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A couple we'll call Hugh and Sally live near Toronto. With a combined gross income of $122,000 a year, they are approaching retirement.

Hugh, 62, has had two heart attacks, bypass surgery and a stroke with some resulting paralysis. He expects that he will have to retire in mid-2007. By then, Sally, 54, will probably have ended her contracts with her current employer, a company in the financial services industry. They worry that once their incomes decline to retirement levels, they will not be able to support the nearly $1,200 a month they pay on their mortgage and for taxes on their $235,000 home.

Their son, 20, works part time and expects to return to university next year.

"We are concerned that the mortgage and taxes on our home may be too much for us to handle when I no longer have my normal income," Hugh says, adding that his health concerns may make him seem "damaged goods."

What our expert says

Facelift asked Cynthia Kett, a certified financial planner at Stewart & Kett Financial Advisors Inc. in Toronto, to speak with Hugh and Sally in order to work out their retirement finances.

"Hugh and Sally are not unlike most people," Ms. Kett explains. "Many of us have financial aspirations in excess of what we can afford."

Hugh's health is going to be a part of the couple's financial planning, Ms. Kett notes. Their financial assets will support a comfortable life in retirement.

Hugh and Sally currently have registered retirement savings plans and locked-in retirement accounts that total $322,468. Even after they pay off credit card debt of $3,200 and set aside $5,000 for day-to-day liquidity, they have almost $100,000 of non-registered funds, Ms. Kett notes.

Hugh and Sally have the time and money to improve their standard of living in retirement, the planner says. The ground floor of their retirement plan is that neither will receive a pension from current or former employers.

Assuming that Hugh earns $87,500 in 2006 and $43,750 before he retires in mid-2007, and that he receives Employment Insurance benefits of $11,392 in 2007 and $6,318 in 2008 and earns no income thereafter, and that Sally earns $36,000 in 2006 and that her gross pay rises by 3 per cent a year until she retires at the end of 2016 when she is 65, then their retirement income can be estimated.

Hugh should make a $59,400 RRSP contribution in 2005 or 2006 to use up his RRSP room, Ms. Kett recommends. Funds can come from non-registered savings immediately or Hugh can accumulate savings over the course of 2006, she adds. He should make additional RRSP contributions of $15,749 in 2007 and $7,874 in 2008, Ms. Kett recommends. Sally should contribute $3,224 to her RRSP in 2006 and then 18 per cent of the prior year's earned income in each subsequent year until 2017 when she retires at the age of 65.

The couple should expect to convert their RRSPs to registered retirement income funds in the year when each turns 69 and to maintain a 60-per-cent stock, 40-per-cent fixed-income allocation, Ms. Kett advises.

In 2007, when Hugh begins his retirement, the couple will have $4,314 in income from their non-registered investments, Ms. Kett says. He will have half a year's salary of $43,746. Adding in $11,392 from EI for the balance of the year, they will have $59,452, Ms. Kett estimates. If Sally is working, her income will add $37,132 for a total of $96,584, the planner estimates. They will have to supplement their incomes by making withdrawals from their non-registered portfolios of $28,123 to produce total cash flow of $124,707, Ms. Kett says.

The withdrawals will cover the cost of a new car they will require in 2007. The next year, 2008, assuming that Sally is still employed with a salary of $38,245, their incomes will be $46,887. They will have to make further withdrawals from their non-registered portfolio of $40,343, to replace employment income, Ms. Kett estimates. At this point, their cash flow will be $87,320, she says.

In 2017, when Hugh is 73 and Sally is 65, their income will have changed quite substantially, Ms. Kett notes. Hugh will have no employment income, but he will have $13,523 in estimated Canada Pension Plan payments. Sally, having stopped work, will receive $11,834 in CPP payments. Ms. Kett estimates each will receive $7,683 in projected OAS payments and they will withdraw a combined $59,039 from Hugh's RRIFs and Sally's RRSPs. Their incomes will then total $99,762 in future dollars, the planner explains.

Hugh and Sally need to control their expenditures, Ms. Kett notes. Expenses will rise at an estimated 3 per cent a year, she says. They can continue to save $270 a month for three more years for their son's education. Assuming that they can continue to finance their mortgage at 4 per cent, they will have to make mortgage payments of $953 a month until the end of 2018.

The couple should review their life insurance resources should either Hugh or Sally die prematurely, Ms. Kett urges. Should Hugh die in the near future, he would have $149,000 coverage.

If he dies after age 68, his coverage will be $100,000, Ms. Kett notes. Sally also has a small policy for $25,000 that provides permanent coverage on top of her $55,000 group coverage. While Hugh's health would make additional insurance coverage prohibitively costly, Sally can obtain additional coverage for their outstanding mortgage liability. A no-frills 10-year-term policy for $100,000 would do the job, Ms. Kett suggests.

"Hugh and Sally will be just fine in retirement," the planner says. "They need to watch their expenses so that a roofing job or furnace replacement does not cause a shortfall of income. Their retirement plan will work, but they will have to live within their expenditure assumptions. In conclusion, even though Hugh has health concerns, he and Sally must plan for a long life. With good fortune, he'll have it."

Client situation

Hugh, 62, and Sally, 54, live in Toronto. A son, 20, lives at home.

Monthly net income: Hugh, $5,470; Sally, $2,516.

Total: $7,986.

Assets: House, $235,000; RRSPs and locked-in retirement accounts, $322,468; non-registered investments, $74,000; GICs, $5,300; two cars, $10,000; cash, $25,650; education savings, $33,500.

Monthly expenses: Mortgage, $953; utilities, $450; maintenance, $120; house insurance, $260; property taxes, $197; food, $900; clothing, $300; recreation, $375; repairs for cars, $650; GO train, $204; gifts & charity, $150; pets, $95; miscellaneous, $300; education savings, $270; life insurance, $137; travel, $330; savings, $2,295.

Total: $7,986.

Liabilities: Mortgage, $118,900; credit cards, $3,200.

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