Can this busy 60-year-old afford to reduce her workload before retiring?


 Lana, 60, wants to reduce her workload and then retire fully by 70.  DARRYL DYCK/THE GLOBE AND MAIL

Lana, 60, wants to reduce her workload and then retire fully by 70.

DARRYL DYCK/THE GLOBE AND MAIL

DIANNE MALEY

SPECIAL TO THE GLOBE AND MAIL

PUBLISHED JUNE 3, 2016

UPDATED MAY 16, 2018


At 60, Lana is feeling the weight of her high-pay, high-pressure consulting job in the entertainment industry. She's looking to cut her work load substantially in a couple of years and then retire fully by the age of 70.

She'll be giving up income of about $192,000 a year.

Lana is separated from her husband and has a grown daughter who is financially independent. As well as her own consulting company, from which she draws a salary, Lana owns an investment condo that she rents out. She has substantial investments, most of which are in RRSPs. She has mortgage debt on her suburban B.C. residence and rental condo totalling about $329,000.

Her goals: To semi-retire in December, 2018, when she will be 63. Her longer-term goal: To buy a final vehicle and to maintain her retirement lifestyle.

"I am hoping that you can give me some insight on how to retire within the next couple of years as the long hours of working in my industry are taking their toll on me," Lana writes in an e-mail. She has a retirement spending goal in the $60,000 a year range – roughly what she is spending now after subtracting income taxes, savings and mortgage payments.

"How much do I need to earn to achieve this?" she asks.

We asked Jason Pereira, a financial planner at Woodgate Financial Inc. in Toronto, to look at Lana's situation.

What the expert says

Lana plans to work full-time until 2018 and then part-time until 2025, when she turns 70, earning $51,000 a year before tax, Mr. Pereira says. Her living expenses are estimated at $56,196 a year, plus $4,200 for travel, for a total of $60,396 after tax. Her one-time car purchase in 2026 is estimated at $40,000.

This may come as a surprise to Lana, but the planner recommends she sell her rental condo. That's because the return on investment (net rental income excluding expenses such as mortgage interest, maintenance and repair – $8,160 – as a percentage of the condo's $240,000 value) compares unfavourably with what she could earn in the stock market. The current pre-tax yield on the property is 3.4 per cent. After tax, that amounts to 1.17 per cent while she is working and earning a high salary, and 2.4 per cent after she has retired and her tax rate is lower.

"Currently, Canadian REIT (real estate investment trust) ETFs (exchange-traded funds) have been yielding 5 per cent," Mr. Pereira says. "If Lana insists on investing in real estate, that is the better option."

As for the potential capital gain from the condo, "yield is money in the bank, while gains are something you have to hope happens," Mr. Pereira says. "Do you really want to be holding an asset that everyone is talking about being in a bubble?" Unless there is something special about this location that makes it unique, the potential capital gain on a diversified portfolio of REITs should provide equivalent capital gains if not better, he adds.

Lana is estimated to have some free cash flow this year, some of which she should put toward an emergency fund, the planner says. He recommends she set aside $48,000 for this purpose, with the money invested in a short-term bond fund. The balance would come from the condo sale proceeds, which the planner estimates will be $79,000 after mortgage and expenses. If she sells the rental condo, Lana will have a nest egg of almost $753,000 when she retires, Mr. Pereira says, broken down as follows: non-registered investments $107,000, RRSPs $587,000, and TFSA $59,000 (she currently doesn't have one).

She should take full advantage of her RRSP contribution room while she is working full time, he says. As well, she should use the rest of her surplus to make the maximum mortgage prepayments on her condos. Of her total surplus of $38,540 for the year, $20,500 could go to prepay her principal residence mortgage, $7,200 to her rental mortgage prepayment and $10,800 to the emergency fund. Once she is debt-free, all surplus cash flow should be directed to a TFSA. The mortgage will be paid off fully in 2021, when Lana is 66.

Despite her high income, Mr. Pereira suggests Lana begin collecting Canada Pension Plan benefits now. Because she is still working, she will have to continue to contribute until age 65, so the reduction in benefits will be lessened.

After she hangs up her hat, Lana could convert her Insurance Segregated Fund RRSP ($108,470 guaranteed minimum withdrawal benefit) to a registered income fund that pays a guaranteed income for life, the planner says. When she has fully retired, she should convert her remaining RRSPs to a registered retirement income fund (RRIF) and begin withdrawing money.

Lana's investment portfolio shows no sign of proper asset allocation, Mr. Pereira says. "The portfolio in general needs work. Most of the assets are highly correlated," which means they tend to move up and down in value at the same time. Having a well-balanced and diversified portfolio is critical for Lana because with no work pension, she will be relying heavily on it in the future.

On a portfolio of 60 per cent fixed income and 40 per cent equities, Lana can expect to earn a rate of return of 3.6 per cent above the annual inflation rate, the planner says.

The minimum rate of return Lana will need to achieve her retirement spending goal is 1.6 per cent above the inflation rate, he says. "If she hits her target return, she will make it to 95 with $2.6-million in assets," Mr. Pereira says.

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CLIENT SITUATION

The person: Lana, 60.

The problem: Can she cut back her workload, and her income, drastically without compromising her retirement lifestyle goals?

The plan: Sell her investment condo and invest the proceeds. Build an emergency fund, pay off the mortgage on her principal residence as quickly as possible and seek help building a balanced, diversified investment portfolio.

The payoff: Financial security.

Monthly net income: $11,820

Assets: Savings account $20,000; RRSPs $330,331; non-registered $20,000; residence $440,000; rental condo $240,000. Total: $1.05-million.

Monthly disbursements: Mortgage $1,500; condo fees $375; property taxes $180; property insurance $46; electricity $50; garden $20; maintenance and repair $895; transportation $448; groceries $400; clothing $200; gifts, charitable $155; vacation, travel $350; dining, drinks, entertainment $505; grooming $250; gym, trainer $195; sports $100; subscription $30; doctor, dentist $100; drugstore $30; telecom, TV, Internet $280; RRSP $2,077; personal office supplies $330; professional association $24; group benefits $69. Total: $8,609. Surplus $3,211.

Liabilities: Residence mortgage $161,000; rental condo mortgage $168,000. Total: $329,000.

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