Will Char­lotte run out of money in re­tire­ment?



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.


Char­lotte could run out of money by age 69 with­out chang­ing her spend­ing, among other things.

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