Professor Can Blossom in Retirement


At the age of 61, a university professor in Vancouver we'll call Grace contemplates a gradual retirement. She would like to teach part time for perhaps five years, using the time away from the classroom for trips overseas. She also wonders if she might be able to afford a second home, perhaps in a coastal community a few hours from her campus.

Grace thinks she might cover some of the cost of the vacation home by renting it out when she is not using it. But she worries that her gross income of $80,000 plus another $32,500 on average from additional teaching will not be sufficient to cover those plans.

"Is the plan workable?" Grace asked.

What our expert says:

Facelift asked registered financial planner Derek Moran, who heads Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Grace. The problem is twofold, he explained. She is close to her income cap. She can work more years, but her pension will not change, he said. As well, her present home, though charming, is a high-maintenance operation. She cannot lock it up and leave for extended periods.

"After two more years of work, she will have fulfilled the 35-year maximum and will be eligible for $56,000 per year of pension income. If she works beyond that mark, she will not continue to accrue pension benefits," he noted. What's more, her pension is not guaranteed to be indexed to reflect increasing living costs, although some increase in payouts is possible if actuaries decide that the plan has sufficient spare cash.

Grace has substantial assets. Her Georgian-style house has an estimated market price of perhaps $1-million and she has $452,000 in financial assets. She will be eligible for Canada Pension Plan payments that have a maximum value of $10,365 in 2007 dollars. Should she decide to take benefits before turning 65, she would pay a penalty of 0.5 per cent a month for each month prior to her 65th birthday that she receives CPP payments. Given that her employment pension does not have guaranteed indexation, Grace should get as much indexation benefit from CPP as possible. And that means waiting to age 65 to begin receiving payments. CPP is indexed to changes in the consumer price index.

At age 65, Grace will be eligible for Old Age Security, which currently pays $5,974 a year. It, too, is indexed.

Assuming 6-per-cent annual growth of her investments and 3-per-cent annual inflation, Grace's total retirement income would be in the range of $77,600 to $93,700 in 2007 dollars, Mr. Moran estimated. The low end of the range assumes no indexation on her employment pension and the high end assumes full indexation at the assumed inflation rate. Grace will have exposure to the OAS clawback, which begins at $63,511. Since Grace is not married or in an equivalent relationship, she cannot split pension income. Some clawback of benefits at a rate of 15 cents for each dollar of income over the clawback point is likely. The clawback ends at $102,865, Mr. Moran noted. At that point, the entire OAS pension is recaptured.

Even without OAS, Grace has the means to buy a second property. But is it wise? If she spends only a few months of the year in her first house, then she might want to consider selling it, substituting a less expensive home and the recreational property she wants, Mr. Moran said.

Grace can get more out of her investments. She holds mutual funds in several institutions. The funds have average-to-high management fees of about 2.7 per cent of total assets under management a year.

With more than $400,000 in mutual funds, Grace can hire an adviser for a flat 1-per-cent fee and save some of the $10,000 a year she has been paying in management fees. She might be able to pay less than half and get better advice as well, Mr. Moran said.

Her holdings are actually not bad. She has well-regarded funds from major managers. There are growth funds, value funds, domestic and foreign equity. She also has balanced funds composed of stocks and bonds. Balanced funds tend to have equity-level management fees in spite of the fact that they tend to contain about 40-per-cent bonds with relatively low returns. Some of her diversification into many funds is redundant. She winds up paying for several cuts of the same roast, the planner noted.

It is time for Grace to make some fundamental decisions about the future, Mr. Moran said. Specific plans cannot be formed unless she can make some estimate of how much she will travel. If she decides to spend a great deal of time in Europe, for example, Grace might want to increase her portfolio weight in German, Swiss or British stocks. If she invests in assets denominated in the currency of the places she plans to be, she winds up with a natural hedge, the planner explained.

Most of all, Grace has to make a clear decision about her million-dollar house.

For practical and financial reasons, it does not make sense to keep it, the planner said. The B.C. land boom may not last forever, so that decision should be made sooner rather than later, he cautioned.

Eventually, Grace should consider downsizing her real estate holdings.

By selling one house later in life, she would be adding income, perhaps for use in an assisted living arrangement. If she were to sell her principal residence and take a capital gain, there would be no tax, for such sales are exempt. Sale of the recreational property would incur taxes, but only at the low capital gains rate, the planner noted.

"Grace has lived well below her means for some time," Mr. Moran said. "It is time for her to live her dream. The planning problem comes down to getting the most from her substantial assets."

"I am not sure that I want to sell my house in the near future," Grace said. "I enjoy the life it provides. I recognize the maintenance issue and once I have retired, I would be inclined to sell it and move into a townhouse or condo with simpler maintenance."

Client Situation

The person

Grace, 61, is a university professor in Vancouver contemplating retirement.

The Problem

How to buy a recreational property and gain time to travel without taking on too much risk.

The Plan

Sell a charming old house, purchase a town home and a recreational property with the proceeds.

The Payoff

Freedom to travel, a lower maintenance residence and no debt or increased risk.

Net Monthly Income



House $1-million, RRSP $204,000, taxable accounts $248,000, personal items $50,000.

Monthly Expenses

Property taxes $522, utilities $360, house maintenance $700, food & restaurants $450, clothing & personal care $550, RRSP $500, home & car insurance $290, travel $500, charity & gifts $300, miscellaneous $578, savings $2,000.

Total Monthly Expenses




© 2007 The Globe and Mail, Used by Permission