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By ANDREW ALLENTUCK
Special to The Globe and Mail
Report on Business
Saturday, October 11, 2008
In Ontario, a woman we'll call Maureen is 66. A health care administrator, she is planning her retirement in 2010, hoping that her combination of financial assets, employment pensions, Old Age Security and Canada Pension Plan payments will enable her to have retirement income of $60,000 a year before tax in today's dollars. She plans to live in her condo, which she owns without mortgage debt.
Adrian Mastracci, “fee-only” portfolio manager at KCM Wealth Management in Vancouver, says, “Her top priority is to deal with her debts, some of which are quite unproductive.”
Maureen's current income before tax is about $120,000 a year, including a partly indexed pension from previous employment of $29,200 a year and CPP benefits of $10,615. She receives OAS of $6,204, all of which is lost to the OAS clawback that begins at income of $64,718. When she retires in two years, she will also get a pension of $6,400 a year from her present employer.
"I have been getting anxious as I head toward retirement that I won't have enough money to maintain my standard of living," Maureen says.
WHAT OUR EXPERT SAYS
Facelift asked Adrian Mastracci, a financial planner and portfolio manager who heads KCM Wealth Management Inc. in Vancouver, to work with Maureen.
"Her top priority is to deal with her debts, some of which are quite unproductive," the planner says. "Her mission will be to eliminate them and to top up her investment accounts by the time she retires. Before she can fix her debts, she must get her spending under control. At present, she cannot account for nearly a third of her after-tax income."
Mr. Mastracci estimates at retirement, Maureen's annual pension income will be $52,285 with the addition of another work pension. That's close to her retirement income target, but she will have to take capital from her registered savings to make up the difference. In her later years, inflation may make sustaining her income a challenge, he says.
Maureen has $243,000 in RRSPs invested in mutual funds. When she begins to convert her RRSPs to a registered retirement income fund not later than age 71, she will have to cash in 7.4 per cent of the total balance in the first year - an estimated $24,000 after growth at 6 per cent for the next five years. That seems like a lot, but inflation will erode her non-indexed investment income.
She should bring her investment account balances up to $350,000 to create the inflation buffer she will need to an estimated age of 90.
Adding $107,000 of savings to get to the $350,000 balance will be a problem, for Maureen saves nothing out of her monthly income. There is not a great deal of fat in her reported expenses, but, in fact, she is under-reporting her spending.
As well, she has an investment property with an estimated value of $156,000 on which she carries a $117,700 mortgage. She claims gross rental income of $13,200 a year, but her true net income requires that she deduct mortgage interest of $8,714 a year, taxes and condo fees of $4,608 a year.
Maureen would like to pay off her debts by the time she retires. The rental property mortgage plus a $33,000 line of credit and a $17,300 car loan add up to liabilities of $168,000. Her best move for now is to sell the condo or at least raise the rent. If she were to sell the condo, she would have $38,300 in proceeds less transaction costs of perhaps $7,000. That would leave $31,300 for payment of her line of credit and her car loan.
By selling the investment condo and paying off related debt, Maureen will no longer incur the monthly costs of maintaining her line of credit and paying off her car loan. In all, she would save $1,152 a month. Those funds can be invested to generate additional capital of $29,297 over the next two years until retirement, assuming that savings grow at 6 per cent a year and yield 6 per cent as well. This sum would add $1,758 to her annual pretax income, the planner says.
The income Maureen will live on in retirement will consist for the most part of employment pensions, CPP and OAS. She will depend for about 13 per cent of her pretax income on her investments. For now, with all of her investments in Canadian stocks heavily weighted with resources and financial services, she is vulnerable to market corrections to a degree that is inappropriate for retired people, the planner says.
In order to reduce investment risks, Maureen should cut her portfolio's stock exposure to 50 per cent. The other half of her portfolio should be in fixed-income assets, such as bonds or bond funds that tend to rise in value in hard times when stocks decline.
"If she eliminates her debts and gets her accounts and investments in order, she can have the comfortable retirement she wants," Mr. Mastracci says.
"I have positive feelings about this advice," Maureen says. "Last year was the first time ever that I began to track expenses. I think that this is an effort that will pay."
Client situation
THE PERSON
Woman, 66, headed into retirement.
THE PROBLEM
Poor accounting, inappropriate investments.
THE PLAN
Encourage better expense tracking and rebuild investment portfolio.
THE PAYOFF
Sustainable retirement income.
NET MONTHLY INCOME
$7,250
ASSETS
Cash $3,000, RRSPs $243,000, rental condo $156,000, residence $260,000. Total: $662,000.
MONTHLY DISBURSEMENTS
Mortgage $726, property tax on investment property $135, home property tax $348, home condo fees $190, investment condo fees $250, utilities $325, home maintenance $200, food & restaurants $400, entertainment $30, clothing $65, car loan $844; line of credit $165; car fuel and repairs $268; travel $50, car & home insurance $144, charity & gifts $255, medical & dental $180, personal $180, miscellaneous & unaccounted $2,495. Total: $7,250.
LIABILITIES
Rental condo mortgage $117,700, line of credit $33,000, car loan $17,300. Total: $168,000.
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