Client situation
In Toronto, Maria Bilder (not her real name) is a high-school history teacher with a $74,000 annual pretax income, no dependents, no partner, and a problem. At the age of 51, she is planning retirement at 58 or 60, but is unsure whether she should stay in her $275,000 condo and sell it for a profit in a decade, or sell now, rent in Toronto and buy a home in Nova Scotia with no mortgage. Complicating the decision, which requires a comparison of projected real estate price growth rates in two cities, is that fact that her school is an hour’s drive from her home and requires 10 hours of commuting each week. “I want to maintain my lifestyle, but just as importantly, I want to move to Nova Scotia,” Maria says. “I can’t afford to own two homes, so I have to make a decision on when to sell my Toronto condo. And that involves estimating how much money I will need for retirement.”
What our expert says
Facelift asked financial planner Michael Cherney, principal at Michael Cherney Associates in Toronto, to speak with Maria.
“Maria loves her life, but she has too many choices to make,” Mr. Cherney says. “She has to stand back from her options and consider what is to be gained and what may be lost by making each.”
Maria’s financial problem comes down to how she can obtain a pretax retirement income of about two-thirds of her present teaching salary, Mr. Cherney says. Rounding off the numbers, he figures that she can meet a $50,000 gross income target, a sum that would provide $39,000 after-tax income in 2003 dollars if she delays retirement to age 60. That sum, he notes, will eventually provide more discretionary spending power than she has today, for her annual mortgage payments of $8,442 per year will end in 15 years when she pays off her mortgage.
Maria is unsure about how much pension income her job and investments will provide.
To estimate future income, he assumes several things: that she will live another 49 years to age 100, which, he says, leaves a comfortable margin for error if she either spends too much in the early years of her retirement or has the good fortune to become a centenarian; that the long-term inflation rate will be 3 per cent; that Maria will begin receiving Canada Pension Plan payments at age 60 at a rate of 70 per cent of the current maximum payout of $801.25 a month indexed to inflation; that she will not contribute any more money to her registered retirement savings plan, which, because of her employment pension, has very little contribution space; that her RRSP will grow at 7 per cent a year before any inflation adjustment; that Maria will be able to receive Old Age Security payments, currently $461.55 a month, without any loss to the clawback; finally, that she will convert her RRSP to a registered retirement income fund at age 71.
To retire at 60, Maria has to begin curb her spending, Mr. Cherney says.
She can trim $450 a month for grooming and clothing, cut down on the $1,900 a year she spends for car insurance by checking out a few brokers, reduce her $155 a month phone bills by getting better deals, and avoid joining an expensive health club in favour of walking. Maria should also keep her 1998 Honda Acura instead of trading it in. She should pay down debt by $5,000 a year.
After her debts are reduced, Maria should examine her RRSP investments, which, at present, are entirely in 2.75-per-cent guaranteed investment certificates. There is a substantial potential for gain —— and loss —— by investing in stocks or mutual funds and bonds or bond funds. But the risk-reward ratio favours some diversification of her $43,000 low-return RRSP portfolio.
If Maria increases savings, reduces debt, improves the return on her RRSP, and is careful to reap her pension entitlements, she should be able to have total income at age 60 of $68,056 in 2012 dollars at the beginning of her retirement, Mr. Cherney says. That sum will be made up of CPP payments of $8,782, school board pension income of $54,189 and RRIF income of $5,085. Five years later at age 65, she will be able to add $8,378 OAS payments to what will then be $10,181 estimated CPP income, $55,282 pension income, and $4,734 RRIF payments for a total annual income of $78,575, which will meet her retirement pretax income target of $75,630.
Were Maria to retire early, at age 58, her pension income from her school board would be $5,000 less, a significant shortfall.
“I would advise against any decision that increases current debt. A second home does not make sense,” he explains. “She should defer buying a home in Halifax until she actually retires and is prepared to leave Toronto. “
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