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By ANDREW ALLENTUCK
Special to The Globe and Mail
Report on Business
Saturday, June 28, 2008
A couple we'll call Lawrence and Jocelyn live in a small town in Ontario. Professionals, they have two children: one 18 and starting university, the other 20 and finishing undergrad studies.
Adrian Mastracci, “fee-only” portfolio manager at
KCM Wealth Management in Vancouver, says, "There is no question that they can sustain their lifestyle in retirement."
Lawrence, 57, and Jocelyn, 56, are diligent asset builders. They have accumulated two homes worth an estimated $689,000, more than $500,000 in registered retirement savings plan investments in 23 mutual funds, and $58,000 in cash and guaranteed investment certificates.
"It seems to us that financial companies would have us save so much that, unless disaster struck, it wouldn't be possible to use up all that money," Jocelyn says. "We want to enjoy the bulk of it ourselves while we're still young enough."
WHAT OUR EXPERT SAYS
Facelift asked financial planner and portfolio manager Adrian Mastracci, head of KCM Wealth Management in Vancouver, to work with the couple.
"These folks have lived fairly frugally, but they wonder when to reduce savings," the planner says. "There is no question that they can sustain their lifestyle in retirement."
Lawrence and Jocelyn already have substantial retirement investments and a savings rate high enough to pay for their children's remaining educational needs. Their net worth is $1,193,000. They want to reduce work to part time in three years and then retire at age 65 with $60,000 pretax income in 2008 dollars.
If they converted $600,000, including registered assets, to cash and invested in a high-quality corporate bond with a 5-per-cent running yield, they would have $30,000 a year. Add in their total benefits at age 65 from the Canada Pension Plan - $10,615 a year for Lawrence and $9,300 for Jocelyn - $6,070 a year for each from Old Age Security and $40,000 a year in pretax pension benefits from a previous job that will accrue to Lawrence. With all that, the couple could have a total of $102,055 a year in pretax 2008 dollars at retirement at age 65.
By pension splitting, they will be able to avoid the OAS clawback that begins at about $64,000 in 2008. They will have close to double their retirement target in pretax income.
Yet, they do have a different kind of problem. Their flock of nearly two dozen mutual funds are mostly from one vendor. All are relatively high-fee products that could be emulated by low-fee exchange-traded funds. Over time, ETFs that replicate benchmarks for their domestic and foreign funds are likely to outperform their managed portfolios, Mr. Mastracci notes.
The couple have life insurance in sufficient amounts to provide either spouse with additional income, even though with their children nearly independent, they have no real need for the coverage.
Lawrence and Jocelyn have a house and a nearby condo for their retirement, which is currently rented out. In retirement, it will be costly to keep two homes, Mr. Mastracci notes. They should decide whether to keep the condo or their house and its substantial acreage. If they want to keep the condo, then they should pay down its $130,000 mortgage more quickly. They can deduct the mortgage from their gross rental receipts, for it is an income property.
Lawrence currently has disability and long-term care coverage through his employer. When he retires, he will have no need for disability coverage, but a long-term care policy would be valuable. It would be useful for the couple to check on the costs of such insurance and to be prepared to shift to their own policies for long-term care and supplement medical expenses when they retire. Insurance of this kind is not cost effective until it is needed. Then it can provide a quality of care that would tax their financial resources. It is worth investigating, he says.
For now, the couple have more than enough savings for retirement, Mr. Mastracci concludes. They should use up their RRSP space for tax reduction, make a long-term plan to substitute low-cost exchange-traded funds for high-cost mutual funds, and make a plan for a retirement sufficiently definite that its costs can be more accurately estimated. As well, with their retirement already adequately financed, they can spend more money now on travel and other pleasures or even giving to charities.
"This couple has worked hard and has achieved a lot of flexibility for their retirement," Mr. Mastracci says. "They have more than they need. They could see this as a reason to start spending now and saving less, but I see their substantial savings as a valuable option to make choices that others, who have not saved so well, might envy."
CLIENT SITUATION
THE PEOPLE
Lawrence, 57, and Jocelyn 56, live in Ontario.
THE PROBLEM
Estimating income needed in retirement.
THE PLAN
Decide where to live in retirement and what to do.
THE PAYOFF
Potentially more money today and in retirement.
NET MONTHLY INCOME
$7,500.
ASSETS
House and grounds $450,000, condo $239,000, RRSPs $513,000, RESPs $13,500, in trust for children $49,500, cash and GICs $58,000. Total: $1,323,000.
MONTHLY EXPENSES
Mortgage $500, property taxes $583, condo fees $95, food & restaurants $450, clothing $150, RRSP $833, car fuel & repairs $600, travel $300, car & home insurance $200, life insurance $200, charity & gifts $150, pet care $160, miscellaneous $400, savings $2,879. Total: $7,500.
LIABILITIES
Mortgage $130,000.
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