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Sally, 54

Dave Chan/The Globe and Mail

Sally has been working part-time earning about $45,000 a year for the past 10 years, but plans to retire soon even though she’s only 54. She is recently divorced with three grown children.

“I hesitate to stop working because I want to be sure I can afford to do so,” Sally writes in an e-mail. She has a mortgage-free house and substantial investments, but she is uncertain about how far her assets will go.

“I don’t yet have a good grasp of what my investment income will be each year because I recently sold off rental properties that I got as part of a separation agreement with my ex-husband,” Sally adds. “My investment portfolio is now just over $2-million, but has only been this size for a few months.” Of this, about $1.7-million is non-registered and $337,000 registered.

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“I would love to have a financial adviser take a look at my situation to help me figure out if I can stop working now, live comfortably and have enough money to last throughout my life,” Sally writes. A top priority is to give each of her three children $90,000 to use as a down payment for a house. She also wants to spend part of the winter down south. Her spending target is $85,000 a year after tax, plus $15,000 for travel.

We asked Stephanie Douglas, partner, portfolio manager and financial planner at Harris Douglas Asset Management Inc. in Toronto, to look at Sally’s situation.

What the expert says

Despite what could be a 40-year retirement horizon, Sally has nothing to worry about, Ms. Douglas says. “Not only can Sally achieve her goals, she’ll still have a net worth of $3.3-million at age 95, but that would be mainly the value of her house.” She would have very little investable assets left. The projections assume a rate of return on investable assets of 4.5 per cent.

The planner assumes Sally starts receiving Canada Pension Plan and Old Age Security benefits at the age of 65. She also assumes that Sally spends $50,000 ($70,000 less the trade-in value of $20,000) every four years on a new vehicle until age 75, and that she gives her three children $90,000 each (for a total of $270,000) in 2023. The additional $15,000 budget for travel ends at the age of 80.

“If Sally chooses to keep spending this additional $15,000 annually beyond age 80, she would not run out of investable assets until 2059 at age 94,” Ms. Douglas says. At that point Sally would still have her house, which would be worth roughly $3.2-million with inflation.

Now for her investments. Sally’s asset allocation is roughly 54 per cent stocks, 32 per cent fixed income (including a personal loan) and 14 per cent cash. “For Sally’s investable assets to last until age 95 without her having to sell her house, she would need a rate of return of at least 4.2 per cent,” the planner says.

Sally says she will likely sell her house at some point so she may be willing to accept a lower rate of return with less volatility and risk, the planner says. That’s because she would have more money to add to her portfolio later. Ms. Douglas recommends Sally keep a minimum of five to seven years’ worth of living expenses in fixed-income securities so she will not be forced to draw from her stock portfolio during a pullback in the stock market. The planner suggests a one- to five-year ladder of government and high-quality corporate bonds.

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Sally’s portfolio could be set up to be more tax-effective, Ms. Douglas says. Sally should consider moving more of her fixed-income exposure to her registered accounts. For example, her Canadian-dollar spousal registered retirement savings plan has an allocation of 7 per cent cash, 45 per cent bonds and 48 per cent stocks. When the $510,000 loan is repaid, she could rebalance her portfolio, selling the stocks in her registered accounts to make room for more bonds.

“This would be better from a tax perspective because interest income is 100-per-cent taxable at Sally’s tax rate” if it is not sheltered in a registered account.

After she quits working, Sally will be relying entirely on her savings and investments until she begins collecting government benefits. Ms. Douglas suggests that Sally withdraw from her non-registered accounts first, with an appropriate amount coming from the U.S. dollar portion to fund her travel expenses. This will allow her registered accounts to continue to grow tax-free.

Based on the planner’s analysis, Sally likely will not have her Old Age Security benefits clawed back. That assumes the OAS claw-back income threshold increases at the rate of inflation. “So I would not suggest early RRSP withdrawals from these accounts because the tax-free growth will be more beneficial to her."

Sally has $165,000 in bank savings accounts and more than $200,000 in guaranteed investment certificates. The planner suggests Sally shift that $165,000 from the savings account to high-interest GICs to get a better return. Keeping this money in GICs makes sense because Sally will need $320,000 in the next three years for the down payments for her children and a new vehicle. If Sally would like to keep extra cash for emergencies, she could set aside three to six months of living expenses, or roughly $20,000 to $42,000. Alternatively, she could use a line of credit for emergencies.

Sally plans to spend several months each year down south. She has 45 per cent of her non-registered portfolio in a U.S. dollar account invested in U.S. stocks, which will help reduce exchange-rate risk when she needs U.S. dollars to travel to the United States.

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If there was a recession or a pullback in the stock market, however, Sally could be forced to either sell some of her U.S. securities or convert some of her Canadian dollars to U.S. dollars to cover her U.S. travel expenses. Her U.S. dollar account has less than $1,000 in cash. To help mitigate the risk, Sally could split some of the cash and fixed-income portion of her portfolio between her Canadian and U.S. dollar accounts.

In terms of estate planning, Sally updated her will in 2017. She should also ensure she designates beneficiaries (other than her estate) for her registered accounts. Doing so will allow these assets to go directly to the beneficiaries rather than going through probate and incurring fees. Sally should be aware that her RRSP and locked-in retirement account will be taxable on her death and the estate (not the beneficiaries) will be responsible for paying the taxes, Ms. Douglas says. “Sally should discuss the implications of this [on her estate plan] with her lawyer.”

Client situation

The person: Sally, 54, and her three children

The problem: Sally wonders whether she can achieve her dream retirement given her age. She would also like to give her three children $90,000 each for a down payment on a house.

The plan: Rejig portfolio to be more tax-effective. Keep five to seven years’ expenses in fixed-income securities with similar terms so she won’t be tempted to sell stock in a down market.

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The payoff: Knowing she has nothing to worry about financially.

Monthly net income: $7,584

Assets: House $1,470,000; non-registered account $1,741,143; RRSPs $203,278; locked-in retirement account $58,695; tax-free savings account $75,620; private loan $510,000; GICs $200,000; cash $165,509. Total: $4.4-million

Monthly distributions: Property tax $917; property insurance $74; utilities $392; maintenance $255; transportation (gas, car insurance, maintenance, parking) $757; groceries $880; clothing $500; dry cleaning $42; vacation $1,080; gifts $300; dining, drinks, entertainment $591; personal care $330; sports, hobbies $266; pet expenses $144; subscriptions $23; health-care expenses $120; life insurance $26; phone, internet, cable $157; charitable donation $185; other discretionary $45; TFSA $500. Total: $7,584

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com.

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

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