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Barbara and Burt.

Todd Korol/The Globe and Mail

Barbara and Burt are laying the groundwork to retire from their respective jobs in June, 2022. Barbara, 58, earns $104,000 a year, while Burt, 63, earns $30,000. He also gets $4,800 a year in Canada Pension Plan benefits.

The mortgage on their Alberta home will be paid off by year-end, as will their line of credit. Apart from Barbara’s pension, which will pay her about $30,000 a year at the age of 60, their savings are modest, so their No. 1 goal is to “save and invest as much as possible,” Barbara writes in an e-mail.

They wonder if they need all the different life insurance policies they have, whether they should manage their own investments using a discount broker and when Barbara should begin collecting government benefits.

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Their retirement spending goal is $50,000 a year after tax. They plan to spend their postwork years travelling in Canada and “maybe abroad,” doing volunteer work, and maybe opening a home-based business.

“How soon can we realistically retire?” Barbara asks.

We asked Tom Feigs, a financial planner at Money Coaches Canada in Calgary, to look at Barbara and Burt’s situation.

What the expert says

After they have paid off their mortgage and line of credit, Burt and Barbara want to bump up their savings substantially to $5,000 a month as a final push to retirement, Mr. Feigs says.

He recommends they both open tax-free savings accounts and transfer non-registered funds to their TFSAs “such that their TFSA contribution room of $69,500 each is used up.” This will shelter growth in the TFSA accounts from tax.

To supplement Barbara’s pension with retirement savings, the planner suggests Barbara continue to use up her registered retirement savings plan contribution room each year ($4,800) until she retires. He does not recommend contributing to Burt’s RRSP because his income is relatively low.

“The balance of savings should first go to their TFSA accounts as contribution room permits and then to non-registered accounts,” Mr. Feigs says. When employment earnings end and savings stop, they should continue to transfer funds from their non-registered accounts to their TFSAs each January until the non-registered accounts are empty.

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He recommends Barbara start Canada Pension Plan benefits at the age of 65 rather than taking CPP earlier. “This serves to create higher lifetime income for basic spending.” Barbara and Burt should start collecting Old Age Security benefits at 65.

“Barbara and Burt will indeed be able to retire in June, 2022,” Mr. Feigs says. “They will have no debt, good pension income and their savings will peak at about $400,000,” he adds. They will be able to sustain after-tax lifestyle spending of up to $64,000 a year (in today’s dollars), surpassing their goal of $50,000.

“It’s nice to know financial independence is close at hand,” the planner says. “Barbara and Burt have some lifestyle flexibility, so they could spend more if they chose to.”

In preparing his forecast, the planner assumed a rate of return on investments of 5 per cent a year after fees, which gradually becomes more conservative over their retirement years. He assumes an inflation rate of 2 per cent and that they both live to the age of 95.

Life insurance is a way to support the survivor in case one or the other dies before financial independence is reached, Mr. Feigs says. “In the case of Barbara and Burt, they are within one year of being financially independent based on their $50,000 retirement lifestyle spending target,” he says.

As Barbara suspects, the couple have more life insurance than they need.

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Barbara has group insurance at work, which will end when she retires, and she has term insurance of $35,000.

Barbara also has whole life insurance with a cash surrender value of $18,000 and a death benefit of $65,000. Burt has a term policy for $105,000 and a universal life policy for $100,000. The planner recommends Burt cancel the universal life policy immediately because Barbara doesn’t need the insurance money, and that they cancel both term life policies in one year. He suggests they sit down with their insurance agent when Barbara retires and explore whether her whole life insurance has continued value.

Next, Mr. Feigs looks at the couple’s investments and how they might manage them differently. Excluding their chequing accounts, Barbara has $140,000 in GICs with the rest managed by an investment adviser. She has asked whether she should “divorce” her financial adviser and go solo using a discount brokerage.

Mr. Feigs recommends she reduce her GICs (safe cash savings) from $140,000 to $30,000 and invest the balance with a single, low-fee investing service, where it should be invested for medium to long-term growth. “That way, it’s easier to monitor performance and keep the draw-down of savings on track,” the planner says.

The planner suggests three distinct options, each with different fees and requiring different degrees of involvement:

  • Self-directed using an online brokerage, where fees are the lowest (0.1 per cent to 0.5 per cent) and clients make all the decisions;
  • Actively managed index portfolios, where fees are 0.7 per cent to 0.9 per cent and clients also get full service planning/investment advice;
  • Actively managed, low-fee mutual fund companies, which charge more (0.8 per cent to 1.2 per cent) and clients also get full service investment advice.

Client situation

The people: Barbara and Burt, 58 and 63

The problem: Can they both retire in mid-2022 with $50,000 a year after tax in spending? Do they need all that life insurance? Should they switch to a discount brokerage to lower their fees?

The plan: Pay off debt quickly and increase savings with the extra cash flow. Maximize Barbara’s RRSP contributions and both Barbara and Burt’s TFSA savings. Cancel the term life and universal insurance policies. Review investing service.

The payoff: Financial freedom

Monthly net income: $8,970

Assets: Bank accounts $5,100; GICs $140,000; her RRSP $30,000; his RRSP $25,000; non-registered $68,000; estimated present value of her DB pension plan $500,000; house $350,000. Total $1.1-million

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Monthly outlays: Mortgage $1,100; line of credit $1,500; property insurance $105; property tax $205; property maintenance $50; cellphone/landline $155; electricity $150; natural gas $75; city services $50; cable/internet $160; health care $50; life insurance $330; vehicle insurance $200; fuel $200; vehicle maintenance $115; parking $5; pets $200; groceries $800; personal care/vitamins $30; entertainment, dining, lunches $400; clothing, shoes $50; gifts $100; charity $100; bank fees $10; RRSP $400. Total: $6,540. Of the surplus, $2,000 would go to newly opened TFSAs.

Liabilities: Mortgage $8,000; line of credit $20,000. Total: $28,000

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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