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Money Makeover: Cash in advance

Knowing where money is going now key to planning retirement

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On the surface, Anne seems to have a lot going for her financially.

The divorcee, in her early 50s, has a good government job, earning about $46,000 a year. She will receive a defined benefit pension when she retires at 65, as she plans to do, and she has more than $150,000 in savings.

Anne owns a condo free and clear, worth about $220,000, and her only debt is a $23,000 car loan.

She pays about $320 a month for the car, but she's recently been thinking about selling it, even though she's only owned it for a few months.

"After reviewing my situation -- expenses versus income -- I realize that making those monthly car payments means that I am now living beyond my means," she says.

Anne's monthly net income is about $2,300, but her expenses -- to the best of her estimations -- are about $2,459.

This is somewhat of a curious situation since she has no debt, other than the car loan. The reason for this, she says, is that she has been withdrawing a few hundred dollars a month from her savings to cover shortfalls.

But she worries the situation cannot go on indefinitely.

"Right now, I find my finances a bit of a struggle," she says, adding she would ideally like to retire at 60. "It would be helpful to have someone look at how I can improve my situation."

Certified financial planner and wealth adviser Mary-Ann Kokan-Nyhof says first things first: Anne needs to address the fact she doesn't really know with any accuracy what she is spending every month. Anne says she had difficulty coming up with a monthly expenses figure, and the fact she lumped many of her expenses, such as groceries, into a $1,297 amount under miscellaneous points to a possible need for her to study her spending in greater detail.

"She should use a monthly worksheet to get an accurate and realistic sum of what she spends her money on," says the wealth planner with MGI Wealth in Winnipeg.

"If she has a credit card, she can go through that item by item and the bank statement is another good source of information."

But without a true reading of her spending, any financial plans will prove relatively worthless.

"This is really financial planning 101," she says about budgeting.

Among the expenses to track are: utilities, cable, Internet, cellphone, home alarm, home insurance, car insurance, gasoline, car maintenance, parking, groceries, toiletries, clothing, gifts, vacations and the always difficult to nail down discretionary spending.

Those are the little expenses that flow out of the wallet almost daily. They may not seem like much -- the odd coffee and doughnut at work -- but they do add up over a few weeks and can contribute to the monthly deficit.

If it does turn out she is running a deficit, she will need to cut costs -- and one area of expense is the car.

But Kokan-Nyhof says Anne doesn't need to consider selling the car just yet. Because she has no mortgage, she could get a line of credit and pay off the car loan, which charges 5.79 per cent interest for the next five years.

She may be able to get a lower variable interest rate from her financial institution, as well as the flexibility to only pay interest costs when she is in a pinch for cash any given month.

On top of that, she has about $5,200 in a TFSA and another $2,800 in savings. This money could be put against the principal of the car loan to further reduce costs. Again, the line of credit would be crucial in the event she needs money for emergencies -- like car repairs.

But equally important to her financial future are her RRSP and LIRA savings.

Anne has five LIRAs (locked-in retirement accounts) that account for all but $10,819 of the more than $136,000 of her registered retirement savings.

"It could be that this money came from her ex-spouse's pension, and she hasn't spent any time looking at investment options," Kokan-Nyhof says.

There's no time like the present for Anne to familiarize herself with LIRA rules on investment and withdrawal.

"Typically, there will be a minimum and maximum amount of income allowed per year once she retires," she says, adding Anne should meet her adviser to get more details about the rules for LIRAs.

One concern Anne should be aware of is the asset allocation of her investments. All of the funds are invested in GICs or variable-rate savings.

"If she leaves her money in fixed income at about three per cent per year, it will grow to a little over $150,000 by the time she hits 65," she says. "And then her money will run out before she hits her life expectancy."

Kokan-Nyhof says she understands Anne's aversion to risk, and as an alternative to investing in the stock market indirectly with equity mutual funds, Anne could choose a variable annuity investment.

"These lend themselves well to long-term investing," Kokan-Nyhof says, adding they often guarantee an annual payout that has the potential to increase over time if the stock market experiences positive returns.

Guaranteed minimum withdrawal benefits are not offered by banks. Insurance companies -- Desjardin's Insurance and Manulife -- offer these annuities that come with a variety of guarantees at a cost.

But they're a good option for Anne who wants to work until 65.

"If she were to invest with Manulife's Income Plus product, for example, she would potentially be allowed to withdraw $963 a month at age 65 and the income is guaranteed for life," she says.

"That, together with her pension of $1,225 at age 65, her OAS of $518 a month will give her approximately $2,700 a month before taxes."

Her monthly income would likely be higher, considering she will be eligible for CPP, but the CPP amount is difficult to predict since Anne is divorced. She could be entitled to some of her ex's money if she stayed home with the children while he worked, Kokan-Nyhof says.

Essentially, Anne will be able to afford retirement -- albeit not an early retirement.

Yet, it's all contingent on her getting a handle on spending today so she's not eroding her future by drawing down on savings to cover monthly expenses.

If she finds it's too much for her to handle on her own, Anne can seek out help through the Employee Assistance Program through her employer, or she can enlist the help of an adviser or planner.

"She is definitely the type that can be helped by a financial planner who will take the time and the interest in her individually."

giganticsmile@gmail.com

 

Anne's finances

INCOME

Annual: $46,129 ($2,308 monthly net)

EXPENSES

Monthly: $2,459 (includes miscellaneous amount of $1,297 that may cover groceries, Internet, entertainment, etc.)

DEBTS

Car loan: $23,000 original amount owing; $320 monthly payments; 5.79 per cent for 72 months

ASSETS

Condo: $220,000

Work pension: $1,225 a month at age 65

Variable LIRA: $8,194

Variable LIRA: $10,747

RRSP: $10,819 GIC

LIRA: $107,031 GIC

LIRA: $10,014 GIC

TFSA: $5,202 (savings)

Savings: $2,830

Republished from the Winnipeg Free Press print edition May 21, 2011 B12

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