Globe and Mail Update
In Vancouver, a woman we'll call Helen is looking at the end point of her career in high tech. A software specialist, she earns $60,368 a year. Now 62, she expects to retire at 65, then devote herself to music; reading through what she suggests, with a laugh, might be the content of the Vancouver Public Library; and cycling into the sunset.
For Helen, it will be a dream come true. Her four children are married and have established lives of their own. Her own marriage is long over and she is, in a financial sense, entirely on her own.
She wonders if her dream can actually happen. She ponders selling her $225,000 condo, though after paying off the $111,000 mortgage, the estimated gain of $114,000 before commissions and other transaction costs might not generate sufficient income to pay the rent on an equivalent space. She could, she thinks, buy a mobile home or move to a cottage in a small town away from Vancouver, though she would miss the excitement of the city. The bottom line on all of her plans is her net worth, about $214,000. It's a slim foundation for her retirement, she realizes.
“This is what happens when you have raised four children mostly on your own,” she explains.
What our expert says:
Facelift asked Derek Moran, a registered financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Helen in order to help her make the most of her resources. “Helen's saving abilities are excellent,” Mr. Moran says. “The only issue is that she started too late in life.”
Helen does have resources. Her registered retirement savings plans, including a deferred profit-sharing plan, total nearly $100,000, Mr. Moran notes. Her assets are almost entirely in mutual funds, about 80 per cent of which are stock funds with 20 per cent in a balanced fund. That is a heavy stock allocation and should be revised to 60 per cent equity and 40 per cent fixed income, he suggests. She can stay within her own fund family, which has average to below-average management fees, he advises.
Helen contributes $190 every two weeks to her deferred profit-sharing plan and her employer matches half of it. She also puts $225 a month into her RRSP on top of the matching program. The contributions total $795 a month or $9,540 a year. If she continues to work and save for another three years to age 65, assuming 6-per-cent growth and 3-per-cent inflation, her portfolio of financial assets should rise to $141,173 in 2007 dollars, Mr. Moran estimates.
If Helen were to retire today and if the portfolio continued to grow at 6 per cent a year less 3-per-cent estimated inflation, she could sustain an inflation-adjusted annual withdrawal of $5,580 or $465 a month for 25 years until age 87, which is five years beyond her life expectancy at birth. However, if she works another three years and saves at present rates with 3-per-cent real annual growth, she could maintain an annual withdrawal of $8,604 or $717 a month until age 87, Mr. Moran notes.
Helen does have one significant liability: her $111,000 mortgage that carries a 5.75-per-cent interest rate. She makes payments of $1,000 a month plus $30 in realty taxes. At her rate of payments, her condo will be paid off in 13 years, the planner says.
Moving into retirement with more than a decade of mortgage payments to make is not attractive. Helen could sell the condo and realize a low six-figure capital gain. But that would not make a major change in her situation.
How much Helen will receive from the Canada Pension Plan is uncertain, Mr. Moran notes. She has applied for a transfer of credits from her former spouse. She should end up with about 75 per cent of the maximum payment of $10,365 a year in 2007 dollars, Mr. Moran says. She plans to retire at 65 and, at that time, her CPP payments would be $648 a month, Mr. Moran estimates. At age 65, Helen will also receive full Old Age Security of $491.93 a month in 2007 dollars. These benefits are indexed.
Adding it all up, if Helen works to age 65, she can expect monthly income of about $1,857 in retirement, assuming that she spreads her income from age 65 to 87. She could enhance that income for the first decade or so of her retirement by depleting her RRSPs more quickly. If she were to do that – expending her entire RRSP balances in the second decade of retirement – she then could receive the Guaranteed Income Supplement at a rate of $266.88 a month. This would, of course, be a poor tradeoff. However, at present payment rates, the GIS ceases when income rises above $14,904 a year. Without these unwise adjustments to her income, Helen will not be able to receive the GIS, Mr. Moran says.
Accordingly, Helen will have to expect to have $1,857 before tax per month in retirement. But $1,000 of that will be required for mortgage payments, leaving her with a very slim pretax sum of $855 a month to support herself.
Helen can find some savings in her budget, Mr. Moran notes. She spends $44 a month on term life insurance. Given that she has net assets and that she plans to leave nothing to her children, she could save $528 a year by discontinuing the coverage.
There are other ways to boost income. Her budget for gifts, $1,200 a year, could be trimmed. She spends $600 a year on memberships in various organizations. That's another place for savings.
Put together, that amounts to $1,800 a year, which is a substantial gain for her budget. If she were to add $723 of her present savings of $1,023 a month to mortgage payments, she could reduce the current 13-year horizon for elimination of the mortgage to six years and five months. That would boost her disposable retirement income quite appreciably, the planner notes.
Helen's situation points out two can live more efficiently than one by sharing many expenses. Her problem is more critical, however, because she has borne much of the cost of raising four children. She has considered a new relationship, but it does not exist at present. In any event, it is not the role of financial planning to delve into interpersonal matters, Mr. Moran adds.
In the end, Helen may have no choice but to sell her condo and seek less costly accommodation, perhaps in a co-op building that bases rents on income levels. The $100,000 potential capital gain on her condo could add $6,000 a year to her income at an assumed nominal 6-per-cent rate of return. That would boost her annual total pretax income to $28,284 even without trimming her present monthly expenditures. The potential reductions in gifts and memberships would push her annual income up to $30,084 if she made all of the potential cuts. That is still a modest income in a province with high real estate prices, but it may be the only way Helen can finance her retirement, Mr. Moran says.
“The reality is that Helen cannot have anything more than a comfortable retirement,” he explains. “There is not enough income to support extensive travel or entertainment. But with good management, she will get by. The key is managing what she has.”
“These are the issues that I have been reviewing in my mind,” Helen says. “I think I will have to investigate an alternative living situation, such as a co-op. In any case, this has been a valuable exercise.”
Helen, 62, lives in Vancouver.
Net monthly income: $4,157.
Assets: Condo, $225,000; RRSPs, $100,000; cash $1,300; car $5,000.
Monthly expenses: Mortgage, $1,000; property taxes, $30; condo fees, $254; utilities, $130; RRSPs, $435; gas, $120; car and condo insurance, $174; life insurance, $44; memberships, $50; food and restaurants, $275; vacations, $300; chiropractor, $50; gifts, $100; miscellaneous, $172; savings, $1,023. Total: $4,157.
Liabilities: Mortgage $111,000.
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