Connie doesn’t own property, but she has an investment portfolio of more than $500,000.Jimmy Jeong/The Globe and Mail
Connie is a 71-year-old single woman hoping to work to age 75 if she can.
She was lucky enough to find a co-op in the Vancouver area, which keeps her rent relatively low. Still, “my housing charges have been going up about 3.5 per cent a year lately because we have had a lot of renovation and repair expense,” Connie writes in an e-mail.
As a contract worker in the entertainment industry, Connie’s income is irregular and has dwindled steadily over the past few years. She hasn’t worked in more than a year.
Connie has gone back to college to retrain as a copy editor and hopes to pick up some work in her new field to offset the dearth of jobs in her old one.
While she doesn’t own property, she has an investment portfolio of more than $500,000. She is living off her government benefits and withdrawals from her registered retirement income fund, or RRIF. Connie deferred her Canada Pension Plan and Old Age Security benefits to age 70 to take advantage of the higher payout. She and her long-term partner live separately, but he often pays for their entertainment and dinners out, Connie writes.
“I do hope to continue working in the industry until I am 75,” she writes. She plans to keep paying her union dues as long as possible so her medical benefits continue to be covered. Otherwise, she will have to pay $250 a month to keep them.
Her near-term goals are to go on a $7,000 holiday and replace her car with another used one. Her retirement spending goal is $48,000 a year after tax, more than she is spending now.
Can she achieve her financial goals? If the worst happens and she can no longer find work, can she live on her savings and government benefits for the rest of her life?
We asked Kristen Pedersen, a certified financial planner and money coach at Money Coaches Canada, to look at Connie’s situation.
What the expert says
The keys to Connie’s success have been saving more than $500,000 despite doing variable contract work, living a modest lifestyle, working enough years to earn 78 per cent of the maximum Canada Pension Plan benefit and then deferring it to age 70 to increase it further, and working to at least age 70 to reduce the number of years her savings will need to last, Ms. Pedersen says.
As well, Connie lives in a cost-stabilized housing co-op. “Her current housing costs are $1,130 a month, which is half what many others pay for rent in Vancouver.”
Her greatest risks are rising housing costs for major repairs and not having a lot of padding in her planned monthly expenses that she could cut if she had to, the planner says.
Ms. Pedersen looks at two scenarios for Connie: one where she keeps working to age 75 and earning $34,000 a year, and one where she can’t find work and has to live on what she has.
In the first scenario, Connie works to 75 and continues to save. By the time she retires, she has $640,000 in assets, including reinvested returns. She has an estimated $34,000 a year in employment income, $20,160 in enhanced CPP, $12,800 in enhanced OAS, and minimum RRIF withdrawals.
Her expenses are estimated at $48,000 a year after tax, more than she is spending now.
In this scenario, Connie can afford to take the vacation and buy the vehicle, the planner says.
Based on historical returns, she would still have some savings left even if she lives to be 100, giving this scenario a 100-per-cent success rate, Ms. Pedersen says.
In Scenario 2, Connie cannot find work. She retires, starting with assets of $564,000 in 2025.
She continues to live on her CPP, OAS and RRIF withdrawals, drawing more from her RRIF than before to cover her $48,000-a-year spending goal – again, more than she is spending now.
In time, her RRIF money runs out and she taps her non-registered investments and TFSAs as well.
Connie still gets by with money left over but her chances of success fall to 80 per cent based on historical averages.
“This is still considered high but requires closer monitoring over the first five to seven years and adjustments to spending would need to be made,” Ms. Pedersen says.
Connie wants to keep active and enjoys her work, so this scenario is a “just in case” test to see how sensitive her success rate is to changes, the planner says.
A note of caution: “Connie’s expenses might be higher than she realizes, so she should begin tracking her occasional and annual expenses to verify before fully retiring.”
The planner’s forecast is based on an inflation rate of 2.1 per cent, a rate of return of 3.9 per cent and a management expense ratio of 1 per cent. Connie’s portfolio is 40-per-cent fixed income and 60-per-cent equities. The forecast assumes Connie lives to be 100.
“Connie will need to monitor her investment returns and plan her withdrawals with the help of her investment adviser,” Ms. Pedersen says.
Tax-free savings accounts provide strong lifetime tax-minimization opportunities and increase flexibility for large purchases in retirement, the planner notes. “For that reason we recommend that Connie maximize TFSA contributions whenever possible, including slowly shifting the funds from her RRIF to her TFSA.”
Client situation
The person: Connie, 71.
The problem: Can she live off what she has if she can’t find work?
The plan: Track spending to ensure it is accurate before she retires fully. Sit down with her full-service investment adviser and plan her withdrawals. If she does find work, keep contributing to her TFSA.
The payoff: A clear-eyed view of how to arrange her finances to last many years.
Monthly net income, including RRIF: Variable, as needed.
Assets: Cash $28,000; non-registered stocks $15,000; non-registered brokerage account (GIC, stocks, mutual funds) $137,450; TFSA $114,550; RRSP $267,830. Total: $562,830.
Monthly outlays: Rent $1,130; home insurance $35; electricity $30; garden $110; transportation $225; groceries $350; clothing $80; gifts, charity $75; vacation, travel $250; time-share $100; bank charges $35; dining, drinks, entertainment $140; personal care $20; pets $45; sports, hobbies $70; subscriptions $45; other $30; doctors, dentists, drugstore $105; phones, TV, internet $125; TFSA $540. Total: $3,545.
Liabilities: None.
Want a free financial facelift? E-mail finfacelift@gmail.com.
Some details may be changed to protect the privacy of the persons profiled.
