Marie, 51, is much happier now that she’s left behind the stress of the corporate world and has taken up a job in retail. However, her more “meagre” income means she has to figure out how best to make it to retirement.Dushan Milic/The Globe and Mail
After a few years spent working in human resources for large corporations, Marie called it quits. The 51-year-old married Alberta mom found the pressure to be too much, largely because of a chronic health condition that's exacerbated by stress.
"Fatigue and stress are my triggers," Marie says. "I often couldn't sleep at night, which just made things worse."
So she walked away. Besides doing some freelance writing, she's now working at her favourite retail store – for $11 an hour.
"It's a great feeling to go to a job where there's no real pressure, plus you're able to leave after eight hours," Marie says. "The atmosphere is really positive."
Although Marie is much happier with her employment, she now has to figure out how to make ends meet with her "meagre" income.
"I'd like to be able to travel within Canada to see my family, but I don't feel like there's any extra cash for those trips," Marie says. "And I'm worried about the lack of financial security."
Although the couple has some RRSPs and RESPs, Marie is also concerned about whether she and her husband, Jon, also 51, a merchandising specialist, will have enough funds for their 16-year-old son's university education.
What do financial advisers make of Marie's new-found reality?
We asked Jennifer Maier, a certified financial planner at Perler Financial Group in Port Coquitlam, B.C., and Calgary's Sterling Rempel, who's a certified financial planner at Future Values Estate and Financial Planning for their advice.
The basics
– Income: Approximately $90,000 a year (Jon: $60,000; Marie: $30,000)
– Credit card debt: $900
– Line of credit debt: $2,500
– Mortgage remaining: $163,000
– Savings: $0
– RRSPs: About $120,000
– RESPs: $17,072
Jennifer Maier's tips
1. Balance out the couple's RRSPs.
"Jon has close to twice the RRSP investments as Marie," Ms. Maier notes. "Even out the RRSPs using a spousal RRSP. His tax refund will be higher, and evening out income in retirement will save tax in the long term."
Once the RRSPs are even, start splitting contributions equally to Jon's RRSP and a spousal RRSP for Marie. "Note, though, that Jon is the one who should contribute. Marie's income level is low, and it makes little sense for her to be the contributor when she won't save much in tax."
At the same time, Ms. Maier recommends paying off debt, building an emergency fund through tax free savings accounts (TFSAs), and streamlining accounts. With nine accounts at four financial institutions, it's no wonder Marie and Jon feel a little lost. "Even the amount of mail would be daunting," Ms. Maier says.
"Consolidate the accounts at one institution under an adviser who will be able to do an efficient asset mix and advise Jon on how to invest through his work plan."
2. Restructure the portfolio.
The new investment mix should eliminate GICs and term deposits, Ms. Maier says, while the fixed-income/bond investments in the balanced funds also need to be re-evaluated.
"Government bonds currently provide poor returns due to interest rates being at an all-time low," Ms. Maier says, noting that when investing over time, it's imperative to choose investments that will keep up with inflation. "Look for managers that hold corporate bonds in their portfolios."
"Finally, the existing portfolio is primarily Canadian," she adds. "While Canada has been a great place to be for a long time, global markets have picked up steam and are looking stronger."
3. Move RESP investments to more stable, shorter-term investments.
"This is where short-term funds like GICs and term deposits do the best work," Ms. Maier says. "They can protect your money from a loss without taking a big hit from inflation, because the money will be used within a few years' time."
Plus, along with their son, Jon and Marie should be researching postsecondary programs now to get an idea of specific costs and looking at his future living expenses in an apartment or on campus versus at home.
Sterling Rempel's tips
1. Organize and optimize cash flow.
After fixed costs such as taxes and mortgage payments, Jon and Marie should have about $4,700 a month in discretionary income, not including living expenses, Mr. Rempel says.
"This may be an opportunity for Jon and Marie to start TFSAs to fund emergencies or for other liquid savings," Mr. Rempel says. "Also, they may want to maximize RESP contributions for the next two years to receive any grants that are still available."
Mr. Rempel also suggests the couple consider accelerated mortgage payments or switching their mortgage to a home equity line of credit. "With the latter, it would be possible to make interest-only payments, thereby freeing up cash flow for other financial objectives," he says. "Of course, the downside is that there is no fixed repayment of principal, and it's possible to increase overall debt levels if there is not a disciplined approach to spending habits."
2. Manage risk via insurance.
A health crisis or premature death could significantly impair the pair's current and retirement finances, says Mr. Rempel, who prepared this critique with colleague Sharon Selvig-Cooper, CFP.
"Critical-illness insurance or disability-income insurance should be reviewed and considered," he says, adding that there's good reason to have adequate life insurance for mortgage and debt payments, tuition costs and ongoing survivor income.
"Life insurance for estate planning, tax minimization, and philanthropic purposes should be considered," Mr. Rempel says. "Life insurance on a joint, last-to-die basis should be considered to cover off the tax liability resulting from the deemed disposition of the RRSPs and capital gains on any business shares, non-registered investments, or property."
3. Accumulate funds over various periods.
In the short-term, Mr. Rempel suggests both Jon and Marie set up a TFSA for their emergency fund. For the medium-term, the two should focus on education funding. "The current RESP could cover approximately two-plus years in tuition costs at University of Alberta," he says. "Can or should the son participate in his own schooling costs by working or scholarships?"
For long-term savings, Mr. Rempel advises re-examining their portfolio breakdown.
"Their current asset allocation looks to be 78 per cent equity growth versus 22 per cent fixed income, in keeping with an advanced risk tolerance. If they are risk-averse, they may choose to move to a slightly less aggressive mix of 60 per cent equities and 40 per cent fixed income."
Finally, Mr. Rempel says the couple's RRSP savings (including Jon's defined contribution pension plan, which is currently valued at about $24,000) will work out to $40,000 a year from age 65 to 90 including CPP and OAS payments (100 per cent for both Jon and Marie) based on a rate of return at 5 per cent and assuming Jon's salary is indexed at 3 per cent. By the time they reach 65, their RRSP savings should total about $382,000 based on these assumptions.
"This retirement income could increase to $42,000 [annually] with an extra $250 per month into Marie's RRSP," he says.
"Other strategies to increase the couple's retirement income," he adds, "would be to delay retirement age, work part-time during retirement, increase overall rate of return through more aggressive investments – although this carries downside risk – or increase savings levels."
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