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Kevin Van Paassen/The Globe and Mail

Vi retired three years ago at 57 and she's "loving every minute," she writes in an e-mail. "The only fly in the ointment is the big question: Do I have enough to live at my current income level for the rest of my life?"

Vi owns her Toronto home outright, has no dependants and is widowed. Her husband worked for the provincial government so Vi gets a survivor's pension or $12,765 a year, indexed to inflation. In addition, she gets $11,944 in Canada Pension Plan benefits.

Despite her substantial savings and investments, which she manages herself, Vi appears to lead a spartan lifestyle, with her biggest expenditures being charitable giving and club memberships.

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"For the most part, I've been a self-directed investor/financial manager, but at this point I'm feeling confused," Vi writes. "There are so many opinions and formulas about how much to withdraw and how long it will last, but there doesn't seem to be any consensus," she adds. "Most of the industry focus is on accumulation."

She also wonders if there might be a better way to structure her investments for the long term. "Taking my pensions into account, will my savings allow me to withdraw enough to have an income of $50,000 a year before taxes for the rest of my life?"

We asked Kurt Rosentreter, a senior financial adviser at Manulife Securities in Toronto, to look at Vi's situation.

What the expert says

Vi's goal is to maintain her current standard of living, the cost of which will rise over time with inflation, Mr. Rosentreter says. Fortunately, her pension, CPP and (at age 65) Old Age Security are all indexed for inflation, so "there is no essential need to buy inflation-indexed portfolio investments."

Setting aside the OAS benefits for the moment, he looks at how much Vi's $837,450 in savings will have to generate each year to make up the $25,291 shortfall between her pension and benefit income and her living expenses. The magic number is 3 per cent a year.

"At 3 per cent, she will generate enough cash flow to avoid having to spend her capital ever," Mr. Rosentreter says. She can achieve this with a low risk portfolio consisting, perhaps, of 75 per cent guaranteed investment certificates (this appears to be what she is comfortable with) and 25 per cent in dividend paying stocks or exchange-traded funds that hold them.

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Even if she invested only in GICs, she would still be able to generate $50,000 a year for life, "but while interest rates are below 3 per cent, she would be forced to spend some of her savings to make up the gap," the adviser says.

"She has reasonable needs from her portfolio, and at age 60, as a widow and conservative investor, she doesn't want to see 20 per cent drops [in the stock market] from time to time."

When Vi turns 65 and begins collecting OAS, "there will be even less pressure for the portfolio to generate high returns," Mr. Rosentreter says.

As for withdrawals from savings, a 4-per-cent annual withdrawal rate would be prudent, he says. Her home in downtown Toronto "has solid long-term value" and can serve as a "strong foundation of money for elder-care costs that are no doubt on her mind."

A tax-planning point: Vi is likely in the lowest tax bracket that she will be in. "Careful thought should be given to how much she withdraws from registered versus non-registered savings each year to minimize her annual tax bill," Mr. Rosentreter says. She should consider withdrawing more from her RRSP now rather than waiting until she must begin drawing the minimum from her RRSP/RRIF (registered retirement income fund) at age 72.

Finally, Mr. Rosentreter looks at Vi's portfolio and finds it to be well-diversified and "very low cost." Fixed-income assets total 52 per cent of her total portfolio. "This is a risk-managed, balanced approach to investing that is suitable for her stage of life and cash-flow needs," he says.

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Vi might want to review some of her bond holdings. Of her $440,255 in fixed-income, $330,000 is in bond funds or bond ETFs," Mr. Rosentreter notes, leaving her exposed to negative returns if interest rates rise.

"If the safe-money part of her portfolio design means never to lose capital, she may want to switch these managed bond products into individual bonds; she already owns some strip bonds. Individual bonds are insulated against market volatility if held to maturity, he says.

***

Client Situation

The person: Vi, 60.

The problem: Can she maintain her current standard of living without running out of money?

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The plan: Vi is doing fine, but she may want to switch her bond funds for actual bonds of a similar, relatively short term to eliminate market risk.

The payoff: Peace of mind.

Monthly net income: $4,060

Assets: Home $700,000; RRSP $652,000; TFSA $32,450; non-registered investments $136,500; GICs $16,500; present value of DB pension plan $200,000. Total: $1.7-million

Monthly disbursements: Property tax $335; utilities, insurance $280; maintenance, garden $285; transportation $220; groceries, clothing $520; gifts $170; charity $420; vacation, travel $290; other $290; club memberships $355, dining out, entertainment $210; grooming $90; other personal discretionary $165; dentists $25; telephone, Internet $65. Total: $3,720

Liabilities: None

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Read more from Financial Facelift.

Want a free financial facelift? E-mail finfacelift@gmail.com

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

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