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financial facelift

Marvin and Melody have done well, earning professional degrees, paying off the mortgage on their Toronto home, and paying for their sons’ university education. They’ve also managed to save a tidy sum.

Lately, the stress of running his own consulting company has Marvin thinking about scaling back or even quitting – especially now that Melody is back working full time. Melody is sympathetic. If Marvin quits, he’ll be leaving behind income of nearly $150,000 a year. Melody earns about $95,000 a year in high tech. He is age 54, she is 53.

“I have recently returned to work full time after nine years of working part time, preceded by a decade of staying at home with our children,” Melody writes in an e-mail. Marvin is suffering from “extreme stress,” she adds. “I wonder if we could live in comfort for the rest of our lives if he stops working or greatly reduces his workload,” she adds. They would live on her salary and savings, if necessary, until she retires at age 65. She’ll be entitled to a defined-benefit pension of only about $6,000 a year.

Their aspirations are high: A retirement spending goal of $100,000 a year after tax, including an expensive vacation each year. In the meantime, they have to finish paying for the boys’ tuition and living costs at an out-of-town university. One graduates next year; the other in 2020.

“When can Marvin stop working?” Melody asks.

We asked Stephanie Douglas, a partner and portfolio manager at Avenue Investment Management in Toronto, to look at Melody and Marvin’s situation.

What the expert says

Marvin and Melody’s $100,000 a year goal will have risen to $126,000 with inflation by the time she retires in 12 years, Ms. Douglas says.

If Marvin decides to retire this year, they would deplete their investable assets by 2050, when Melody would be 85 and Marvin 86. At that point they would either have to borrow against their house, which would be worth an estimated $1.7-million with inflation, or sell it to help pay for their living expenses.

“Marvin and Melody would not be able to fund their retirement goal without using the equity in their home,” the planner says. Her forecast assumes a rate of return on their investments of 4.5 per cent, an inflation rate of 2 per cent and that they live to age 95. The calculations are based on their living on Melody’s salary and their investable assets until Melody retires at age 65.

The couple face some substantial demands on their income, the planner notes. They want to continue to support their children through university at an estimated cost of $110,000 over the next two years. They value their annual family vacations at a cost of $15,000 a year. And they have a $38,400 loan to pay off.

A better option would be for Marvin to work part time, she says. This would help them meet their retirement goal by preserving their capital and allowing them to save more.

“For example, they could achieve their spending goal if Marvin works until age 61 at a reduced salary of $70,000 a year and continues to save $3,408 monthly [$2,491 to registered retirement savings plans and $917 to their tax-free savings accounts] until retirement.”

Alternatively, they could save more aggressively while Marvin is still working at his current salary, which would allow him to retire earlier, Ms. Douglas says. Their monthly budget shows a big cash surplus, at least some of which should be available for savings.

“I suggest they carefully track their spending to figure out where those extra funds are going and look at options to cut back.”

Once Melody retires, they will get $6,000 a year from her defined-benefit pension plan. The planner recommends they wait until age 65 to collect Canada Pension Plan benefits, which she estimates will be 60 per cent of the maximum if Marvin retires early. Both will get Old Age Security pensions at age 65.

If none of these options works, they could lower their retirement-spending goal by $15,000 a year, adjusted for inflation. If they chose to do this, their investable assets would last them until age 95.

Now, it’s possible they will earn a higher rate of return on their investments than the planner used in her calculations. “Melody has done a great job investing and the rate of return for their accounts has been higher than the assumed rate of return used for the plan,” of 4.5 per cent, Ms. Douglas notes. “However, I caution them against planning for similar high returns in the future, especially considering a more conservative asset allocation during retirement.”

Their current asset allocation is 70-per-cent equity, 24-per-cent bonds and 6-per-cent cash. Melody’s goal is to gradually lower the stock component and raise the fixed income.

Finally, Marvin and Melody should eliminate their $38,400 in debt before Marvin retires. With their current debt payments of $400 a month, it would take nine years to pay off. “They should focus on paying this down as soon as possible.”


The people: Marvin, 54, Melody, 53, and their two children

The problem: Can Marvin leave his stressful job immediately while Melody continues to work until age 65?

The plan: Marvin works a few years longer, if only part time, allowing them to save more, and meet short-term financial obligations. Track spending carefully to see where the money is going. If all else fails, lower their retirement spending goal.

The payoff: A clear view of what it will take to relieve immediate stress and still achieve their goals

Monthly net income: $15,465

Assets: House $900,000; his RRSP $540,977; her RRSP $89,564; his TFSA $63,894; her TFSA $72,171; his locked-in retirement account $22,483; her LIRA $36,647; joint nonregistered portfolio $245,000; her stocks $15,000; joint cash $32,660; her cash $5,540; estimated present value of her DB pension plan $40,719; RESP $22,206. Total: $2.1-million

Monthly outlays: Property tax $854; utilities $442; property insurance $452; maintenance $860; transportation $585; groceries $500; clothing $90; loan payment $400; gifts, charity $130; vacation, travel $1,250; other discretionary $200; dining, drinks, entertainment $435; grooming $15; club memberships $35; sports & hobbies $100; subscriptions $60; vitamins & supplements $8; life insurance $10; phones, TV and Internet $482; RRSPs $2,491; TFSAs $917. Total: $10,316 Surplus: $5,149 (some goes to nonregistered savings, some is unaccounted for)

Liabilities: Loan $38,400

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