Money Makeover: Ready to ease up

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Sixty-one-year-old Georgette's main advantage that may allow early retirement is the potential flexibility in her investment strategy. (MIKE DEAL / WINNIPEG FREE PRESS) Photo Store

Georgette wants to know if she can retire, now.

Only the 61-year-old, who works in sales, says she still plans to work a few more years.

"It'd just be nice to know I can slow down and don't have to push myself to work evenings and weekends," she says.

"I would like the option of not having to work, but I continue to work just because I want to do it."

Georgette earns about $83,000 a year before taxes and deductions and collects about $582 a month from CPP. Much of her net worth is tied up in real estate. She owns a home assessed at $430,000 and a cabin worth $180,000. She even has an income property worth about $280,000.

She owes $48,000 on the rental -- a result of recent upgrades to the property -- but it still nets her about $5,000 a year.

Georgette also has $230,000 in RRSPs, invested in mutual funds, and another $28,800 in stocks in a TFSA.

She also has a brokerage account with about $40,000 of unregistered money invested in stocks and another $44,000 in a savings account.

Georgette says her retirement-income goal is to net $40,000 a year, and she is willing to sell the rental property to fund her retirement. She will even sell her home in about 10 years to downsize, if necessary.

Although her retirement plan doesn't involve wintering as a snowbird, she does intend to travel more than usual -- about $6,000 a year.

"My financial adviser says I don't nearly have enough, but I think I do," she says.

"Or will I be buying cat food for myself?"

Certified financial planner and wealth manager Brent Hardman with ScotiaMcLeod in Winnipeg says Georgette should work two more years to make her plan work smoothly, but it's not absolutely necessary.

"If she lives to age 85, and retires now, she will have enough assets to provide her with her desired income for several years before needing to sell the house," he says.

He estimates Georgette will likely need to sell the house in 10 years, downsizing and using the leftover proceeds to help fund her retirement lifestyle into her 80s.

Still, the investment income she earns -- along with CPP and OAS once she turns 65 -- will be less than her current monthly income of about $4,500. In retirement, her income will be about $3,330 a month after taxes.

"A reduction in monthly expenses may be necessary," he says. Her current expenses are $4,258 a month, but her fixed expenses are $2,883 a month, so she will have room to adjust.

Georgette can also make changes to her investments so they yield as much income as possible with moderate risk and optimal tax efficiency.

Her current RRSP portfolio is at least 70 per cent invested in equities and her TFSA and non-registered investment accounts only hold stock.

"She may want to shift her asset mix to about 50 to 60 per cent equity, with exposure to dividend stocks that have had a history of raising dividends," he says.

This strategy will generate income and growth over time, and it's less risky than her current portfolio, which is more than 80 per cent invested in the stock market.

While this asset allocation may be performing well now, it's also more susceptible to market volatility. At this stage, she needs a portfolio that produces an income.

"For diversified income in the portfolio, I would recommend laddered maturities of GICs, bonds or preferred shares," he says. For example, she could buy $25,000 worth of GICs with $5,000 invested in a one-year, $5,000 invested in a two-year and so on up to a five-year GIC. As a GIC expires each year, the $5,000 would be reinvested at the five-year rate to produce the highest, most secure income stream possible.

Ideally, fixed income investments should be inside the RRSP because they earn interest income, which is fully taxable. Regardless of how income is earned, all withdrawals from RRSPs are fully taxable. Any income produced from capital gains and dividends, which receive favourable taxation in non-tax-sheltered accounts, would also be 100 per cent taxable.

"For tax efficiency, the dividend payers should be held in non-registered accounts."

This doesn't mean she should transfer equity investments from the RRSP to a non-registered account, which would trigger taxation; instead, future non-registered investments should favour dividend stock because dividends -- and capital gains even more so -- are taxed more favourably than interest income. This means more money in her pocket.

Another consideration is switching from a mostly mutual fund portfolio to a managed one of stocks and bonds. Georgette has about $300,000 in investable assets, so she could find a wealth manager who would build her a personalized portfolio of stocks, bonds and other assets at a lower cost than her current mutual fund portfolio.

"Many mutual funds charge management fees that are higher than managed accounts with MERs (management expense ratios) averaging 21/2 per cent or higher," he says.

Many portfolio managers charge 11/2 per cent of assets a year for their services.

"A savings of one per cent per year in fees could enhance her performance quite a bit over the next 20 years."

Hardman says Georgette should also think about selling the rental property. It is mostly paid off, and he says she can likely invest the money to produce more income than she is currently receiving from rent without the headaches of being a landlord.

"An investment of $200,000 earning four per cent dividends would provide her with $8,000 per year versus the $5,000 she is currently generating from the property," he says. "But she should consult a tax specialist before selling to determine capital gains taxes payable on the sale of the rental home."

If she would end up netting much less than $200,000 from its sale, it will be harder to yield $8,000 a year from an investment portfolio. In that case, she can delay selling and see how she manages her expenses with a cash flow from rental income, government pensions and investments. If she finds she needs more money, she can sell the rental and invest the proceeds to produce a yield, albeit it would be less than $8,000 a year. She can also use the capital to supplement her cash needs, which would erode its ability to earn income, but at least the money would be tax-free and could be used for large, one-time expenses.

Overall, Georgette is in good shape because she has flexibility to adjust her investment strategy. She will even likely leave behind the cabin as an inheritance -- though there may be taxes payable for the estate.

While a reduction in spending habits is entirely likely, the adjustment won't be dramatic. And it will be even less so if she works a few more years.

"The bottom line is that if she retires now, she can expect an income of $40,000 net from all sources -- investments, CPP, OAS and the rental property -- that should last until life expectancy."

giganticsmile@gmail.com

Georgette's finances

INCOME: $83,000 ($3,975)

CPP: $582 monthly

Rental income: $5,000 a year net

Monthly expenses: $4,258

DEBTS:

Car loan: $12,700 a five per cent interest; $393 a month

Rental property mortgage: $48,000 at 3.5 per cent

ASSETS:

RRSP: $230,000 (mostly in equity mutual funds)

Home: $430,000

Cabin: $180,000

Rental property: $280,000

TFSA: $28,881 in stocks

Non-registered account: $39,461 in stocks

Savings: $44,800

NET WORTH: $1,172,442

Republished from the Winnipeg Free Press print edition February 23, 2013 B13