Will Charlotte run out of money in retirement?
THE PERSON
Charlotte is a single public relations professional in her mid-forties. She owns a small condo in downtown Toronto and earns $78,000 a year. After lifestyle expenses and taxes, she saves $300 a month toward her Registered Retirement Savings Plans and an additional $300 a month to her savings account for contingency planning. THE PROBLEM
Charlotte has set a goal of retiring in 20 years. She wants to know if she’s on the right track to meet her goals. She says she needs $65,000 a year in retirement income. She has accumulated $103,000 in investments (14 mutual funds), but her portfolio only has a rate of return of 0.70 per cent since its inception in 2007. She has built up $211,000 of equity in her condo but has a $200,000 mortgage that should be paid off in 16 years. THE PARTICULARS Assets Condo: $410,000 Cash: $8,000 Registered Retirement Savings Plans: $103,000 Liabilities Mortgage: $199,999 THE PLAN
If things continue as they are, Charlotte will fall short of her retirement income goals, says Robyn Thompson, a fee-based financial planner at Castlemark Wealth Management in Toronto. While Charlotte will receive both Canada Pension Plan (CPP) and Old Age Security (OAS) along with her investments, it’s not enough. In fact, assuming the same low rate of return on her investments, Charlotte will run out of money at age 69.
Thompson calculates that Charlotte will either need to reduce her retirement income by $22,800 a year or save an additional $3,500 a year.
Step one for Charlotte is to speak to her investment adviser about her rate of return and take a hard look at the value she is receiving.
“She should ask the portfolio manager for the benchmark rate of return, so she can compare her asset manager’s performance relative to the market,” Thompson says. “It is imperative to use a benchmark with your advisors. This is how they quantify their value. You pay them to beat the market. Targeting an average annual 7per-cent return on her investment portfolio, net of fees, is historically in line with a balanced portfolio.”
Charlotte defines herself as a balanced investor, but her asset allocation needs a bit of tweaking to stay in that range, Thompson says. “Instead of 14 mutual funds, I recommend she raise her fixed-income allocation to 40 per cent of her investable assets from her current 34 per cent, spreading the allocation among corporate and government bonds, guaranteed investment certificates (GICs) and income-producing real estate investment trusts (REITs),” she says.
Charlotte should then reduce her equity allocation to 60 per cent from the current 66 per cent, and spread it out among blue-chip, dividend-paying stocks, preferred shares and broad-based index-tracking exchange-traded funds (ETFs). Geographically, Thompson suggests having a minimum 10 per cent exposure to Canada, 10 per cent to the U.S., and 10 per cent for international equities.
Thompson advises that Charlotte start a Tax-Free Savings Account for any surplus savings. She says it’s a better option than a savings account since any the growth of any investments and withdrawals will be tax-free.
If Charlotte will have difficulty saving more money, Thompson has a couple of other options. One is for her to work two years longer and retire at 67, reduce her spending by $3,500 a year or sell her condo and downsize to provide the additional necessary income.
Charlotte can also look for new employment that provides a higher salary and a pension plan. “This could go a long way to support her retirement goals and provide for excess income to travel and other things she may want to do in retirement,” Thompson says. “Never underestimate the value of a company pension.” By implementing these changes, by age 65, Charlotte will have a net worth of more than $1.3 million. Her condo will be valued at $719,000, her RRSP at $500,000 and her TFSA at $88,500, Thompson calculates.
Turning to estate planning, Thompson notes that Charlotte does not have a will.
“Having a valid will reduces delays and expenses involved in closing out her financial affairs,” she says.
Charlotte should also consider establishing Powers of Attorney for Property and Personal Care to ensure her wishes are carried out and tough decisions made should she become incapacitated.