via The Globe and Mail | July 2013
Sylvie is looking forward to leaving her job of 30 years, packing up her worldly goods and moving back to the Maritimes.
“My retirement plans are fairly simple,” she writes in an e-mail. “They involve gardening, possibly fostering rescue animals and volunteering.” She is 55 and grosses about $135,000 a year.
When she retires from her administrative job at a western Canadian university in five years, Sylvie will have a pension of $30,860 a year, before tax. This will go a long way toward her retirement spending goal of $42,000 a year (after tax).
She also has a locked-in retirement account (LIRA) from a previous employer. Sylvie’s work pension is not indexed to inflation.
“I’m in good health and enjoy small-town living,” Sylvie writes. She would like to find a small bungalow that she can renovate to her taste, ensuring it is set up so that she can get around in a walker in her old age if need be. “I also hope that my finances will allow me to hire someone to assist me with household chores later in life,” she adds.
Sylvie is a disciplined saver who could probably save even more, “but I also want to enjoy life now,” she says. “Am I on track?”
What the experts say
First, Mr. Ardrey and Mr. Baldwin look at whether Sylvie can achieve her $42,000 a year spending goal.
They assume she begins collecting Canada Pension Plan benefits at age 60 and Old Age Security benefits at 65.
All other lifestyle expenses will be funded first from portfolio income and then from capital.
They assume an average annual return on investments of 5 per cent and an inflation rate of 2 per cent.
As well, the planners assume Sylvie continues to save at her current rate, contributing the maximum of $3,380 a year to her RRSP, $5,500 a year to her tax-free savings account and $27,132 a year to her non-registered portfolio. They assume she lives to age 90.
When Sylvie retires in five years, that $42,000 of spending will have increased to $46,370 after inflation. With growth and additional contributions, her RRSP and LIRA portfolios will have risen to $415,978. She’ll have $66,828 in a tax-free savings account and a non-registered portfolio of $241,356.
“Based on these assumptions, Sylvie is in an excellent position to reach her retirement goal,” the planners write.
By the time Sylvie is 90, she will still have $819,820 in investment assets as well as her home.
Indeed, she may want to spend more. If she spent all her savings, so that she was left with only her home, she could raise her spending target from $42,000 in today’s dollars to $52,480.
Sylvie has mentioned that she might take a part-time job when she returns to the Maritimes if she can find one. If so, she should keep track of her moving expenses and include them on her income tax return that year, the planners say. Then, if she does find a job, she may be able to deduct those expenses against the income she earns, which may allow her to earn tax-free income for one or more years.
About 60 per cent of Sylvie’s registered holdings are in the locked-in account. When she converts these holdings from a LIRA to a life income fund at age 72 (or earlier), she might be able to unlock up to 50 per cent of the account’s value, the planners note.
This would give her increased flexibility in case she needed a big chunk of money at some point because there would be no maximum withdrawal on the unlocked funds.
Sylvie could stand to make her investments more tax-efficient, the planners say. They recommend she hold her fixed-income investments inside her RRSP and stocks or stock funds outside wherever possible to take advantage of lower tax rates on stock dividends and capital gains.
Sylvie also needs to keep a close eye on costs. Her portfolio has reached a size that she could shift from the high-cost mutual funds she now holds to lower-cost pooled funds or exchange-traded funds through an investment counsellor, where she could save as much as one percentage point a year.
“A one percentage point saving on a portfolio of $723,860 – the value of Sylvie’s portfolio when she retires – would be in excess of $7,000 a year,” the planners note. That’s nearly 17 per cent of her original $42,000 a year spending goal.
Determining whether her well-thought-out retirement plan is on track financially.
A few easy steps – unlocking some retirement funds, making investments less costly and more tax efficient – will improve what is already a sound financial plan.
Enough money to spend more than her target and still have a comfortable financial cushion.
Monthly net income:
Bank deposits, savings accounts $27,100; non-registered $51,840; TFSA $26,480; LIRA $186,630; RRSP $123,334; estimated present value of pension $314,180; residence $308,000. Total: $1.04-million.
Property tax $285; utilities $155; home insurance $45; security $30; maintenance, garden $190; transportation $325; groceries $600; clothing $225; dining, entertainment $250; pets $175; grooming, other personal $100; sports, hobbies, subscriptions $150; dentists, drugs $135; health, disability insurance $75; telecom, cable, Internet $200; gifts, charitable $100; vacation, travel $200; other $225; RRSP $280; TFSA $460; other saving $2,260; group benefits, professional association $145. Total: $6,610.
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