Loretta, an outdoorsy sort, has her eye on retiring from her managerial job in a couple of years and moving up north to the Georgian Bay area of Ontario. She is 56, single with no dependants. She makes $73,000 a year, plus $9,000 annually in rental income from a flat in her Toronto-area house. Her plan is to buy her retirement home in advance before she quits working. She would sell her city home a year or so later for roughly $665,000, leaving her with about $400,000 to invest after paying $225,000 or so for the country house. In the meantime, her goal is to save as much as possible.
After she retires at the age of 58, she intends to put off collecting Canada Pension Plan and Old Age Security benefits until she is 70. She would draw on the proceeds of her house sale to make ends meet from the age of 58 to 70. As well, at 60 she will be entitled to about $13,000 a year from two work pension plans.
Like most people, Loretta wants to travel when she retires. "I enjoy backpacking [Bolivia, Nepal]," she writes in an e-mail. "I look forward to being able to spend a bit more time at the end destination instead of a two- or three-week vacation."
Should she save in her registered retirement-savings plan or her tax-free savings account? "How can I best invest the $400,000 windfall [from her house sale] so that it will last me for 35 years?" Loretta asks. We asked Marc Henein, an investment adviser at Scotia Wealth Management in Mississauga, to look at Loretta's situation. Mr. Henein holds the certified financial planner (CFP) designation.
What the expert says
Loretta is hoping to retire in December, 2018, and live on $3,500 a month, less than she is spending now, Mr. Henein says. Her major concern is having her money last as long as she does. Many of her family members are in their 90s.
Loretta could consider buying an annuity with a portion of her home proceeds. Just to illustrate, for a 60 year old, a $400,000 annuity would pay out about 6 per cent or $24,000 a year with a fairly low tax implication, he says. The downside is that she would have no access to the funds.
"We generally recommend no more than half of your liquid, non-registered monies be committed to an annuity for this very reason," Mr. Henein says. Thus, a $200,000 annuity might suit Loretta because of her lack of investment experience, her need for immediate income once she retires and the fact she is not concerned about leaving an estate.
The remaining $200,000 could generate a 4-per-cent dividend, he says. "If we have half of the $400,000 proceeds in an annuity and the other half in a dividend-income portfolio, Loretta will be able to enjoy $20,000 of annual income at a fairly low tax rate," he says ($200,000 at 6 per cent equals $12,000, while $200,000 at 4 per cent equals $8,000).
Loretta asks whether she is wise to wait until 70 to draw from CPP and OAS. "Seeing as she is looking to retire early, I would suggest she start CPP at 60 and OAS at 65," Mr. Henein says. "The help from these two pensions will ease the burden on her savings in the initial years of retirement."
Loretta has $33,000 in stocks. The adviser suggests she contribute these stocks to her TFSA or RRSP so their future growth will be tax-deferred. As well, Loretta asks if it is worthwhile making a $15,000 contribution to catch up on her unused RRSP contribution room. The answer is yes, because her retirement income will be about half what she currently earns. She could make the contribution now and then pull out the money once she is retired and in a lower tax bracket.
If Loretta retires at 58, she will "put a significant drain on her savings," the adviser notes. Instead, he suggests Loretta work a couple of years longer. At 60, she will have $13,000 a year from her employer pension plans and $10,000 in CPP benefits, leaving her with a shortfall of $17,000 a year. This will be mostly covered by the income generated by her $400,000 portfolio.
"This sets her up in an ideal situation to live comfortably between age 60 and 65," Mr. Henein says. Once Loretta turns 65 in 2025, she will get another $7,000 of income from Old Age Security. She can use this extra income for travelling if she chooses.
As for the house up north, Mr. Henein does not suggest she buy a second house until she sells her current one. Owning two houses could create potential financial stress because she would have to borrow to buy and she does not have much in the way of surplus cash flow.
The person: Loretta, 56.
The problem: How to make her money last as long as she does.
The plan: Sell her city home before buying the retirement house.
Consider buying an annuity with part of the house-sale proceeds. Seriously consider working a couple more years.
The payoff: A comfortable retirement.
Monthly net income: $4,665
Assets: Cash in bank $12,000; stocks $33,000; TFSA $23,000; RRSP $141,000; estimated value of her DB pension plans $325,000; residence $665,000. Total: $1.2-million
Monthly disbursements: Property tax $300; home insurance $46; utilities $249; maintenance $100; transportation $325; groceries $240; clothing $75; gifts, charity $90; vacation, travel $250; personal discretionary (grooming, dining, entertainment, sports) $270; telecom, Internet, TV $105; RRSP $1,250; TFSA $1,250; pension-plan contributions $110. Total: $4,660.
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Some details may be changed to protect the privacy of the persons profiled.