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By Andrew Allentuck
Special to The Globe and Mail
Report on Business
Saturday, February 16, 2002
For Marshall Southern, rebuilding a retirement fund isn't easy.
After devastating losses in his registered retirement savings plan
investments, he has almost nothing left. On a salary of $60,000
a year, the cost of caring for three children and for an elderly
aunt who lives at home in a small town in British Columbia doesn't
allow for a lot of saving.
At 55, Marshall (not his real name) would like to retire in 10
years from his job as a manager at a utility company. But he wonders
if he can afford it. His retirement income target is two-thirds
of his current income or $40,000 a year pretax before company pension,
Canada Pension Plan and Old Age Security.
Marshall has found it hard to save in his one income household.
Separated from his wife, he has a daughter with special needs in
his care. She receives a disability income of $750 a month, and
spends $400 a month on living expenses. His aunt receives $400 a
month from a combination of OAS and the Guaranteed Income Supplement.
The financial space Marshall lives in is defined by his salary
of $60,000 a year. His job provides a company medical and dental
plan with disability, basic life insurance coverage and take home
pay of $3,500 a month.
Marshall's financial problems are rooted in old investments in
the 1990s that nearly wiped him out and left him with a $27,000
debt that he is paying off at the rate of $600 a month. He still
owes $12,600.
What our expert recommends
Adrian Mastracci, a registered financial planner at KCM
Wealth Management in Vancouver, said Marshall has a net worth
of $340,000, including $231,000 of financial assets. So, his situation
is serious but far from hopeless.
Marshall's $40,000-a-year goal is attainable on top of CPP and
OAS at a fairly reasonable 8.5-per-cent annual rate of return if
he can save $10,000 a year for 15 years, Mr. Mastracci says. "If
Marshall does that for 15 years, he'll make the $450,000 of investments
he needs to supplement his company pension, OAS and CPP," the
planner explains.
By age 70, Marshall will have drawn full CPP benefits since age
65. In 2002 dollars, the maximum CPP payout is $788.75 a month.
Adrian Mastracci, president of KCM Wealth
Management says, “I think that Marshall has to go back to doing
the basics of investing.”
Assuming Marshall gets 90 per cent of that for his level of lifetime
contributions, he could begin retirement at age 65 with a monthly
cheque for $709.88. But by postponing retirement for five years
to age 70 he would receive $922.84. OAS would begin at age 65 at
$442.66 a month in 2002 dollars. Adding it all up, Marshall at age
70 would have $16,386 in CPP and OAS annual payments plus a company
annual pension of $12,600, for a total of $28,986. His targeted
goal of $450,000 would then produce $22,500 in 2002 dollars growing
at 5.5 per cent each year in real terms after inflation. Even with
an annual adjustment of 3 per cent for inflation, total income would
exceed his expectations and provide for a comfortable retirement,
Mr. Mastracci says.
Building the $450,000 investment base is critical to achieving
the retirement income Marshall requires, so he has to invest wisely,
Mr. Mastracci says.
"I recommend that half his RRSP money go to index mutual funds
or low-fee alternatives like the top TSE stocks packaged as the
exchange-traded i60s," the planner says.
"That will provide asset growth. The other half of his money
should go half to a bond fund that has corporate issues and a bit
of high-yield debt as well as a moderate management expense ratio;
the other half should go to high-yield royalty trusts that can grow
their yields as the economy recovers. As well, in his company-sponsored
pension fund, a total of $41,400 should be reinvested in the same
asset blend," Mr. Mastracci says.
For the immediate future, Marshall should use free cash to pay
off his line of credit that costs 6 per cent a year. He has to find
a way to save $7,500 a year for his RRSP and another $2,500 for
investments outside of his RRSP. Income assets should go into the
RRSP and the full $2,500 outside of the RRSP should be in equities,
which could generate capital gains with reduced tax rates.
"I think that Marshall has to go back to doing the basics
of investing," Mr. Mastracci says.
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