July 10, 2020

Winnipeg
19° C, A few clouds

Full Forecast

Close this

Advertisement

Advertise With Us

Second opinion

Couple gets another adviser to review retirement plan

TREVOR HAGAN / WINNIPEG FREE PRESS
Lacking defined-benefit pensions, Frank and Caroline will need substantial savings to get by in retirement and enjoy those planned summer road trips.

TREVOR HAGAN / WINNIPEG FREE PRESS Lacking defined-benefit pensions, Frank and Caroline will need substantial savings to get by in retirement and enjoy those planned summer road trips.

Hey there, time traveller!
This article was published 10/1/2014 (2372 days ago), so information in it may no longer be current.

Frank and Caroline have been saving year after year, forgoing a lot of self-indulgences just so they can retire comfortably one day. Now all their hard work is about to pay off as their retirement date nears -- so they hope.

"We think we're ready," says Frank, an aerospace worker who earns about $57,000 a year.

The couple doesn't have extravagant retirement plans and believe the more than $500,000 they have invested in mutual funds in RRSPs will be enough to fund their modest plans.

"I'm going to be poking around the house and the yard," Frank says. "We'll probably do some travelling, but nothing big -- maybe one winter vacation a year and one road trip during the summer."

In his early 60s, Frank would like to retire in about six months, but he will work longer if need be.

Caroline, in her mid-50s, plans to work two more years at her job with a local school division, earning about $30,000 annually.

While their financial adviser has assured them they can afford to retire as planned, Frank and Caroline would like a second opinion.

"Our planner is quite thorough, but I want to make sure that I'm going to be ready," he says. "What I really want is that second opinion to find out where we sit financially."

Certified financial planner Karen Diamond examined their retirement plan and says they are on track to retire as planned, earning an income for several decades that will cover 70 per cent of their current expenses.

This is good news, but there are a few potential problems that could foul up their plan.

"Based on simply crunching the numbers, it might appear that Frank and Caroline could achieve their target retirement income with their current savings if all the assumptions regarding lifestyle needs, inflation factors, income sources and projected rates of return unfold as per initial guesstimates over the next 30 years or more," says the Winnipeg adviser with Diamond Retirement Planning. "But reality never unfolds in a straight line, and small differences in any of the factors could skew the outcome significantly."

For example, if inflation and market returns are not as expected -- that inflation is higher and returns are lower -- they will have to reduce spending or face the prospect of running out of money.

Based on a 30 per cent reduction in their current annual spending of about $50,000, indexed at two per cent inflation, they need their investments to average annual returns of 5.5 per cent.

This strategy involves a fair amount of risk for a retired couple, she says.

"I would not feel comfortable about their ability to achieve that rate of return over 30-plus years with a moderately conservative portfolio suitable for a retired couple depending mostly on their personal savings to produce income."

If inflation averages three per cent during retirement, they would have to reduce their spending by $6,000 a year to keep up with costs.

"If the numbers suggest it's tight but doable and their income sources come with lots of variables, I would counsel them to consider a more gradual approach to full retirement," she says.

Neither of them has a defined-benefit pension plan, so they will have to rely heavily on their savings. Their only guaranteed income is old age security and the Canada Pension Plan, which are indexed to inflation, but these pensions only make up roughly half of their total retirement income.

Moreover, Caroline will have to wait until age 66 to receive OAS.

Making matters even dicier is the fact most of their wealth is invested in registered accounts, so all withdrawals to create the other half of their retirement income are fully taxable.

Diamond says creating income from investments in retirement has little in common with receiving a regular paycheque while working. It involves a lot of planning and variability, so the more breathing room they can build into their plan, the more likely it will turn out as intended. As a result, Diamond suggests Frank should consider transitioning into retirement more slowly.

"By that I mean being prepared to work part-time for a few more years to bridge the gap until their government benefits can provide a bigger source of their basic income."

They should also carefully track their spending to ensure their estimated expenses are realistic, because Diamond suspects they have overlooked money for vehicles and home repairs.

With so much of their wealth tied up in registered accounts, any lump-sum withdrawal to cover these costs could be subject to significant taxation.

To avoid this, they should develop a strategy to withdraw cash from their registered accounts tax efficiently, in turn contributing those withdrawals to their TFSAs. Until now, their TFSAs have been largely ignored in their savings plan, but in retirement, these would provide an excellent source of a tax-free income for big-ticket costs.

While retirement is within their grasp, Diamond says it's always best to transition into retirement gently instead of calling it quits.

"Transitioning involves a little bit of part-time work, but it does not have to have negative connotations," she says.

Instead, this strategy would help take some pressure off their savings early in retirement, reducing the risk of over-withdrawing early on while underachieving with investment returns -- a situation with negative long-term implications.

So yes, they can retire as planned, but exercising a little more caution can only help stabilize their future, Diamond says.

That may not involve delaying retirement, but taking a more critical eye to their plan. Asking those 'what if' questions is never a bad idea, she says.

A retirement plan is always a work in progress that needs regular maintenance.

"Frank and Caroline especially need to revisit their plan often in the early years to make sure they are on track and that their plan reflects all the new realities as they have unfolded."

giganticsmile@gmail.com

Advertisement

Advertise With Us

Your support has enabled us to provide free access to stories about COVID-19 because we believe everyone deserves trusted and critical information during the pandemic.

Our readership has contributed additional funding to give Free Press online subscriptions to those that can’t afford one in these extraordinary times — giving new readers the opportunity to see beyond the headlines and connect with other stories about their community.

To those who have made donations, thank you.

To those able to give and share our journalism with others, please Pay it Forward.

The Free Press has shared COVID-19 stories free of charge because we believe everyone deserves access to trusted and critical information during the pandemic.

While we stand by this decision, it has undoubtedly affected our bottom line.

After nearly 150 years of reporting on our city, we don’t want to stop any time soon. With your support, we’ll be able to forge ahead with our journalistic mission.

If you believe in an independent, transparent, and democratic press, please consider subscribing today.

We understand that some readers cannot afford a subscription during these difficult times and invite them to apply for a free digital subscription through our Pay it Forward program.

The Free Press will close this commenting platform at noon on July 14.

We want to thank those who have shared their views over the years as part of this reader engagement initiative.

In the coming weeks, the Free Press will announce new opportunities for readers to share their thoughts and to engage with our staff and each other.

You can comment on most stories on The Winnipeg Free Press website. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or digital subscriber to join the conversation and give your feedback.

Have Your Say

Have Your Say

Comments are open to The Winnipeg Free Press print or digital subscribers only. why?

Have Your Say

Comments are open to The Winnipeg Free Press Subscribers only. why?

By submitting your comment, you agree to abide by our Community Standards and Moderation Policy. These guidelines were revised effective February 27, 2019. Have a question about our comment forum? Check our frequently asked questions.

Advertisement

Advertise With Us