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By ANDREW ALLENTUCK
Special to The Globe and Mail
Report on Business
Saturday, July 12, 2008
In British Columbia, a woman we'll call Philippa has had most of her life savings locked up in the collapse of the market for asset-backed commercial paper. About $122,500 of her cash and $134,400 of her registered retirement savings plan were put into these supposedly safe IOUs. They came with high credit ratings and were backed with supposedly solid assets. A year ago, a crisis of confidence shut down the ABCP market, freezing billions of dollars of institutional money and the savings of a small number of individual investors.
Adrian Mastracci, “fee-only” portfolio manager at
KCM Wealth Management in Vancouver, says, "She has to return to investing for the long term with a diversified portfolio."
Philippa, 52, is one of them. Before the deal closed, she had put money saved for the down payment for her house into ABCP in the belief that it was as safe as government-insured guaranteed investment certificates. It did not turn out that way and Philippa has had to face the possible loss of most of her money and her house. A resolution is in progress, but it may be months before she can get her cash.
Separated from her husband and without spousal support, she lives frugally on a $48,000 pretax annual income. Awaiting resolution of the commercial paper mess and payout of her money, she has had a loan from her employer, enabling her to make her down payment and mortgage payments. With her money frozen, her plan to retire at age 65 is on hold. She has debts she cannot resolve until courts and various other creditors resolve their issues, and an emotional tie to a dream house that turned out to be a nightmare.
She could sell the house, which has a suite she rents out for $550 a month, and buy a smaller townhouse that generates no rental income. There would be moving costs and other transfer expenses. But more than money is involved, for her confidence in investment markets has been shaken - with justification.
"I am, frankly, an emotional basket case these days," Philippa explains. "At this point, I would just like to regain my equilibrium after the emotional and financial challenges in the months I have struggled with my funds being tied up."
WHAT OUR EXPERT SAYS
Facelift asked financial planner and portfolio manager Adrian Mastracci, who heads KCM Wealth Management in Vancouver, to work with Philippa to map out a way to cope with the present crisis in her finances and to develop a plan for investment and retirement once it is settled.
"For now, it is important for Philippa to find a balance between financial security and the value she places on her home as a sanctuary," Mr. Mastracci says. "She wants to preserve capital, to plan a retirement and to avoid poverty in old age."
Currently, Philippa's financial assets total $324,500 - $256,900 of that money is tied up in the ABCP debacle, but the problem is on the way to being resolved. She owes $107,000 on a line of credit and $185,000 on her mortgage. She is likely to get a complete refund of the money put into ABCP.
When the ABCP funds flow to her, Philippa can use the $122,500 of cash that was tied up to pay off her $107,000 line of credit. The remaining $15,500 can be used to pay down her mortgage, which she can do without penalty, reducing it to $169,500.
Philippa's retirement income target is $35,000 before tax in 2008 dollars at age 65. She can expect annual Old Age Security payments, currently $6,070, and Canada Pension Plan payments of about two-thirds of the $10,615 current yearly maximum, or $7,080, at age 65, a total of $13,150 a year, the planner estimates. She has no employment-based pension, he notes.
If Philippa were to add $3,000 a year to her present $202,000 of RRSPs, which she will be able to do after she is repaid money tied up in the ABCP issue, then assuming 6-per-cent growth of assets and 2.5-per-cent inflation, she would have $450,000 of capital at age 65. Her $35,000 target retirement income at age 65 in 2008 dollars can be met with $13,150 from public pensions plus $21,850 in 2008 dollars from her savings.
Philippa will have to draw down her savings in order to supplement public pensions, which, Mr. Mastracci assumes, will be indexed at only 1.5 per cent a year, less than his projected 2.5-per-cent rate of inflation during her retirement. By age 88, at which time the plan assumes she will die, her capital will have been exhausted, Mr. Mastracci says.
"Philippa has been through a great deal of anxiety over the last year with so much of her life savings tied up in ABCP," Mr. Mastracci says. "She has to focus on what can be done and put the disaster, which will have been temporary, behind her. She has to return to investing for the long term with a diversified portfolio. And if she does, she can make this plan work."
"It is nice to know that I be will able to afford a few flowers in my retirement," Philippa says. "I just want this to be over and to go back to my garden."
Client situation
THE PERSON
B.C. woman, 52, trying to plan retirement.
THE PROBLEM
Most of her financial assets are tied up in the asset-backed commercial paper crisis.
THE PLAN
Put investment money that comes out of ABCP in a diversified portfolio.
THE PAYOFF
Sufficient cash flow to pay down mortgage and retire in 13 years.
NET MONTHLY INCOME
$3,200.00
ASSETS
Cash in ABCP $122,500, RRSP $67,600, RRSP in ABCP $134,400, house $450,000. Total: $774,500.
MONTHLY EXPENSES
Mortgage $1,000, line of credit $700, property tax $167, food & restaurants $450, entertainment $50, clothing $50, RRSP $250, car, gas, repairs & insurance $116, travel $50, home insurance $67, charity & gifts $50, miscellaneous $50, savings $200. Total: $3,200.
LIABILITIES
Mortgage $185,000, line of credit $107,000. Total: $292,000.
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