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Barbara could quit working, double her current lifestyle spending and still not run out of money to age 100Glenn Lowson/The Globe and Mail

Thirty years ago, single again with two children, Barbara threw herself into her work. Today the 69-year-old home-care worker can’t seem to stop. She’s been holding down two jobs, bringing in more than $100,000 some years, including mileage reimbursement.

“She goes out at all hours, especially in the evenings often just for a short shift, to help patients go to bed,” her son, now in his 40s, writes in an e-mail. Barbara has savings and investments and a mortgage-free house in small-town Ontario, yet she feels she has to keep working.

“I believe part of the reason is habit – she says yes to any request at any time anywhere,” her son says. She’s afraid she can’t live on her retirement savings. “I also believe she gets a sense of purpose from working and enjoys it,” he adds.

Barbara’s family want to show her that she can afford to work less and even retire completely. Her son helped her fill in the Financial Facelift application forms.

Barbara’s retirement goals are to live comfortably, maintain her house and replace her vehicle when necessary. She’s also concerned about paying for her health care needs when she gets older.

In her application, she asks whether she should buy an annuity for income, or if an income-focused investment portfolio would be better. Her retirement spending target is $50,000 a year, more than she is spending now.

We asked Warren MacKenzie, a fee-only certified financial planner in Toronto, to look at Barbara’s situation. Mr. MacKenzie also holds the chartered professional accountant (CPA) designation.

What the expert says

Barbara’s concern about having enough to live on is common among seniors who have worked hard and saved for years, Mr. MacKenzie says

“The saving habit is a hard one to break, and the problem is made worse because many people hold the mistaken idea that it’s always better and safer to have more.”

Barbara is spending $37,700 a year (excluding savings) but she’d like to be able to spend $50,000, mainly to cover unforeseen expenses or occasional expenses such as a new vehicle. “Based on reasonable assumptions – an inflation rate of 2 per cent and an average rate of return of 5 per cent – she can immediately retire from both jobs and increase her spending to $50,000 a year,” Mr. MacKenzie says.

If she makes it to age 100, she would leave well over $1-million to her two children.

Barbara’s work gives her a sense of purpose and accomplishment so there may be excellent reasons for her to continue for awhile, but with fewer hours, the planner says.

Barbara is collecting Old Age Security benefits but deferring Canada Pension Plan benefits to age 70. If Barbara retired from work at age 70, she estimates she would get enhanced CPP benefits, OAS and minimum withdrawals from her registered retirement income fund, or RRIF, broken down as follows: CPP $15,500 (higher because she deferred it from age 65 to 70), OAS $8,500 and RRIF withdrawal of $18,000.

That adds up to $42,000 a year. She would convert her registered retirement savings plan to a RRIF when she retires.

She will also have the income from her non-RRSP funds, which total about $500,000. The forecast assumes she earns a rate of 3 per cent a year, or $15,000, on this capital, most of which is in high-interest savings accounts.

Even if Barbara made zero return on her non-RRSP capital, her savings would last for 25 years, Mr. MacKenzie says. “Then at age 90, if she needed health care, she could sell her home for more than $1-million,” he adds. “That ensures she would have more than she needed for the rest of her life.”

Looking at it another way, Barbara could quit working, double her current lifestyle spending to $75,000 a year and still not run out of money to age 100, Mr. MacKenzie says. That assumes a 3 per cent return on her savings accounts, a 5 per cent return on her mutual fund investments and 2 per cent inflation.

The planner’s forecast also points out that some of Barbara’s net worth is surplus to her needs and goals.

To illustrate, a net worth of $1.3-million would be sufficient for her to spend $50,000 per year and not run out of capital before age 100, Mr. MacKenzie says. Because she has a net worth of more than $1.6-million, Barbara has surplus funds of about $300,000 that she could spend or give away.

One area in which Barbara could be better served financially is with her investments, Mr. MacKenzie says.

“There is no evidence that Barbara’s financial adviser is following a disciplined investment process,” the planner says. The combined portfolio, which includes her non-registered accounts, an RRSP and a tax-free savings account, is too complicated to rebalance in a disciplined manner, he adds. “The asset mix is not goals-based; i.e., it is not designed to achieve a rate of return that is consistent with her stated goals.”

Barbara’s mutual fund statement does not show performance compared with the appropriate benchmark. “Without this information, it’s not possible for her to exercise good stewardship,” one of her stated goals, Mr. MacKenzie says. “If she had a proper performance report, she would see that over a five-year period, almost all of her 10 different mutual funds have underperformed the appropriate benchmark by an average of about two percentage points per annum,” earning about 5 per cent rather than 7 per cent a year.

Barbara has asked about life annuities. Given that she is risk-averse, it makes sense to consider moving about one-third of her portfolio into a life annuity in order to lock in today’s interest rate, the planner says. If she put $300,000 into a life annuity, she would get about $21,000 per year guaranteed. This, combined with her CPP, OAS and RRIF withdrawals, would be more than enough to fund her target spending.

As a possible alternative, “she should also look at the Longevity Pension Fund, from Purpose Investments, designed to provide retirees with income for life but where capital is not locked in” the way it is with an annuity, Mr. MacKenzie says.

In future, some of Barbara’s OAS benefits may be clawed back, the planner says. To minimize income tax and the OAS clawback, as soon as she retires she should convert her RRSP to a RRIF. Any extra cash flow requirements should come from her RRIF. “Her de-cumulation strategy should be to first take funds from her RRIF, then from non-registered accounts and finally from her TSFA.” She should continue to use her non-registered funds to contribute the maximum amount to her TSFA each year.

Client situation

The Person: Barbara, 69, and her two adult children.

The Problem: Can she afford to cut back work or retire and live comfortably for the rest of her life? Should she buy an annuity?

The Plan: Cut back working as much as she wants because she has saved enough. Draw down RRSP/RRIF first. Monitor investment returns and consider an annuity for part of her savings.

The Payoff: A healthy perspective on her financial security.

Monthly net income: Variable.

Assets: High-interest savings account $313,820; GICs $6,000; non-registered mutual funds $43,720; TFSA (savings account and mutual funds) $90,585; RRSP $360,545 (balanced mutual funds); market value of defined contribution pension $43,000; residence $800,000. Total: $1.66-million.

Monthly outlays: Property tax $360; water, sewer, garbage $40; home insurance $150; electricity $80; heating $110; maintenance, garden $430; transportation $935 (partly reimbursed); groceries $415; clothing $40; gifts $150; vacation, travel $40; personal care $40; dining out $175; health care $65; phone, TV, internet $110; RRSP contributions $700; TFSA $500; DC pension plan contributions $445. Total: $4,785.

Liabilities: None

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

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