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financial facelift

Peter Redman for The Globe and Mail

Mary and Mike have done everything right, paying off their debts, saving diligently, keeping their spending low – all the while raising a family.

Now, at 67, and with no company pension, they fear they may not be able to retire as comfortably as they had hoped because of historically low interest rates and a languishing stock market.

"We have been planning for retirement for a long time but things just haven't panned out," Mike writes. "We are just not achieving adequate returns with our investments." Mary brings in $5,000 a year from a part-time job, while Mike earns $1,000 a week from a project management contract that will end next year.

Their chief concern is how to "transition to a new reality" after Mike's job ends. They also want to travel and they recently financed a new car, payments on which will end shortly after Mike retires.

Longer term, in eight years or so, they may decide to sell their Muskoka cottage home north of Toronto – which one of their sons would like to buy – and move to a retirement community closer to their daughter.

Should they give up on the financial markets and buy an annuity, they wonder? If not, how should they invest? And can they sell the lakefront home to their son "without compromising our own desired lifestyle" and without being unfair to the other kids? Their retirement goal: $55,000 to $60,000 a year after tax.

We asked Adam Weinstock, a portfolio manager and senior adviser with ScotiaMcLeod in Pointe-Claire, Que., to look at Mike and Mary's situation.

What the expert says

Mary and Mike are in a position to have the retirement they desire because of their ability to income split, which will keep their taxes low, and by using a conservatively balanced portfolio that should in the long run provide a reasonable return, Mr. Weinstock says. To generate the desired $60,000 a year, they would need gross income of about $70,000. Their Canada Pension Plan and Old Age Security benefits total $26,118 a year, which means their investments will need to generate $44,000 before tax in order to meet their needs.

As it stands, they have about half of their roughly $745,000 in savings in fixed income, including preferred shares, and the other half in Canadian stocks, mainly through pooled funds.

"The management fee on their portfolio is 1.35 per cent, which is reasonable given their level of assets," Mr. Weinstock says. Switching entirely to fixed income (bonds, guaranteed investment certificates, preferred shares) will do little to protect them from inflation, a concern Mike has acknowledged. As well, trying to generate the amount of after-tax income they want from fixed income securities "would require them to eat into their capital annually at an unsustainable rate," the adviser says.

Mr. Weinstock does not recommend Mike and Mary buy an annuity in such a low-interest rate environment. It would take all their savings plus the entire proceeds of their house sale to generate their desired income from an annuity. Even if they rented in a retirement community rather than buying, their housing costs could rise over time, eating into their budget. If they were to buy an indexed annuity (tied to inflation), they would not reap enough in annual payments to satisfy their retirement goals.

Mike has expressed dissatisfaction with his investment adviser because of the couple's modest returns recently, but Mr. Weinstock points out this needs to be put into the right context. The market itself has been lacklustre over the past five years, rising a scant 1.1 per cent a year on a total return basis. They should explore whether their modest returns have been the result of poor investment choices or simply a sign of the times. Their asset mix, half fixed income and half equities, should serve them well over the long term.

Mike and Mary should be able to achieve an average annual rate of return of 5 per cent, Mr. Weinstock says. With 2.5 per cent inflation, their savings should be able to generate $38,000 a year in indexed net annual withdrawals in 2012 dollars for about 20 years. That, plus CPP and OAS, will give them the desired $60,000 annually to the end of the year in which they turn 88. If they could get by on $55,000 a year they could stretch their funds another four or five years. They would still have their home, or the proceeds from its sale, to fall back on.

As for selling their Muskoka home to one of their children, any such sale would have to be agreeable to all and at full market value, Mr. Weinstock says.


The people

Mike and Mary, both 67.

The problem

How to prepare for the day a year from this fall when Mike's contract job is over and they have to rely on their savings and investments to supplement their government benefits.

The plan

Take advantage of income splitting, stay the course with a balanced, low-cost investment portfolio. Consider spending a little less than their $60,000 after-tax target.

The payoff

A secure retirement with the flexibility to move closer to their children if they choose.


Client situation

Monthly net income



TFSAs $43,000; his RRSP $375,690; her RRSP $327,500; home $500,000. Total: $1.25-million

Monthly disbursements

Property tax $270; utilities, maintenance $610; transportation $565; groceries $600; clothing $210; car payment $1,065; charitable $250; vacation, travel $200; gifts, other $130; entertaining, dining out $450; clubs, sports $190; subscriptions, other $120; personal grooming $50; medical, dental, drugstore $165; phone, Internet, cable $265. Total: $5,140.


Car loan $25,000


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