Winnipeg Free Press - PRINT EDITION

MONEY MAKEOVER: Big retirement dreams...

even bigger planning problems

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Six more years separate Tom and Diane from retirement. And they know they have a lot to do before then to get ready, especially considering their ambitious post-career plans.

Both have defined-benefit pensions. They have about $173,000 in investments and they earn more than $155,000 a year before taxes and deductions.

Among their investments is about $19,000 in RESPs for their two children. One child will enrol next year in post-secondary, while the other is about six years away.

"We're rubbing our hands going, 'We get to retire! We get to retire!' But we keep forgetting about the university expenses," says Diane, a federal employee in her early 50s.

While Tom and Diane will have a combined work-pension income of more than $5,800 a month when they retire, they wonder if it will be enough to maintain their lifestyle.

"One of our questions: Is $375 of savings twice a month enough for retirement?" asks Tom, a teacher in his mid-50s. "Our financial adviser keeps suggesting we contribute more, but I don't think we can."

The key piece of their retirement plan hinges on their rental property. At the moment, they're only paying a little bit more than the interest costs on the property, worth $350,000, on which they owe about $198,000.

"Most of our money is going toward paying down our house," Tom says. Their home is worth $400,000 and they owe $144,000 and an additional $30,000 on a line of credit.

They plan to sell their home when they retire in six years and move into the rental, and with the proceeds, they'd like to buy a little villa someplace warm where they can live five months of the year.

But they don't know if the plan is feasible. Right now, their expenses and income barely match up -- in part because they pay more than $10,000 a year for their children's extracurricular activities.

"Even though it appears that we spend more than we bring in, we probably are slightly under budget," Diane says.

"We'd just like to sit down with an objective third party and find out what we need to do to get ready for our retirement."

Certified financial planner Uri Kraut says Tom's and Diane's expenses appear to exceed their income, but they likely manage to avoid annual deficits because they receive a sizable tax refund every spring. Or the fact they owe $30,000 on a line of credit could indicate they're living beyond their means.

While their adviser's retirement income projections indicate their expenses and income should be more balanced, Kraut says these estimations are problematic because the numbers don't account for taxation.

"Once this is factored in, there is a shortfall in retirement income based on an income need of $60,000 net per year," says the wealth manager with Assiniboine Credit Union in Winnipeg.

So while they're arguably not running in the red today, they may very well be during retirement.

Kraut calculated their $60,000 retirement income based on their expenses today, excluding costs associated with raising a family, paying down debt and saving for retirement -- a reduction of 54 per cent.

"Assuming this net amount is all that is needed to finance their retirement, then, they will likely face a shortfall sometime around 2044 in their early to mid-80s," he says.

"Furthermore, this figure does not include the costs of travelling to and wintering someplace warm."

Given the expected shortfall, early retirement poses a problem for Tom and Diane. Because they will not have additional income from CCP and OAS in the first few years, their RRSP savings will have to substantially supplement their pension income, so they won't have as much money later on for the extras such as extended vacations at a villa.

Compounding problems, their investments are not properly allocated to deal with market risk during the next six years. Despite being balanced investors, their RRSP portfolio investments indicate otherwise.

"The portfolio's current asset mix is 10 per cent fixed-income and 90 per cent equity," he says. "This would be considered an aggressive growth portfolio."

At this stage, risk reduction should be a high priority because they can't afford to lose money this close to retirement.

Further complicating matters is their children's education. Their RESP investments for their youngest child are also too risky, even though school is six years away.

"They should understand that recovery from a market crash could take as long as 10 years so it is imprudent to hold equity assets when the capital is needed within a 10-year period."

Fortunately, they will have about 70 per cent of their children's post-secondary education funded, provided they can continue to invest $100 a month until their youngest enrols in college.

Yet if their children choose to pursue education beyond four years, they will likely have to go it on their own or Tom and Diane will have to scale back retirement plans to help them out.

Then again, the couple should seriously consider pushing back their retirement date to match up with their children's scholastic ambitions. The delay would allow them to pay down more debt and earn a higher income in retirement from their pensions.

"It'd likely be prudent for them to delay retirement until their youngest child is age 23 and finished a degree," Kraut says. "By then, they would have something like $37,000 left in debt on the rental and no debt on the house."

But to make that scenario play out, they should stop RRSP contributions and focus on debt reduction.

"They need to redirect their $750 monthly contributions to their mortgage along with the newfound cash savings from daycare -- roughly $2,300 per year -- when their youngest stops going to after-school care later this year," he says.

This strategy will help them pay off their home by 2018. In the five following years, they can use the money they put toward their home's mortgage to pay off their rental property.

This strategy makes their retirement dreams a lot more feasible, he says. Their work-pension income will increase and they won't have a big gap between retiring and receiving CPP and OAS, which will put less pressure on their savings.

With both properties paid, they have the option to sell both, using the equity to buy a condo in Winnipeg and possibly a small property in warmer climes.

"This strategy would go a long way not only to realizing their life goals of living overseas, it may also help them reduce their annual expenses from $60,000 --by downsizing -- and ensuring they do not have a shortfall in their early 80s."


Tom's and Diane's finances:


Tom: $75,103 ($4,333 net a month)

Diane: $82,252 ($4,300 net a month)

Rental income: $15,600 ($1,300 a month)



Home mortgage: $144,000 owing at 2.35 per cent

Rental property mortgage: $198,000 owing at 3.35 per cent

Line of credit: $30,000 owing at 3.5 per cent.


Tom RRSP: $119,043

Diane RRSP: $34,310

RESPs: $19,648

Home: $400,000

Rental property: $350,000

Tom pension: $1,842 a month at 2019

Diane pension: $4,008 a month at 2019; reduced to $3,177 at age 65


Republished from the Winnipeg Free Press print edition March 23, 2013 B17

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