Personal Finance

Winnipeg Free Press - PRINT EDITION

No pension, no problem

On track to a smooth retirement

By: Joel Schlesinger

Posted: 02/11/2012 1:00 AM | Comments: 0 (including replies) | Last Modified: 02/11/2012 3:48 PM | Updates

Today's Money Makeover couple have paid off their mortgage and almost completely erased their debt. Now what do they do? How should they save for the future? (MIKE DEAL / WINNIPEG FREE PRESS)

Nicole and Jared's finances

INCOME:

Nicole: $29,000 ($1,936 a month net)

Jared: $84,000 ($4,500 a month net)

Monthly income: $6,436

EXPENSES

Monthly: $3,745

DEBTS

Car loan: $33,000, zero interest; $500 payments for 36 months

ASSETS

Home: $400,000

Nicole TFSA: $15,000

Jared TFSA: $15,000

Joint savings: $19,000

Nicole RRSP: $57,000

Jared RRSP: $93,735

Nicole LIRA: $16,403

Jared LIRA: $27,898

NET WORTH

$614,036

Jared and Nicole's inheritance brought with it bittersweet sentiment.

The late 40s couple had lost a parent, yet they suddenly found themselves no longer struggling financially.

They set aside money for their children's education. They paid off the mortgage and maxed out the TFSAs.

But new challenges came to the forefront.

"We are six years ahead of our game plan," says Nicole, in her late 40s, who earns about $29,000 a year.

"I thought we'd be relieved having our mortgage paid off, but then we thought, 'We want to make sure we're not being stupid and blowing money.' "

Although Jared earns about $80,000 a year, neither he nor Nicole has a work pension plan, so their most obvious need is saving for retirement.

Already, they have about $150,000 in RRSPs. They also have about $42,000 in LIRAs (locked-in retirement accounts) from previous employment. Their portfolio reflects a balanced asset allocation, but they also have a lot of money sitting in cash outside their RRSPs.

"When we paid our house off, we put the mortgage money into our savings until we figure out what to do with it," she says.

They accumulated $16,000 in savings in just a few months, and they also have $30,000 of inheritance money sitting in savings in their TFSAs.

They want investment advice, but they're leery of mutual funds. "It feels like throwing money into the abyss," she says. An adviser has recommended they invest in a guaranteed minimum withdrawal product -- a type of annuity that can grow with market returns.

But they don't know its pros and cons. Nicole says they know the status quo won't do -- especially if they want to semi-retire in 10 years and fully retire at 65.

"They say you need $1 million or $3 million, but we just don't know."

Certified financial planner Doreen Sigurdson says Jared and Nicole have several things to their advantage.

"They are being debt-free and they have surplus cash flow -- about $2,000 a month -- to substantially build their retirement assets over the next 10 to 15 years," says Sigurdson, a registered financial planner with Edmond Financial Group and Quadrus Investment Service.

But they also have the right attitude.

"They are looking at retirement in a healthy way with their desire to semi-retire in their late 50s."

Working part-time is often a better way to transition into retirement than stopping work altogether, but Sigurdson says they should consider holding off even semi-retirement until age 60.

If they can earn about $40,000 a year combined from part-time work from age 60 to 64, they will accumulate more than $1 million in retirement savings by age 65.

Sigurdson says their semi-retirement income would include CPP, which they should start at age 60, and they would have to withdraw a few thousand dollars from retirement savings a year until full retirement at 65. At age 60, their combined annual income would be about $62,000, and it would increase annually to keep pace with inflation.

By age 89, their RRSP would be completely collapsed, but they would still have about $228,000 in their TFSAs and their home.

To make this work, however, Jared and Nicole need to take the following steps.

They must continue to save about $2,000 a month over the next decade. They would contribute about $1,167 a month to RRSPs.

"It makes sense for Jared to make all the RRSP contributions because he's in the 39-to-43-per-cent marginal tax bracket," Sigurdson says. "He could split his contribution into a spousal plan for Nicole and his own to keep their retirement capital roughly equal."

They would put the rest, about $833 a month, into TFSAs.

"The TFSA offers the advantage of tax-free income in retirement, which can be helpful when qualifying for income-tested benefits, such as pharmacare and the age tax credit."

As for the $16,000 in savings, they can leave it as the emergency/vacation fund.

Their RRSP and TFSA, however, will need to yield more than a savings account to achieve their goal.

Before retirement, they'll need to average six per cent annual returns on their investments based on a three per cent inflation rate.

"Some may feel that is optimistic, considering their returns of the past few years; however, the important number is their real return -- net of inflation," she says. "So if inflation is low, say at one per cent, they just need to earn four per cent to stay on track."

Getting between four and six per cent a year isn't feasible investing in savings-oriented vehicles like GICs.

Jared and Nicole will need to invest some money in the stock market.

"The asset mix shown in the planning is about 40 per cent fixed income and 60 per cent equity," she says.

"Bonds and GICs can be important stabilizers in a portfolio, but with their 10-year horizon, I'd suggest equity investments should be a considerable portion of their investment mix."

They should even consider allocating a percentage of their portfolio to equities after they retire -- gradually reducing the allocation as they age.

Even in retirement, they will need equity investments, such as stock-based mutual funds or index exchange traded funds (ETFs), to hedge against inflation.

Sigurdson said they should aim for a four per cent yield on their portfolio in retirement if inflation runs at three per cent -- an entirely possible scenario after a prolonged period of historically low interest rates.

One investment option on their table is a guaranteed minimum withdrawal benefit -- a hybrid of an annuity and a mutual fund. Offered by insurers, these investments guarantee your invested principal while allowing for increases in its value with positive stock market returns.

Upon retirement, you can draw an income, as you would with an annuity, but the payment could increase periodically if the markets perform well. "These plans come with substantial costs, and I'd encourage investors to take the time to understand the drawbacks as well as their benefits," she says.

Right now, Nicole and Jared don't need to commit to this type of investment. Later on, however, they may find an annuity is a good option. They could invest a portion of their money in an annuity-type plan that would provide them with a source of guaranteed income. But they don't need to consider one until closer to retirement when interest rates should be higher, meaning an annuity payment would be higher, too.

Today, their main focus is saving and seeking advice to find suitable investments.

The only other consideration is a little risk management.

"This is a good time to review their risk coverage to ensure they have sufficient life, disability and critical illness insurance to protect against uncontrollable risks in life," says Sigurdson, a chartered life underwriter.

With proper insurance, everything else should fall into place nicely with a little bit of planning, she says.

"They are already in a solid position to ease into semi-retirement in 10 years, and the best way for them to have peace of mind is having a comprehensive plan in place to get there."

giganticsmile@gmail.com

Republished from the Winnipeg Free Press print edition February 11, 2012 0

History

Updated on Saturday, February 11, 2012 at 3:48 PM CST: adds fact box

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