Jennifer wonders whether she can leave her part-time consulting work behind in a couple of years and truly retire.
She is 63, single (divorced), and living on her consulting income, a small company pension, Canada Pension Plan payments, income from two units she rents out in her house and a bit of dividend income. The consulting income allows her to "have the quality of life I want," she writes in an e-mail.
If she retires completely, will the income from her registered retirement savings plan be enough to tide her over for the rest of her life, she wonders. Her mother lived to be nearly 103.
She wonders, too, whether she should switch her RRSP holdings entirely to bonds and guaranteed income certificates to preserve her savings, given how heavily she will be relying on them.
And should she use some of the $30,000 she inherited from her mother to pay down the $130,600 mortgage on her $525,000 suburban Vancouver house even though she is able to deduct a portion of the mortgage interest against her rental and business income?
We asked Nick Grychowski, an investment specialist and financial planner at Vancity/Credential Asset Management Inc. in Vancouver, to look at Jennifer's situation.
What the Expert Says
With $297,000 in her RRSP and $59,500 in non-registered savings, Jennifer is well positioned to retire in a couple of years with enough income to last for the rest of her life, Mr. Grychowski says. Her living expenses are modest and will fall further as her mortgage is paid down, he notes.
Currently, she is earning $36,000 a year. In her first year of retirement, at age 66, she will need after-tax income of $32,435 to cover her expenses, the planner estimates. Of this total, $5,240 will come from CPP, $5,540 from Old Age Security, $10,825 from her indexed, defined benefit company pension, $1,404 from net rental income and $10,817 from her RRSP or registered retirement income fund, resulting in a surplus of $1,391 a year, Mr. Grychowski calculates.
He assumes an average annual return on investments of 3.5 per cent and inflation of 2.5 per cent - conservative by any measure. On this basis, her savings will last until her 99th year - and she will still have her house to fall back on.
Jennifer has about 65 per cent of her savings in equity-type investments and 35 per cent in fixed income. She should consider shifting more assets to fixed income gradually until this component of her holdings is about the same as her age, he says. He does not recommend abandoning stocks altogether.
He takes investors' nervousness as a hopeful sign that markets will soon recover. "Now is probably not the best time to make wholesale changes in a portfolio and go entirely to GICs."
After she retires, she can convert her RRSP to a registered retirement income fund so she will have control over how the funds are invested as well as the timing and amount of withdrawals. Given her long life expectancy, she may also want to consider investing part of her savings in an annuity once interest rates rise a bit to provide guaranteed payments for life.
Mr. Grychowski suggests Jennifer pay as much as she can on her mortgage loan each year even though she is deducting a portion of the interest against her rental income because doing so will "free up cash flow in later years." By getting rid of the debt as soon as possible, she will be less exposed to possibly higher mortgage rates in future, he notes.
This year, she can use part of her inheritance to pay down the mortgage, he says. In future years, she can draw on her non-registered holdings to prepay her mortgage and contribute the annual maximum to her tax-free savings account, which will serve as an emergency fund. Rainy day savings should be kept readily available in a savings account or cashable term deposit.
Assuming she pays $15,000 toward her mortgage principal each year until the mortgage comes up for renewal in 2014 (in addition to her regular payments of $715 a month), she will have reduced the balance to about $51,100, the planner estimates. She could renew the loan at the same interest rate (4.09 per cent) for another 20 years, lowering the monthly payment to about $310. She could choose a shorter amortization if she is able to make higher payments.
He suggests Jennifer arrange a line of credit secured by the equity in her home before she retires so she will have a ready source of funds in case of a major emergency. Not only are such credit lines inexpensive - no interest is payable unless money is actually drawn down - but lenders may be reluctant to extend credit at all once she is retired.