By: Caroline Alphonso
The Globe and Mail
Globe Investor Section,
Saturday, November 16, 2002

As baby boomers age, they need to start adjusting their nest eggs so they can retire comfortably.

Although a late starter, John Chapman is battening the hatches, getting his finances in order for his retirement years.

"My wife and I were always spendthrifts. We never thought we would grow old," said the now-widowed 56-year-old. "I'm certainly a lot more focused on it now than I was before."

These days, Mr. Chapman, who commutes from his home in Guelph, Ont., to his job as an information services manager for a pet food company in Mississauga, socks away as much as he can in his registered retirement savings plan (RRSP) and his non-RRSP portfolio.

The avid wine collector is also not as frivolous as he once was with his cash. He looks at his wine collection -- about 200 bottles of wine, including bottles of Chateau Lafitte-Rothschild and Chateau Margaux -- as an investment, planning to sell them down the road for several times their cost. "There certainly are investment possibilities there," he said.

He added: "You realize you're getting older and you don't have enough [money for retirement]. That's when you start playing catch-up where you can."

As baby boomers start looking toward retirement, they need to start building or adjusting their nest egg so they can live comfortably when they stop working, experts say. "For most people, around the age of 45 to 55, that's when the word retirement starts creeping into their vocabulary," said Adrian Mastracci, president of fee-based investment adviser KCM Wealth Management Inc. of Vancouver. "It becomes a priority."

Mr. Chapman hopes his retirement years will be content. He still plans to do some consulting on the side, but at his own pace. "If I'm lucky, in another five years is when I plan to retire and I expect to have enough saved up," he said.

So at a time when many, like Mr. Chapman, are nearing their retirement years, the following are some things to start mulling over. As Warren Baldwin, a financial planner, says: "There's no hard-and-fast rule as to when people are going to start talking about retirement. But the rule of thumb is the earlier the better."

Positioning your investment portfolio.

As you near retirement, there doesn't necessarily need to be a drastic change in your investment portfolio, Mr. Baldwin advises. Instead, it should be changing over time as you recognize your financial needs.

For example, if a person has a fairly decent pension plan, the portfolio should be more equity focused because they are not solely reliant on this money as they grow older. But if you were self-employed and sold your business or don't have an adequate pension plan, then you may want to consider a less risky, more conservative portfolio, slanted a bit toward fixed-income assets.

"It all depends on your circumstances," Mr. Baldwin said.

Indeed, how your portfolio is positioned is dependent on the amount of risk you are willing to take.

Mr. Mastracci has seen some people with "more than 50 per cent in equities when knocking on the retirement door." He said that those dependent on their investments through their retirement years should be taking less risk in their portfolios.

Paul Lermitte, a financial planner, said it's best to sit down with an adviser to map out an approach and look at the asset allocation.

Drawing money out of your RRSP.

Most experts agree that it's not a good idea to draw money out of your RRSP when you hit retirement -- unless in desperate situations -- because of the tax implications.

When you turn 69, you must roll the contents of your RRSP into a registered retirement income fund (RRIF) or annuity before the end of that year and start taking the money out and paying tax on it. Alternatively, you can simply cash out the plan and take the tax hit all at once.

Mr. Baldwin recommends waiting till you turn 69 to convert the RRSP into a RRIF, especially if your income is reasonable up to that point. On the other hand, if your income is thin, then you should definitely take some money out of your RRSP and pay the taxes.

"It might be worthwhile taking a look with an adviser about taking money out," he said. "You need to look at the entire picture. There is no hard-and-fast rule. You have to model it to your own needs."

Wisdom of reverse mortgages.

A reverse mortgage is a special type of loan used to convert the equity of your home into cash. Basically, it's a way for people 62 and older to borrow against the appraised value of their home without having to pay the principal or interest until they either move out or die, in which case the money is taken out of their estate, if they choose, or their next-of-kin may make alternative plans to pay it off.

The money obtained through a reverse mortgage is usually used to provide seniors with some financial security in their retirement years. But keep in mind -- reverse mortgages are best suited to people who don't have enough money to live comfortably. They act as a source of income for seniors. Seeing a financial planner is a good idea.

"For some people who don't have another pool of money, they probably won't have any other choice than to start dipping into their home," Mr. Mastracci said. However, "that should be the last choice. It doesn't really make a lot of sense."

Mr. Baldwin is not a big fan of reverse mortgages either, describing the strategy as "putting oil on a slippery slope." He warns that reverse mortgages have some features that people should be aware of. For example, if you want to pull out prior to 36 months, a prepayment fee may apply. After 36 months, an interest rate differential payment may be applicable. The penalty for breaking a mortgage is usually the greater of three months interest or what's called an interest rate differential.

"If you get it and hate it, you may not be able to get out without paying a penalty," he said.

Also, unlike conventional mortgages, there is no long-term rate available. The rate is reset annually by the Canadian Home Income Plan (CHIP), the sole national provider of reverse mortgages, and calculated on a semi-annual basis. It's important to note this, especially if rates rise over the next little while.

Mr. Baldwin said there is probably a "deeper issue" involved for those considering a reverse mortgage. They may not be able to afford their lifestyle and may want to consider scaling down instead of buying into a reverse mortgage.

Instead of a reverse mortgage, Mr. Baldwin recommends borrowing from family members, if possible, renting out part of your home or taking out a line of credit against your home. "At least then, you're not paying the high costs of reverse mortgages," he said.

Long-term care insurance.

There's no denying that there are plenty of insurance policies out in the market, including critical illness insurance and disability insurance. Another product, which is quite popular in the United States and just starting to grow in Canada, is long-term care insurance.

It is designed to cover expenses such as upgrading nursing home accommodations or financing your at-home care.

Mr. Lermitte said those who don't have dependents should consider buying this type of insurance. But he advises people to be careful when buying long-term care insurance. They should make sure they are choosing the right package. You should ask the insurance agent to give you three examples -- the inexpensive, the middle-of-the-road package and the expensive one -- "so you can make the right decision," Mr. Lermitte said.

Mr. Baldwin says that there's an array of products out there that would support people at a low cost. He knows of companies that provide resources to their employees who have elderly parents. You should find out what is available to you before buying into insurance policies, such as long-term care, he said.

Meanwhile, Mr. Mastracci said baby boomers should start looking into insurance policies now, asking themselves if they will need it down the line.

"The key right now is have a look and decide for yourself," Mr. Mastracci said.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.