Winnipeg Free Press - PRINT EDITION

Retirement snapshot

Ian wants to spend more time pursuing his hobby, photography, but is his post-work plan picture-perfect?

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Ian says early-morning light is best for taking the perfect landscape photo. But for much of his working career, he has been on the job at dawn instead of pursuing his passion.

Now, at 59, the private-sector manager -- earning about $54,000 a year -- anticipates having the freedom to get up early to capture picture-perfect light when he retires at 60 next year.

Yet with about $293,000 in retirement savings, including a work pension, he says he'll likely keep one foot in the work world until he turns 65.

"I'd like to hold off drawing on CPP until then if possible, but that depends on what kind of part-time job I have," says Ian, who's divorced with two adult children.

Ian says he will only retire once he's certain he can line up part-time work. A self-professed jack-of-all-trades, he doesn't foresee much difficulty in achieving that goal.

He's also a saver and has no debt. As for his assets, his group RRSP with his employer, mostly invested in the stock market, is worth about $117,000. And he has about $84,000 in an RRSP, also invested mostly in stock-market-based mutual funds.

About one-third of his money is in low-interest savings, including more than $21,000 in a tax-free savings account.

"Even if I gross $1,500 a month at a part-time job, that would probably cover my day-to-day stuff, and then I'd just have property tax, insurance and vacation."

Yet Ian says he's concerned about the markets and his investments, and how another financial implosion could affect his plans -- though he is confident he can weather any economic storm.

"I live far within my means and I'm saving huge wads of money," he says. "At some point, I should be able to bail. That's what I'm trying to sort out."

Father-and-son financial planning duo Bob and Ryan Challis, both with Nakamun Financial Group in Winnipeg, analyzed Ian's finances and had the following commentary.

Both certified financial planners, they question whether Ian has considered all the possible expenses he may have in retirement. He states his monthly expenses are about $1,800, but that cost will likely rise if he wants additional medical and insurance coverage -- benefits he will lose when he retires from full-time employment.

In addition, Ian will need to continue saving in retirement, putting aside money for future expenses, such as buying a new car and home repairs. And he makes no provision in his budget for costs associated with dabbling in photography.

"Overall, we just don't see Ian being able to contain his true spending at the level indicated," Bob Challis says.

Ian still can retire, but he will have to be careful with his money -- maybe even more than he already is -- and put any surplus cash into savings for the aforementioned medium-term needs.

The real test of his plan will be early on in retirement. Can he earn and save enough from 60 to 65 without drawing on CPP?

"If he starts CPP at age 60, Ian will be penalized more severely, lose out on some indexing of benefits, pay more tax than would otherwise be the case and be forced to contribute on his continued earnings anyway."

Challis says Ian -- like all new retirees -- is affected by recent changes to CPP, which increase the amount the benefit is reduced for early receipt. And if he continues working, he will have to pay into the plan until age 65.

If he does draw on CPP at age 60, this will have a lasting negative effect on his finances long-term.

Under this scenario, Challis says Ian should defer using his RRSP until age 71, withdrawing the minimal amount as long as possible to keep taxes low.

"An indexed retirement can be funded as hoped for 24 years, until age 84," Challis says. "At that time, should Ian remain alive, he will have to sell the house or borrow against it."

Challis says the assumptions for the forecast are that Ian's expenses will be $21,755 a year, increasing at two per cent annually to keep pace with inflation.

And he estimates Ian's portfolio will average a 1.35 per cent annual return, similar to what he's earning now on his non-registered savings and TFSA.

Indeed, the portfolio return is very conservative even though most of Ian's personal and work retirement savings are invested in stock-market-based mutual funds.

Normally, the return on a stock portfolio would be much higher. These days it's about five per cent, but that's a long-term return.

Ian's timeline for needing his savings is shorter, and over the next few years his portfolio is exposed to a lot of the same risk and volatility of the last decade, which could continue for the next decade, says Ryan Challis, who analyzed the asset allocation in Ian's portfolio.

"The 100 per cent asset allocation in equities is very aggressive," he says.

Furthermore, 85 per cent of his portfolio is invested in Canadian companies, with 65 per cent concentrated in banks and energy.

"Given the risk tolerance he describes, an appropriate mix might be in the range of 60 per cent equities, 40 per cent fixed income." And no more than 30 per cent of the portfolio should be exposed to the Canadian stock market.

As alternatives, he should consider investing as much as 30 per cent in U.S. equities and as much as 20 per cent in a global fund. And he should have at least 15 per cent in North American bond funds, mainly investment-grade corporate bonds.

If he wants to spice things up, he can invest as much as 15 per cent of the portfolio in emerging markets fixed income (bonds) and another 10 per cent in gold, real estate or commodity-based investments.

By rebalancing his portfolio, Ian will likely be able to achieve a better short- and long-term yield to suit his potential need for retirement income. Basically, greater exposure to bonds and more geographical areas will provide a steadier return -- retirement income if need be -- with less risk of substantially reducing the portfolio's size as a result of choppy market conditions.

Still, if he can earn a return on investments that only keeps pace with inflation, start drawing on his RRSPs at age 60, work part-time and delay taking CPP until 65, his assets will last a lot longer, Bob Challis says.

"An indexed retirement can be funded as hoped for 31 years, until age 91," he says. And at his life expectancy, age 81 as estimated by insurers, his estate would be worth about $580,000 after tax -- though most of it will be tied up in the value of his home.

"Clearly, the small recommended adjustments would have a significant impact," Challis says.

But Ian's plan remains susceptible to market and employment risk.

If the market underperforms -- and his portfolio loses money, as it has in recent years -- or he is unable to work until he's 65, he will burn through his savings much more quickly and may have to borrow against his home or move, Challis says.

"Ian's got some good habits -- he lives within his means -- but he needs to ask himself whether he's looking at his future through rose-coloured glasses."


INCOME: $54,096 ($3,171)


DEBTS: none


Home: $250,000

Work RRSP: $117,726

RRSP: $85,656

High-interest savings: $41,855

TFSA: $21,671

NET WORTH: $517,760

Republished from the Winnipeg Free Press print edition November 3, 2012 B11

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