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financial facelift

Tijana Martin/The Globe and Mail

In two years, Jane plans to retire from her $124,000-a-year job in the education system with a full teacher’s pension of $71,800 a year, fully indexed to inflation. She’ll be 58.

When she does, she wants to spend time outdoors – playing golf, skiing in the Rockies and travelling abroad. With more time for the things she enjoys, Jane aims to double her travel and leisure budget to $20,000 a year. She also wants to help her daughter, who is 16, with university costs.

Once she has put the working world behind her, Jane is mulling selling her suburban Toronto house and moving to a smaller city or town where she can live simply and enjoy nature. In the meantime, she wonders whether she should focus on paying off the remaining mortgage on her city home or direct more savings toward investing.

Jane says she is willing to work a little longer if it would put her on a more solid financial footing. She’s not sure how much money she will need but has set her goal at $90,000 to $100,000 a year after tax. She manages her own investments and wonders whether she should consolidate her assets.

We asked Karen Hennessy and Nushzaad Malcolm, financial planners at T. E. Wealth in Montreal and Toronto, to look at Jane’s situation.

What the experts say

First, her daughter’s education. Jane has $80,000 in a registered education savings plan and $120,000 in a trust account for her daughter’s studies. These investments should be adequate for future tuition costs estimated at $20,000 to $30,000 a year, plus expenses, the planners say. To take full advantage of the federal education savings grant, they recommend Jane continue to save in the RESP until her daughter turns 17.

Next, the mortgage versus investing question. The planners look at Jane’s income needs now and when she retires under two scenarios, one where she pays off her mortgage and one where she keeps it to maturity in 15 years.

“Jane’s total cost of living will be reduced when she retires,” the planners say, so her spending target is probably higher than necessary.

Jane’s basic expenses total $67,750 a year. Mortgage payments add another $15,600 a year and she is saving $22,500 a year, for total current outlays of $105,850. Even if she retires with the mortgage in place, she will no longer be saving $22,500 a year, so her cash needs will fall to $83,350.

Once her mortgage is paid off in 15 years, she’ll have basic spending of the same $67,750 a year (with no savings and no mortgage payments). She’ll add another $10,000 a year for travel, for cash needs of $77,750 a year after tax.

Most of Jane’s retirement income will come from her work pension and government benefits, supplemented by her investment portfolio. Jane’s portfolio consists of $47,000 in her registered retirement savings plan, $50,000 in her tax-free savings account and $150,000 in her non-registered or taxable investment account, for a total of $247,000.

Jane says her investments are all in stocks, allocated 50 per cent to Canada, 30 per cent to the United States and 20 per cent internationally, in a variety of technology, consumer and utility stocks. She deals with four financial institutions.

In preparing their forecasts, the planners assume a 2-per-cent inflation rate, maximum Canada Pension Plan benefits at 70 ($26,383), giving Jane a 42-per-cent increase in her lifetime CPP benefit, and Old Age Security benefits of $8,799 at 65. Life expectancy is 96. Jane’s pension will be $71,797 a year before tax if she retires at 58 and $81,920 a year at 60.

The planners used two rates of return in their forecast: 5 per cent after fees with Jane’s existing growth portfolio, and 3.26 per cent after fees based on a balanced portfolio of equities and fixed income.

In their base plan, where Jane retires in two years, she falls short of her spending goal regardless of whether she switches to a balanced portfolio or stays with the more aggressive one. Her savings are depleted by 69 after which she still has her teacher’s pension and government benefits.

In the alternative plan, where Jane works a couple years longer, she comes much closer to her goal, with $74,670 a year using a balanced portfolio and $76,325 with the more aggressive one. (Her cash needs are $77,750 a year after tax.)

Jane has been musing about selling her house, so the planners offer a scenario in which Jane retires in two years, sells her city home, buys a less expensive place in a smaller centre for $700,000 and invests the remaining $500,000. In this forecast, Jane surpasses her $77,750 a year spending target regardless of which portfolio she chooses: by $5,000 a year in the balanced portfolio and by $9,600 a year in the growth portfolio.

“Retiring at age 58 and downsizing her property will allow Jane to achieve her retirement goals without any concerns,” the planners say.

The planners recommend that Jane continue to contribute the maximum each year to her TFSA and, if possible, top it up to the maximum now. After she has retired, she can transfer funds from her non-registered account to her TFSA each year.

As well, they suggest Jane ensure her investments are in line with her risk tolerance, especially since their projections suggest she can achieve her goals without the higher return – and the higher risk – that an all-stock portfolio entails.

Client Situation

The people: Jane, 56, and her daughter, 16.

The problem: Can Jane afford to retire in two years and still meet her goals?

The plan: Weigh the alternatives. Retire in two years and spend less, work two more years and meet her spending goals, or retire in two years, downsize her house and surpass her goals.

The Payoff: Gaining clarity about her financial future.

Monthly net income: $9,165.

Assets: Non-registered portfolio $150,000; RRSP $50,000; TFSA $47,000; RESP $80,000; trust account $120,000; estimated present value of defined benefit pension $1.325-million; principal residence $1.2-million. Total: $2.97-million.

Monthly outlays: $1,300; property tax $460; home insurance $135; utilities $325; home maintenance $290; garden $85; transportation $400; groceries $835; clothing $210; gifts, charity $250; vacation, travel $835; dining, drinks, entertainment $625; personal care $40; club membership $20; golf $125; pets $165; sports, hobbies $85; subscriptions $25; vitamins, supplements $100; life insurance $375; phones, TV, internet $265; RRSP $165; TFSA $540; pension plan contributions $1,165. Total: $8,820.

Liabilities: Mortgage $183,000.

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

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