Shannon VanRaes/The Globe and Mail

Mark, who is turning 57 soon, would like to quit his $90,000 a year communications job, take early retirement and perhaps move from his Prairie home to a warmer clime in Ontario or British Columbia. He has a mortgage-free condo, registered savings and a modest defined benefit pension.

Mark is divorced with a son, age 22, in university.

“What is the earliest I can retire and meet my spending goal?” Mark asks in an e-mail. His retirement spending target is $42,000 a year after tax, an amount that would have to rise if he were to move to a more expensive part of the country. He also wants to travel more.

“What do you think of the idea of selling my condo, moving cities and renting?” Mark asks. He would invest the proceeds in blue-chip dividend funds, using the extra income to help offset higher living costs in a more expensive city.

We asked Jeffrey Ryall, a financial planner and associate portfolio manager at investment counsellor Cardinal Capital Management Inc. in Winnipeg. Mr. Ryall also holds the chartered financial analyst (CFA) designation.

What the expert says

“Living comfortably within his means and saving almost $3,000 per month has provided Mark with the option of retiring now,” Mr. Ryall says. “But before he makes that decision, I would encourage him to carefully reflect on his retirement lifestyle, especially if he relocates to a Canadian city with warmer winters.”

Mark would have to increase his budget for housing and entertainment costs, among other things, the planner says. Mark also wants to travel more, “and will likely need to increase his travel budget from $1,900 annually.” This would leave his retirement plan with little margin of safety if he retired now, Mr. Ryall says.

“My recommended course of action would be for Mark to continue working three more years and retire at age 60,” he says.

“Based on Mark’s pension plan’s formula, the additional three working years is projected to increase his monthly retirement benefit from $1,158 to $1,718, partly indexed to inflation, an increase of 48.4 per cent.”

Mark has two RRSPs totalling $350,000 plus two locked-in retirement plans from previous employers of $102,000, for a total of $452,000.

In preparing his forecast, Mr. Ryall assumes Mark lives to age 95, the inflation rate averages 2 per cent a year and the rate of return on his investments averages 3.82 per cent. He further assumes Mark gets 80 per cent of maximum Canada Pension Plan benefits and full Old Age Security benefits starting at the age of 65.

As an alternative to retiring now, Mr. Ryall looks at how things might work out if Mark works to age 60, then sells his condo and invests the net proceeds, estimated to be $200,000, in his non-registered account. In the meantime, Mark saves $2,950 a month – $500 in his TFSA, $180 in his RRSP and $2,270 in his non-registered investment account. (He is contributing more to his TFSA and RRSP now to catch up with unused contribution room.)

The planner assumes a monthly pension benefit of $1,718 with a guaranteed payout of 15 years. In this scenario, Mark could have after-tax spending power of up to $57,000 a year. He’d leave little in the way of an estate.

“These two scenarios establish upper and lower boundaries for Mark: Retire now with a lower annual income, or work longer to allow greater security and increase his standard of living during retirement.”

Mark’s current investment portfolio is positioned for growth, with an asset allocation of 83.5 per cent equities and 16.5 per cent cash and fixed income. He pays an average management expense ratio of 2 per cent a year on his mutual funds, giving him an assumed annual return of 3.85 per cent, the planner says.

“Two per cent is on the higher side for an individual with $627,000 of investable assets,” Mr. Ryall says. Mark could likely find similar investments at a lower fee – 1.5 per cent, for example.

“Further analysis of his underlying holdings indicates he has too many mutual funds with considerable overlap of the top 10 holdings,” Mr. Ryall says. One stock is approaching 10 per cent of the portfolio.

“Mark should organize and simplify his holdings,” the planner says.

Mark has 17 different mutual funds. As well, he has started buying Canadian blue-chip, dividend-paying stocks in his non-registered account and his TFSA using an online discount brokerage. “Before purchasing additional stocks in his non-registered account, Mark must ensure his portfolio remains adequately diversified” across his various accounts. Reducing his mutual fund holdings will make it easier for Mark to monitor his positions to make sure they do not become too concentrated.

Mark’s 16.5 per cent allocation to cash and fixed income provides him with three years of income needs, which is appropriate, Mr. Ryall says. He would recommend Mark maintain his equity exposure at 80 per cent to 90 per cent. If he is adding stocks to his TFSA and non-registered accounts, he will need to add fixed income to his other accounts to ensure he stays within his asset allocation target.

If Mark decides to sell his condo and invest the proceeds of $200,000 in Canadian blue-chip dividend paying stocks, he should consider rebalancing his registered funds – which are not entitled to the dividend tax credit – to include increased foreign stocks and stock funds. Rebalancing transactions within his RRSPs would not trigger a taxable disposition.

Finally, Mark has no will, so he should make this a top priority, Mr. Ryall says. “With a young adult son, long-time partner, and former spouse, ensuring his wishes are clearly articulated (including a health care directive) can help ease the burden on loved ones after he is gone,” the planner says. A valid will also eliminates the need for a family member to obtain a court application granting them authority to administer the estate.

Client situation

The person: Mark, age 57

The problem: How soon can he afford to retire? Can he afford to move to Ontario or British Columbia?

The plan: Work another three years to age 60. This will greatly improve his pension and allow him to save more money.

The payoff: Greater financial security and the prospect of a more comfortable lifestyle.

Monthly net income: $5,675

Assets: Cash $4,000; GICs $11,000; non-registered stocks $75,000; TFSA $100,000; RRSPs $350,000; LIRAs $102,000; estimated present value of pension $397,600; residence $240,000. Total: $1.28-million

Monthly outlays: Condo fees (including utilities) $820; property tax $230; home insurance $10; transportation $190; groceries $400; clothing $45; gifts, charity $110; vacation, travel $160; other discretionary $10; dining, drinks, entertainment $220; sports, hobbies $10; subscriptions, other personal $100; physio $20; communications $265; TFSA $850; RRSP $225; DB pension $635; non-registered investments $1,000; emergency fund $250. Total: $5,550

Liabilities: None

Want a free financial facelift? E-mail [email protected].

Some details may be changed to protect the privacy of the persons profiled.

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