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Tijana Martin/The Globe and Mail

A series of life changes has Ella preparing well in advance for the day she turns 65 and her disability benefits cease. She is approaching age 56 and divorced with two of her three children still living at home.

“I want to do what I can to ensure that I can support myself when my disability benefits terminate in 10 years,” Ella writes in an e-mail. Her goal is to maintain her current income of about $8,000 a month after tax.

As well, Ella’s employer is contributing $1,000 a month to her defined contribution pension plan until she turns 65 and is officially retired. She is getting child support of $835 a month for the two younger children.

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Ella has a $1.5-million house with a mortgage in suburban Toronto.

She wonders, too, if she should increase the U.S. stock holdings in her pension plan, which she halved when the COVID-19 pandemic struck last spring. The plan is self-directed.

We asked Warren MacKenzie, head of financial planning at Optimize Wealth in Toronto, to look at Ella’s situation.

What the expert says

“Ella is in excellent financial shape and she should have no financial worries,” Mr. MacKenzie says. Without a financial plan, though, Ella’s concern is understandable, the planner says. Even with conservative assumptions, Ella has more than enough money to maintain her lifestyle and even pay for long-term health care if she eventually needs it, he says.

“Ella has worked hard to build a substantial net worth,” Mr. MacKenzie says. Instead of worrying, she could use her “surplus” capital – which he estimates at more than $500,000 – to “maximize her happiness” over her lifetime by either spending it or giving it away while she is still in control. He defines surplus capital as money above and beyond a person’s stated needs.

Ella’s work pension – similar to a group registered retirement savings plan – is valued at $1,335,000. When she retires, she will be able to roll part of the pension money into an RRSP (and then into a registered retirement income fund) and part into a locked-in retirement account, or LIRA (and later into a life income fund, or LIF).

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If the capital grows by 3 per cent per annum, in nine years' time, by Ella’s age of 65, her portfolio would be worth about $1.9-million. In addition, she has just begun saving about $2,000 a month. If these savings earn an average of 3 per cent per annum, they would grow to about $240,000 by then.

“By age 65, the total of her DC pension and her non-registered savings is expected to be over $2.1-million and could generate $63,000 income per year (before tax) if she earns 3 per cent per annum,” Mr. MacKenzie says.

At the age of 66, to maintain her current lifestyle (including mortgage payments and paying income tax), Ella would need about $122,000 a year, the planner says ($56,000 spending plus $36,000 income tax plus $30,000 mortgage payments). “When her two children leave home, some of her expenses will be lower, but she intends to travel south in the winter, so her total expenses may not be significantly lower,” Mr. MacKenzie says.

Of the $122,000 needed in 2030, about $25,000 will come from Canada Pension Plan and Old Age Security benefits. In addition, she will pull about $97,000 from her investment portfolio. Given that (at 3 per cent per annum) the earnings on her investments would be $63,000, the $97,000 withdrawal would reduce her invested capital by $34,000 a year, he says. “However, since the value of her home is expected to rise by about $35,000 per year (if inflation runs at 2 per cent), and she is reducing the principal owing on her mortgage by $20,000 per year, her net worth would still be increasing by about $21,000 per year ($35,000 plus $20,000 minus $34,000).”

When Ella reaches the age of 90, Mr. MacKenzie’s calculations show that her net worth (in dollars with the same purchasing power) will be almost the same as it is today. “Ella should ask: is her goal to leave as much as possible to her children, or to enjoy retirement and help her children while she is living,” the planner says.

If Ella’s goal is to leave as much as possible to her children, then there are some things she can do to minimize her tax liability, he says. First, her monthly savings should go to a tax-free savings account. “One could argue that paying down the mortgage would be the best over the long term,” Mr. MacKenzie says. “However, if she is to have some liquidity and spend a bit of her surplus, it makes sense to put it into a TFSA where she can get her hands on it if she so desires.”

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Mr. MacKenzie also points out that $370,000 of her pension funds are not “locked in” and at the age of 66 she can qualify for the $2,000 pension tax credit by turning this portion of her DC pension plan into an RRIF. She can also withdraw about $20,000 from the new RRIF to create income to add to the $25,000 CPP and OAS income that she will receive. "This will bring her income up to a level that allows her to take full advantage of the low rate of tax on the first $44,740 of taxable income.”

Next, he looks at Ella’s investment portfolio. “Before COVID-19, she was 100 per cent in U.S. equities,” he notes. “Early in 2020, she wisely moved 50 per cent to a money market fund.” She asks whether she should now increase her exposure to U.S. equities. “Because of the uncertainty around COVID-19, it would not be wise to do so at this time,” Mr. MacKenzie says.

As it is, Ella’s investment portfolio is poorly diversified, the planner says. “The proper asset allocation for Ella would be a ‘goals based’ one,” he adds. “This means taking as much risk [exposure to the stock market] as necessary, but no more than is necessary to achieve her goals.” She could reduce portfolio volatility by having a more diversified asset mix of traditional asset classes and geographic regions.

Given that she is not an experienced investor, Ella should consider working with a portfolio manager or investment counselling firm that has a fiduciary duty to act in the best interests of its clients. A professional money manager could give her access to non-traditional investments that are not tied to the ups and downs of financial markets, Mr. MacKenzie says.

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Client situation

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The person: Ella, 55, and her three children

The problem: How to maintain her standard of living once her disability payments cease.

The plan: Draw up a goals-based financial plan to determine how much money she will need for the duration of her life. Consider what she wants to do with the rest.

The payoff: No more worrying about whether she has enough.

Monthly net income: $8,100

Assets: Market value of defined contribution pension $1,335,000; RESP $158,550; residence $1.5-million. Total: $2.99-million

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Monthly outlays: Mortgage $2,500; property tax $560; home insurance $140; heat, hydro $510; transportation $400; groceries $1,000; line of credit $100; gifts, discretionary $255; personal care $100; dining out $100; pets $100; life insurance $70; communications $290. Total: $6,125 Surplus goes to savings.

Liabilities: Mortgage $527,585; line of credit $2,910. Total: $530,495

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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