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financial facelift

Sarah B Groot/The Globe and Mail

At age 48, Gavin and Audrey have been diligently paying down the mortgage on their Calgary house, setting aside money to help with university costs for their two children, 15 and 17, and saving for their own eventual retirement. Gavin earns $84,000 in the non-profit sector, Audrey earns $165,000 in the oil patch.

“Together, our income sounds big,” Gavin writes in an e-mail, “but there is never any money left over after the mortgage, savings and expenses are paid.”

Short-term, they want to spend about $100,000 renovating their house. As well, they made a big lump-sum payment of $50,000 to their mortgage this fall, money that came in part from Audrey’s annual bonus.

Their main question is a familiar refrain: “When can we retire? The sooner, the better.” They hope to escape the working world at age 58 with a spending budget of about $100,000 a year after tax – roughly the same as they are spending now.

Their second question is also one shared by many people. “Should we stay with our portfolio manager, find a different manager, or go with lower-fee self-management?” And finally, “What might we be able to leave as an estate?”

We asked Ian Black, a fee-only financial planner at Macdonald, Shymko & Co. in Vancouver, to look at Gavin and Audrey’s situation.

What the expert says

Gavin and Audrey’s retirement plans have two significant areas of uncertainty, Mr. Black says: their Canada Pension Plan entitlement and their long-term investment returns. Neither has a defined-benefit pension plan.

“There is a real question as to the value they will receive from the CPP,” the planner says. They have not provided statements of CPP contribution, and they are considering retiring at age 58.

“Everyone gets, essentially, eight years of CPP low-earning dropout in calculating their CPP, so if Gavin went to work at age 18, and made the maximum CPP contribution every year until he retires at age 58, then he could afford to add seven (age 65 minus age 58) zero-contribution years and still receive near-maximum CPP,” Mr. Black says. “However, if a few of those years at the start were less-than-maximum, and maybe there were a couple of years off work in there, the math can really change,” he adds. The same factors apply to Audrey, although the child-rearing provision tends to help her.

This matters in two ways. Lower CPP benefits have a cumulative effect over the projected 35 years of retirement, the planner says; for example, $1,000 less each per year at age 65 is more than $100,000 less in total over the course of retirement, he says. “CPP is their most important inflation-adjusted asset.”

As well, the decision of when to start CPP is affected if they already have low-earning years, he says. “It is generally favourable to wait to start CPP until at least age 65, but if they already have low-earning years, the advantage of waiting may be neutralized by the disadvantage of adding extra zero-contribution years.”

Because they have no set pension, their investment returns are critical, Mr. Black says.

Their current allocation of 90 per cent equities should decline gradually as their retirement date gets closer, he says. “A more balanced portfolio of 60 per cent to 70 per cent equities and 30 per cent to 40 per cent fixed income may smooth their overall returns,” he adds. “That said, their long-term retirement is dependent on portfolio performance.”

Gavin and Audrey have a net worth of almost $2.4-million. Their spending, after tax, saving and debt, is about $103,000 a year.

“With their current assets, and projected income and savings, they can likely retire at age 58,” Mr. Black says. His assumptions include retirement spending of about $100,000 a year, adjusted for inflation, 80 per cent of maximum CPP benefits, life expectancy of age 95, a portfolio of 65 per cent equities and 35 per cent fixed income with a total return of 4.6 per cent, and an inflation rate of 2 per cent.

“In our projection, at age 95 they still retain some registered retirement income fund assets available to be spent or included in their estate,” Mr. Black says.

In reality, they could retire at age 58 and adapt their spending to their circumstances, the planner says. One step they could take now is to get their CPP statements through the Service Canada portal, he says. “Early retirement might have a significant impact on the value of their CPP benefits if they already have existing low-income years.”

Given their current monthly total saving capacity of $2,450, excluding Gavin’s matched RRSP contributions ($550 a month), they can accomplish their goal of retiring their remaining mortgage of $100,000 by the middle of 2023, Mr. Black says. At that point they plan a $100,000 renovation of their home. Once the mortgage is gone and the home renovated, they should focus that savings capacity on their RRSP and TFSA contributions, the planner says.

As to their portfolio manager, they are paying 1.25 per cent a year, including the management expense ratios of the underlying holdings. “This is not outside of the industry standard, and would not be an immediate red flag.”

They could get a similar portfolio at a discount broker with low-MER exchange-traded funds and an overall cost of perhaps 0.20 to 0.30 per cent, “but this would require a commitment of additional time, research, and a degree of confidence in making their own decisions with little outside assistance,” the planner says. Or they could elect to invest their entire portfolio in a single-solution ETF, such as the Vanguard Growth ETF Portfolio (VGRO) or iShares Core Growth ETF Portfolio (XGRO), at an MER around 0.20 per cent. “This would reduce the level of effort involved in managing the portfolio themselves, while still providing sufficient asset class and geographic diversification,” the planner says.

“The decision of whether to fire your portfolio manager should not be made solely on the basis of cost, but rather in the context of cost-versus-benefit,” Mr. Black says. “If your current adviser helps you make decisions to reduce your taxes, avoid expensive market timing mistakes, and provides portfolio advice, that may be added value that is worth the price you pay.”

If Gavin and Audrey stick to their current savings targets, avoid expensive market timing errors, and adapt to reality as time passes, they can expect to leave an estate of around $650,000 in today’s money. This is essentially the value of their home, which could be sold if necessary to cover unexpected costs such as for health care.


Client situation

The people: Gavin and Audrey, both 48, and their two children, 15 and 17

The problem: When can they afford to retire, should they keep their portfolio manager or find a new one, and will they be able to leave something to their children?

The plan: Pay off the mortgage, renovate the house then shift all available capital to TFSA and RRSP contributions. Determine how much CPP benefits they will be entitled to before they decide to retire early.

The payoff: An awareness that they may have to adjust their expectations as they go along

Monthly net income: $14,350

Assets: His TFSA $100,000; her TFSA $92,500; his LIRA, group RRSP at work and personal RRSP $523,000; her LIRA, group RRSP and personal RRSP $792,300; registered education savings plan $157,000; residence $725,000. Total: $2.39-million

Monthly outlays: Mortgage $2,755; property tax $400; utilities $400; home insurance $495; maintenance $550; garden $200; transportation $980; groceries $1,500; clothing $325; gifts, charity $675; vacation, travel $1,000; dining, drinks, entertainment $800; personal care $150; club memberships $140; sports, hobbies, subscriptions $230; health care $145; life insurance $120; cellphones $220; TV, internet $190; RRSPs $1,100; RESP $365; TFSAs $480. Total: $13,220. Surplus of $1,130 goes to unallocated spending and extra mortgage payments.

Liabilities: Mortgage $100,000

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

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