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financial facelift

Sharon wants to retire from work before the age of 65 and do some travelling.Tijana Martin/The Globe and Mail

After 35 years of working in the entertainment industry, Sharon is looking to hang up her hat. She’s 58 and single again with no dependants.

Sharon is a self-employed freelancer (incorporated) with no pension plan. Her main asset is a small house in Toronto valued at $700,000. She also has a registered retirement savings plan and some savings in her corporate account. She is living on $3,500 a month after tax and “hopes not to live on less than net $3,000 a month in retirement, if at all possible,” she writes in an e-mail.

“I am wondering when I can afford to retire,” Sharon writes. “My industry can be both intensely demanding and youth-centric, and thus I feel that as I age, my freelance opportunities may become fewer.” She’s thinking of working part-time at “something that allows for regular hours and is community-oriented,” Sharon adds. She wonders how long she can stay in her comfortable home before she has to sell and downsize.

We asked Charmaine Huber, a certified money coach at Money Coaches Canada in Barrie, Ont., to look at Sharon’s situation.

What the expert says

Sharon hopes to retire from work before the age of 65 if possible and do some travelling, Ms. Huber says. She wonders whether she will need to work part-time to meet her expenses.

Sharon has no debt and does not overspend. Currently, she has $125,000 in her corporate account. “These funds are intended for her to draw from during months/years of lower income or no income if she isn’t able to secure contracts, as her industry is very unpredictable,” Ms. Huber says.

The planner assumes Sharon will retire at 65 and will require these funds before then. If, however, she has some money left at, say, age 63, then she could choose to retire earlier. She could use the funds to sustain her spending until the funds ran out and then wind down her corporation.

If Sharon works to the age of 65, she would be entitled to 93 per cent of maximum Canada Pension Plan benefits as well as Old Age Security. If she waited until the age of 70 to collect CPP and OAS, she would get 42 per cent and 36 per cent more of each, respectively.

It might be helpful if Sharon worked part-time during her early retirement years because her current after-tax spending target does not give her much wiggle room for travel, or in case large expenses come up during retirement, Ms. Huber says.

She outlines the following retirement income strategy:

From the age of 65 to 70, Sharon can draw funds from her RRSP to cover her expenses of $3,500 a month after tax. Currently her RRSP is worth $360,000 and she has $60,000 of available RRSP contribution room. By the time she is 65, without any additional contributions, and assuming a 4-per-cent return on investments after fees, her RRSP will have grown to $473,700.

At that point, she could convert a portion of her RRSP to a registered retirement income fund (RRIF) so she can benefit from the federal pension tax credit (on the first $2,000 of pension income) starting at the age of 65. She could withdraw enough money each year to cover her spending needs. “It would be prudent for her to maintain one to three years of cash-flow requirements in short-term cash equivalents within her RRIF,” Ms. Huber says.

Because she will have enough funds in her RRSP to sustain her desired retirement income level to the age of 70, Sharon should hold off collecting CPP and OAS to the age of 70 to take advantage of the higher benefit, especially if she continues to be in good health, Ms. Huber says. That way, she will have to withdraw much less from her RRSP/RRIF from that point on.

Income from Sharon’s RRSP/RRIF, CPP and OAS would provide her with about $2,900 a month, after tax and in today’s dollars, until the age of 95, Ms. Huber says. “So, to meet her spending goal of $3,500 per month, she will have to downsize her home” at some point. Otherwise, if she spent $3,500 a month without downsizing, she would run out of savings at the age of 82.

If Sharon downsizes at the age of 80, assuming a 2-per-cent average inflation-adjusted yearly price increase, she could sell her house for about $1.05-million. If she downsized to a condo in the $700,000 range, and if she still hasn’t contributed to a tax-free savings account at that point, she could put $240,000 into a TFSA. The remainder could go to non-registered investments. This would allow her to meet her spending goal of $3,500 a month to the age of 95, Ms. Huber says.

At Sharon’s age 80, her $240,000 in TFSA funds, along with her minimum yearly RRIF withdrawals, non-registered investments, CPP and OAS payments, would give her an after-tax income of slightly more than $3,500 a month to the age of 95. If she lives beyond 95, she will still have CPP, OAS and her condo, “which, assuming a 2-per-cent inflation increase from age 80, when she purchases it, would have a theoretical street price of slightly more than $1-million.”

Also, Sharon could do better with her investments if she moved her RRSP funds from the high-fee mutual funds she is invested in (2.4 per cent management expense ratio) to lower-fee investment options (such as low-fee mutual funds or exchange-traded funds), Ms. Huber says. If Sharon could shave one percentage point from her fees, she could save $3,600 a year, an amount that would increase each year as her portfolio grows. ”The longer you are invested, the more impact the fees will make on the overall portfolio,” she says.

Sharon also has $15,000 sitting in cash, which she considers her emergency fund. She could move these funds to a high-interest savings account and still have access to the cash if she needs it.

Client situation

The person: Sharon, age 58

The problem: How soon can she afford to retire from work and still maintain her lifestyle? When will she have to sell her house and downsize?

The plan: Work to the age of 65 in current position, or possibly retire earlier if corporate savings are still available. Downsize at the age of 80, adding balance after condo purchase to savings. Move money into low-fee investments.

The payoff: A comfortable retirement.

Monthly net income: $3,500

Assets: House $700,000; RRSPs $360,000; non-registered $15,000; corporate account $125,000. Total: $1.2-million

Monthly distributions: Property tax $300; home insurance $110; utilities $285; maintenance $315; garden $45; transportation $250; grocery store $400; clothing $80; vacation, travel $90; other discretionary $325; dining, drinks, entertainment $660; personal care $100; club membership $50; subscriptions $20; health care $225; phones, TV, internet $245. Total: $3,500

Liabilities: None

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