Jennifer Roberts
After Cassandra's husband died, her priorities shifted. Now 48, she is thinking of taking some time off and perhaps working part-time so she can spend more time with her children, 10 and 13.
"I want to travel more with the kids, particularly over the next five years, because I am starting to lose my health somewhat and I don't want to put it off too far into the future," she writes in an e-mail. "My fear, like many, is that I will run out of money, particularly since I am on my own." Fortunately, Cassandra and her husband were "lifelong savers, living below our means," so she has a comfortable financial cushion.
As well, she chose a lump-sum payout of her husband's pension. Her husband also had life insurance. This money, combined with her own savings, is more than enough to pay for the children's education, she says, but will it be enough to support her in her old age?
"Inflation is scary," she adds. "I see it now with increasing gas and grocery bills." If she worked until she was 65 in her public sector job, she would get an indexed pension of about $37,000 a year. But that's not in the cards. The sooner she quits, the sooner she can "spend time with my kids that I will never get back."
We asked Marilyn Trentos, vice-president, investment adviser and portfolio manager at RBC Dominion Securities Inc., to look at Cassandra's situation.
What the expert says
Ms. Trentos enlisted the help of her colleague, Janice Walsh, a chartered accountant and a financial planning specialist with RBC Wealth Management Canada. Their conclusion: Cassandra can easily afford to leave her job and work part time.
Ms. Walsh assumed Cassandra would earn $30,000 a year working part time. The planners increased this amount by 2.5 per cent a year for inflation. On the expense side, they used her current expenses, again adjusted for inflation. They assumed Cassandra would continue to contribute $330 a month to her children's registered education savings plan and another $300 a month to a self-directed RRSP. She would tuck the maximum $5,000 a year into a tax-free savings account.
Cassandra's $950,000 of non-registered investments should provide about $47,000 a year in net income based on a conservative asset mix of 65 per cent fixed income and 35 per cent equity, the planners calculate. This implies an annual return of 5.95 per cent, which they say is "quite achievable." They recommend her taxable account hold a fair amount of preferred shares of good-quality Canadian companies. Her registered accounts should hold federal, provincial and corporate bonds rated BBB or higher. "A good vehicle for registered assets is stripped coupon bonds for the compounding feature," Ms. Trentos says.
Based on a yearly work income of $30,000, a Canada Pension Plan survivor's pension of $11,400 and investment income of $47,000, and after adjusting for taxes, Cassandra would need to withdraw about $15,000 from her investment portfolio each year to sustain her lifestyle expenses of $70,000. Because part of this money would end up in the RESP, RRSP and TFSA, "this is really just a reallocation of funds from a taxable portfolio to non-taxable portfolios," Ms. Trentos says. (If she quit her current job today and left the money in her company plan, she would also get a pension of about $3,650 a year starting at age 65.)
They suggest she increase her RESP contributions to $5,000 a year, which would allow her to take full advantage of the federal government grant of $500 for each child. Otherwise, her RESP savings will not be enough to fund both children for four years of undergraduate studies.
Cassandra will stop contributing to the RESP in 2019. By 2023, her expenses will drop because her children will have graduated and begun working.
With her 5.95-per-cent return on investments, Cassandra's net worth will grow over the years. Her RRSP, with annual contributions of $3,600, will be about $3.25-million by the time she is 71 and has to convert it to a registered retirement income fund. The TFSA, with annual contributions of $5,000, will grow to slightly more than $1-million by the time she is 89.
At age 72, when Cassandra has to start withdrawing money from her RRIF, the minimum withdrawal – $225,000 to $240,000 annually in future dollars – will more than cover her expenses, so the surplus funds can be reinvested in her non-registered account. At age 89 – her statistical life expectancy – Cassandra's non-registered assets will have risen to about $2.3-million and her home will have increased in value to $1.4-million.
Cassandra's net worth at age 89 will still be about $6.5-million, the equivalent of $2.4-million in today's dollars – very close to the current value of her assets. This should put to rest her fears about inflation.
"She is effectively preserving her current wealth in inflation-adjusted figures," Ms. Trentos says.
Client Situation
The person: Cassandra, 48
The problem: Deciding whether she can quit her full-time job and work part time to spend more time with her children without jeopardizing the family's financial security.
The plan: Work part time, continue contributing to savings, hike RESP contributions.
The payoff: Time to travel and enjoy her children while they are still young, plus ample savings for the future.
Monthly net income: $7,430 (current)
Assets: Bank account $3,000; GICs $300,000; portfolio $650,000; RESP $55,000; TFSA $15,000; RRSP $830,000; residence $500,000. Total: $2.35-million
Monthly expenses: Property tax $330; home insurance $70; heat, hydro $220; maintenance $130; car insurance and maintenance $495; groceries $600; children's camp $200; clothing $200; personal $150; entertainment $200; pets, sports, $110; subscriptions $40; health, dental insurance $60; life insurance $30; telecom, $180; RRSP $300; RESP $330; savings $1,000; gifts, charity $300; vacations $820; company pension $820. Total: $6,585
Liabilities: None
Special to The Globe and Mail
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