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‘One of the biggest risks in retirement is outliving your money,’ financial planner says.

JEFF BASSETT/The Globe and Mail

Benjamin is a university professor about to take a year's sabbatical, during which time his salary will drop by 60 per cent. He is 47, single, and lives in suburban Vancouver.

While he is off, researching and writing, Benjamin plans to continue paying for his benefits, including making pension plan contributions, so money will be tight. He is contributing more than necessary to his defined contribution pension plan so he will have a larger income when he retires at age 65. His retirement spending goal is $55,000 a year.

He wonders whether he should give up his apartment and put his stuff in storage for the six months to a year he will be in Asia. He could also sublet it.

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Early on, Benjamin decided against home ownership because of the work involved, so he has a fair amount of capital to invest – most of it sitting in cash – and is seeking some advice on how to go about building a portfolio. He has no debt and lives fairly modestly, paying $1,250 a month in rent.

We asked Lynne Triffon, a financial planner with T.E. Wealth in Vancouver, to look at Benjamin's situation.

What the expert says

If he can, Benjamin would be better off subletting his apartment rather than giving it up entirely and paying for storage, Ms. Triffon says.

First off, he should sit down and draw up a budget, detailing what he will be spending during his stay in Asia, as well as his ongoing expenses at home. Then he should look for expenses to cut, such as the cost of operating his vehicle.

In addition to his pension contribution, Benjamin saves $1,100 a month in a non-registered account, an outlay he could suspend for the year that he is off work, the planner says.

"The bottom line is that you do want to be prudent and reduce your expenses as much as possible during your sabbatical," Ms. Triffon says. He could make up for the forgone savings later.

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If Benjamin decides to continue saving at the current rate, he is on track for a potential after-tax income of $50,000 a year in today's dollars when he retires 18 years from now, Ms. Triffon says. That does not include any Old Age Security benefits he might be entitled to.

The planner assumes an average 6 per cent rate of return on investment, an inflation rate of 3 per cent a year, and a life expectancy of 100 – a bit on the high side.

"One of the biggest risks in retirement is outliving your money," she says.

If instead he suspends his savings plus the voluntary portion of his pension contribution for one year, and allocates $17,000 to living expenses in Asia ($1,000 a month plus a contingency reserve of $5,000), he will have potential retirement income of $48,000 after tax using the same assumptions, Ms. Triffon calculates. OAS would lift him closer to his $55,000 target.

Benjamin recently shifted much of his savings from mutual funds to cash. As a result, he is earning a "negligible" return, which will hurt his retirement income prospects, the planner says.

He is waiting for stock prices to fall to a point where they look attractive.

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"The first thing he needs to do is assess his risk tolerance and his goals and determine an appropriate asset allocation," she says.

She suggests Benjamin set aside $20,000 in short-term holdings as an emergency fund and begin investing the rest – approximately $275,000. Once he has determined the appropriate asset mix, he needs to ensure that he is well diversified across geographic regions (Canada, the United States and internationally).

"With about $275,000, it would be very difficult to get adequate diversification geographically as well as across industries and companies using individual stocks and bonds or guaranteed investment certificates," the planner says.

Rather than trying to build a portfolio of individual stocks and bonds, the planner recommends Benjamin invest in low-cost mutual or exchange traded funds instead.

Benjamin tells how his friends say he is wasting money by renting rather than owning a home, but home ownership is not without risk, Ms. Triffon says – especially in expensive Western Canadian markets.

CLIENT SITUATION

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The person

Benjamin, 47

The problem

How to finance a year's sabbatical, during which his income will drop, without crimping retirement savings.

The plan

Draw up a budget, looking for ways to cut spending. If necessary, suspend monthly savings for the duration of the sabbatical, and plan to catch up later.

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The payoff

A solid, worry-free footing for the long term.

Monthly net income

$5,000

Assets

Non-registered savings $221,000; TFSA $20,500; RRSP $54,000; employer pension plans (current and previous employers) $132,000. Total: $427,500.

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Monthly disbursements

Rent $1,250; other housing $113; transportation $250; groceries $450; clothing $70; charitable $120; vacations, travel $200; dining out, entertainment, $440; other personal discretionary $490; dentists, drugstore $190; telecom, TV $155; savings $1,100; professional association $25; group benefits $52. Total: $4,905.

Liabilities

None

Special to The Globe and Mail


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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