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Marguerite’s RRSP holds mutual funds and segregated funds.Justin Tang/The Globe and Mail

In 2013, the year of Marguerite’s first Financial Facelift, she had left her home to care for her ailing mother in Vancouver. Marguerite was 51 and worried that working part-time while overseeing her mother’s home care would jeopardize her plan to retire from work at age 60. Marguerite’s spending target was $50,000 a year after tax.

The planner, Ngoc Day of fee-only financial planning firm Macdonald Shymko, concluded that Marguerite would either have to substantially increase her income, work past the age of 60 or plan to spend less when she retired.

More than six years have passed. Marguerite is 57 and back living with her partner. Her mother died in 2015. Marguerite and her siblings shared their mother’s estate.

The inheritance provided “some measure of financial security as I head toward my life in retirement,” Marguerite writes in an e-mail. She has found work as a supply teacher and plans to continue working part-time to age 65, after which she hopes to travel more. Her retirement spending target is still $50,000 a year after tax.

Marguerite has most of her inheritance in short-term guaranteed investment certificates. “I’ve been hesitant about investing while the markets are high and a correction appears to be on the horizon,” she writes. “When and how should I invest for the long term to earn higher rates?” She wonders, too, whether she should buy an investment property.

Once again, we asked Ms. Day of Macdonald Shymko & Co. Ltd. in Vancouver, to look at Marguerite’s situation.

What the expert says

After getting by on part-time work for a number of years, Marguerite recently landed a job as a substitute teacher and hopes to earn at least $26,000 a year until she retires at age 65. Marguerite says she can live comfortably on $26,000 a year after tax because, while she shares household expenses and food bills, she does not pay rent.

Ms. Day’s calculations show Marguerite could indeed retire at the age of 65 with income of $50,000 a year after tax. She has a defined benefit pension plan from a previous employer that will pay about $30,500 a year, including bridge benefit, at 60, falling to about $27,700 at 65.

“The strength of her financial independence lies in two contributing factors,” the planner says: Marguerite’s retirement cash flow need is moderate, and her Canada Pension Plan, Old Age Security and defined benefit pension benefits will make up a substantial percentage of her desired retirement income.

At 65, Marguerite’s combined CPP, OAS and DB pension benefits will total about $45,000 a year before tax. “She would only need to withdraw some funds from her portfolio to cover income taxes and top up her cash flow,” Ms. Day says. At 72, after Marguerite has converted her RRSP to a registered retirement income fund, her RRIF income will further contribute to required cash flow, the planner says.

Her calculations assume a 2.5 per cent inflation rate, a 5 per cent average annual investment return, and that Marguerite lives to 95.

Still, Marguerite will depend on her investments if her expenses – such as her housing costs – rise substantially, Ms. Day says. Marguerite may also face assisted living or home-care expenses in her advanced years.

Marguerite’s RRSP holds mutual funds and segregated funds. Her TFSA holds mutual funds and a mix of exchange-traded funds, while her investment account holds mainly Canadian stocks. She has $344,000 in short-term GICs.

Ms. Day recommends Marguerite consider two steps in her investment planning:

First, she should set aside sufficient liquid funds for emergencies, typically three to six months’ of expenses. She also wants to take two months off to complete a project. When the dust settles, she will have her emergency fund plus money set aside for those two months off. The rest of the inheritance money will be invested for the long term.

Before she invests her inheritance, though, Marguerite needs to determine what asset allocation she would feel comfortable with. This allocation will apply across her various accounts – RRSP, TFSA and non-registered.

“She could consider a conservative, balanced and diversified portfolio, to provide for both income and potential long-term capital growth,” Ms. Day says. Marguerite could use ETFs for diversification and low cost.

“Depending on her desired asset allocation, she might need to adjust her current investments as well so that her entire portfolio is aligned with her asset-allocation targets,” the planner says. Marguerite’s portfolio should be structured to be tax efficient. “In the long term, any income not needed for her living expenses should be reinvested, keeping with the asset allocation targets,” the planner says. She should also maximize her TFSA annually.

“Once Marguerite has determined her asset mix target, the answer of whether now is a good time to invest will fall into place,” Ms. Day says. Assuming that Marguerite has invested in a balanced and diversified portfolio, a correction could actually be a good opportunity to rebalance, selling some fixed income holdings to buy equities while the markets are low.”

Marguerite’s current portfolio includes some mutual funds and segregated funds, which tend to have higher management expense ratios than low-fee mutual funds and ETFs because of the guarantees they offer, the planner notes – guarantees that come at a cost. “Marguerite has to decide whether these guarantees are important enough to her to justify the added expense.”

Should she invest in a rental property for income? It depends on “her appetite for being a direct landlady,” the planner says. On the plus side, a rental property could provide steady net rental income that is not related to equity market returns. On the other hand, direct ownership of a rental property requires time and effort. In addition, real estate is less liquid than publicly listed investments, so she should carefully consider how much of her investable funds would be required for this purchase, Ms. Day says.

“Before purchasing a rental property, I’d suggest that Marguerite stress-test the operation with some what-if scenarios to assess the potential profitability and downside risks: What if she couldn’t find tenants for several months? What if there were extraordinary repair costs?”

Client situation

The person: Marguerite, age 57

The problem: Can she afford to retire at age 65 with $50,000 a year after tax?

The plan: Go ahead and retire as planned. Review entire portfolio and set asset allocation targets in line with her risk profile. Rebalance as needed.

The payoff: Financial flexibility

Monthly net income: $2,395 (variable)

Assets: Cashable GICs $344,000; RRSPs $111,505; TFSA $71,395; investment account $108,715; estimated present value of defined benefit pension $433,565. Total: $1.1-million

Monthly disbursements: Heat, hydro $75; transportation $475; groceries $350; clothing $105; gifts, charity $125; vacation, travel $350; personal care $100; gym membership $240; dining out, entertainment $145; hobbies $60; subscriptions, books $45; doctors, dentists, prescriptions $115; disability insurance $110; phone, internet $100. Total: $2,395

Liabilities: None

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

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