No Major Correction - Just Tweaks

Saskatchewan woman advised to channel some of her energy and drive into boning up on stocks, bonds


At the age of 44, a woman we'll call Rose has made a success of a new career in the government of Saskatchewan. Rose is single; her daughter has left home, established her own life and borne Rose a grandchild.

Rose earns $60,000 a year, which is a good income in her province, but wonders whether she can stretch it to cover a sabbatical for which she has saved. After the leave, which she is considering taking in a few years, she ponders leaving Saskatchewan for another province with a more robust market for her specialized work. She also worries about retirement based on a career that began only a few years ago in the provincial government.

"Given my current financial situation, how realistic is it for me to be taking an eight-month deferred leave and still move toward reasonable retirement savings?" she asks.

What our expert says:

Facelift asked Derek Moran, the head of Smarter Financial Planning Ltd. of Kelowna, B.C., to work with Rose. "She has made remarkable progress in her life and now asks very reasonable questions about the eventual move into retirement, perhaps in a different city. For now, her finances are in good shape. The problem is the future that she wants to explore."

Rose's financial situation has two issues. One is the deferred salary leave program that her employer offers. She has saved 12 per cent of her salary in the plan to finance a leave with pay that will almost match her present salary, Mr. Moran notes. The other issue is the retirement income she can expect from her government pension, a defined contribution plan in which the employer matches 100 per cent of Rose's contributions so that the plan is funded with 5 per cent of her gross monthly paycheque. She had $30,297 in the plan as of March 31, 2007.

If the plan can generate a 3-per-cent annual return after inflation and if Rose and her employer continue to add a total of 5 per cent of her annual salary, it would total $102,259 by her age 60 and $134,252 by age 65, Mr. Moran estimates. These sums would produce an inflation-adjusted life income of $5,417 a year if she retires at 60 and $8,170 if she were to retire at 65. All sums are in 2007 dollars.

In her registered retirement savings plan, assuming that she lives to age 87, which is her life expectancy plus five years, and that she plans to exhaust her RRSP savings by the time of her death, then her capital could support annual, inflation-indexed withdrawals of $22,949 from age 60 or $32,193 from age 65, the planner estimates.

If she works to 65, her Canada Pension Plan payments will be close to the $10,365 maximum for 2007. She would also qualify for full Old Age Security, currently $5,903 a year, at age 65. She will also have $32,193 in RRSP payments and $8,170 from her government pensions. That sum, $56,631, is more than she now has each year after payroll deductions, mortgage payments and savings.

There is a good deal more that she can do to increase her wealth and retirement options, Mr. Moran observes. Her RRSPs are invested in a variety of mutual funds, all of which feature fees that range from an average 2.32 per cent to a rather high 3.2 per cent. Her portfolio of funds is diverse but, in spite of the fees that cost her what Mr. Moran estimates as $7,000 a year, the portfolio has many losses and mediocre performance. She should explore other ways to invest.

With her obvious intellect and drive, she could study capital markets and make her own decisions. Were she to select a few low-fee alternatives to her present funds, she would probably be able to raise her wealth in the long run. After all, if her fees average 2.5 per cent a year, in the next 20 years, she will be paying $133,518 in fees before retirement. For now, there is no certainty that her mutual funds will even earn their fees; indeed several have not. As an alternative to her high fee funds, she can buy low-fee index funds, exchange-traded funds, invest in managed funds that have fees below average or even pick her own stocks.

Rose bought the funds from a former colleague on the basis of trust rather than information. The funds were purchased with deferred sales charges, but the average six-year penalty period for early withdrawal has ended. She can move the money to different funds, different companies or, indeed, start direct management of her assets herself, Mr. Moran notes.

Rose has a substantial asset in her condo. With an estimated market value of $150,000, it has a modest mortgage of $22,600 at 5.7-per-cent interest due to be rolled over later this year. Her mortgage payments of $630 a month will end in 2010. After she is free of her mortgage, she can invest the $630 a month it has cost her. If that sum returns 5 per cent a year and, assuming 3-per-cent inflation, she would have $103,423 in 2007 purchasing power at age 60 and $154,317 at age 65.

Rose is considering leaving Saskatchewan. She has pondered moving to a place with more rapidly rising real estate values. In fact, some neighbourhoods in several cities in the province have had substantial gains in house and condo prices. Moving to a place that is currently booming might mean missing out on a future Saskatchewan land boom. In any event, making real estate price predictions 20 years in the future is not feasible, Mr. Moran says.

The effect of an eight-month leave is immaterial, Mr. Moran adds. It is not even an issue, for Rose has planned well for it. There would be a slight reduction in her pension benefits, but the issue concerns only eight months out of a career that could go on for another 21 years to her retirement. She should be able to take her leave without concern, the planner explains.

Rose has posed the question of whether she should make a bequest to her grandchild for post-secondary educational expenses. That would be in the form of a contribution to a registered education savings plan. It is a good idea, but Rose should pay off her mortgage first. That will enable her to increase her wealth and her ability to do things for the grandchild in future, the planner says.

"Because Rose started to save early in her life, she can now just continue with the pattern she has established, putting money into her RRSP each month and letting time do the work for her," Mr. Moran explains. "However, there is the issue of the fees she pays for mutual funds that are not even keeping pace with the market. She should devote as much energy to studying stocks and bonds as she has to remaking her life. With her energy and intellect, that should be an excellent investment."

"I am relieved that I do not have to make a major correction in my life," Rose says. "I understand that gloom is not the issue. And I do plan to read in the field of investments. The analysis shows that it can pay."

Client situation

Rose, 44, lives in Saskatchewan.

Net Monthly Income



Condo $150,000, RRSP $135,823, LRSP $83,211, pension $30,297, cash $1,000, car $12,000.

Monthly expenses

Mortgage $630, property taxes, $140, condo fees $177, utilities $150, home insurance $28, food $235, travel $220, gym & hair, $180, auto insurance & gas $150, books $80, clothing $75, charity $25, RRSP $400, savings $200, deferred leave $575, health care $15, gifts $165.

Total: $3,445.


Mortgage $22,600.

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