction charges and portfolio management. (They likely would not include the management fees for any exchange-traded funds or mutual funds she might hold, but her investments are mainly direct.)
At roughly 1.47 per cent of her portfolio, the charges are lower than those paid by most mutual-fund investors and comparable to low-fee mutual funds. The holdings appear to be designed to generate mainly dividend income (common and preferred shares and REITs) with a smattering of GICs and bonds. Mary says she is satisfied with the performance and says it is better than she achieved investing herself using ETFs.
Still, Mary asks if she should move to a "full-service financial planner/wealth manager." In fact, she already has a full-service "wealth manager." If she feels she might need some help with financial planning, Mary's first step should be to sit down with her investment adviser and ask her what other services she offers and if there are any additional charges, Ms. Franklin says. Many investment advisers also have financial planning credentials, or work closely with someone who does.
The person: Mary, 48.
The problem: Has she saved enough to semi-retire at 60 and fully retire at 65?
The plan: Leave her savings intact, add to them if she can, and work to 65.
The payoff: A realistic view of what it takes to achieve financial independence.
Monthly net income: $4,000.
Assets: Cash reserve $40,000; GICs $15,000; non-registered portfolio $155,980; TFSA $61,115; RRSP $355,000; locked-in retirement account $45,000. Total: $672,095.
Monthly outlays: Rent $2,150; home insurance $35; hydro $20; transportation $50; groceries $200; clothing $25; gifts $50; vacation, travel $500; dining, drinks, entertainment $200; personal care $125; sports, hobbies $25; subscriptions $65; medical $115; drugstore $20; cellphone $85; internet $40; miscellaneous $295. Total: $4,000.
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