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This article was published 8/7/2011 (2383 days ago), so information in it may no longer be current.
Patty is a single mom who was once burned financially when a relationship went south.
As a result, the teacher in her late 40s, still has a small mortgage, despite being a devoted saver.
Yet, she's once again considering a merging of households — and at the same time, uncertain what that may do to her finances.
"I definitely know what I'll be doing if I do go into another relationship," she says. "There will be some lawyer work done ahead of time."
Patty wants to upgrade to a larger home if things keep progressing smoothly in her new relationship. Her home is valued at $230,000 and she owes about $23,000 on the mortgage.
"If I did want to buy a bigger house, what kind of salary would I be looking at for the other half?" she says, adding her price range would be $450,000.
She says she worries that an upgrade would also affect her retirement plans. She earns about $77,500 a year. And besides her pension, which would pay her $2,976 a month at age 55, she has $76,000 in RRSPs and more than $86,000 in non-registered investments.
She also has about $24,000 in an RESP for her daughter.
Despite the ample assets, she is also concerned about how her portfolio is set up to provide for the future.
"Are those mutual funds that I own the right ones for me at this stage?" she says. "I love my job and have no plan to retire early, but I want to know if I stayed on my course, what would I be looking at for retirement?"
RBC adviser Ryan Lussier says Patty is a model saver. She maxes out her RRSPs whenever she can. She has little debt. And most importantly, she's a good saver — that is, she doesn't spend more than she earns.
It's a simple formula for a comfortable retirement, he says.
"She had a vague retirement range of 55 to 65, so what I wanted to do is take the earlier date and see if she could accomplish it then, and if she can do that, then any other date should not be an issue at all," says the planner with RBC Wealth Management in Winnipeg.
After crunching the numbers, Lussier found that Patty can retire at 55 and carry on the same lifestyle she enjoys today.
Patty would retire with an income of $41,000 a year, or 3,416 a month.
"She currently nets $3,641 per month after taxes and deductions, so her retirement income is really close to what she currently makes now," he says. "I would say she is fine retirement wise — especially considering she loves her job, so she can always double-dip like a lot of teachers out there."
Patty likely won't be able to rely solely on her pension income for the first five years, so she will have to make minimal withdrawals from her non-registered assets to make up for the shortfall.
As for her daughter's education, that too should be well-covered, at least for an undergrad program. Her daughter will likely have about $10,000 a year for five years of education. The question is whether that is sufficient for her educational goals. If Patty also wants to fund her daughter's graduate studies, for example, she may have to save more money.
While all is good with Patty's finances, on the surface, Lussier says he is concerned about her lack of knowledge regarding her investments.
"If she is asking, 'Are these the rights funds for me?' it doesn't seem like her adviser has done a very good job of explaining how the funds fit within her investment strategy."
And that has the potential to be costly over time. One investment choice is already proving his point. Much of her RRSP is invested in a dividend mutual fund that has underperformed its benchmark index since its inception five years ago.
The fund is offered by a firm that typically caters to high-net worth investors and has recently started providing mutual funds to retail investors offering the same strategy. Unfortunately, the investment strategy, while lucrative for high-net worth investors, doesn't seem to work on the mutual fund level.
"It's only a good fund if you have $1 million-plus and go directly to the fund company itself, and then you get a discount on the MER," he says. "If it's sold through an adviser, it pumps the MER really high and it underperforms the index."
She is paying about two per cent a year in management costs when she could find similar funds with better track records, paying less than two per cent, he says.
Still, she might not notice the potential lost returns in portfolio since she's already well set up for retirement.
But every extra dollar helps, especially since she's considering a home upgrade. Even then, depending on how she goes about the purchase, she may not require much more financial might than she has now.
Lussier says if Patty sold her home, she'd likely have about $200,000 in equity for a down payment on a $450,000 home, leaving her with a $250,000 mortgage. If she and her partner go in 50-50 on the purchase, she would end up with a $25,000 debt on her line of credit to cover the remainder of her portion.
"There's absolutely no difference to what she's currently paying now," he says. "If she's looking at doing it on her own, though, then it's a $250,000 mortgage."
Patty would then be paying $1,600 a month on the mortgage to have it paid off by age 65.
"She probably could afford to upgrade a home by herself, but $450,000 is pretty expensive for someone on her own," he says. "That's a pretty big house."