Time to shift some investment holdings

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For 28 years, Melina worked as an engineer in the high-tech industry. Last fall, at 57, she was let go from her $80,000-a-year job. She is living on employment insurance and her savings.

She owns her Ottawa house free and clear but has some investment-related debt.

Melina says her job prospects are not good and she wonders whether she has enough in her registered retirement savings plan and investment accounts to give her an income of $2,600 a month after tax for the rest of her life. That would be $31,200 a year and would include Canada Pension Plan and Old Age Security payments.

"Is retirement right now wishful thinking or is it attainable for me?" she writes in an e-mail. "Do I have to go to work again?"

We asked Norm Collins of Collins Financial Consulting in Dartmouth to look at Melina's situation.

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What the Expert Says

Melina has a lot going for her, Mr. Collins says. She owns her home, she is mortgage-free, she has considerable savings and her spending "is by no means excessive."

But she does have a $52,000 line of credit taken out for investment purposes on the assumption the interest would be tax deductible, Mr. Collins notes. With no prospect of taxable income any time soon, Melina should pay this off immediately, he says. In so doing, she would cut her monthly expenses by $300.

By far the biggest threat to Melina's security, though, is her heavy exposure to the financial markets. Her non-registered investment portfolio comprises $65,000 in dividend-paying mutual funds and $215,000 in dividend-paying stocks. Her RRSP and Locked-In Retirement Account are 60 per cent in stocks and 40 per cent in fixed income.

Over the next 10 years, Melina will have to liquidate more than $250,000 in investments to cover her living expenses, Mr. Collins says. If the stock market takes another dive, as markets are wont to do, she may be forced to sell at depressed prices.

To avoid this, she should begin a program of shifting stock holdings to guaranteed investments timed to mature as the money is needed; for example, a one- to five-year bond or guaranteed investment certificate (GIC) "ladder" with a certain amount of money coming due each year. This may result in lower yields on the money she will be withdrawing, but she would still have upside potential in the long-term stock portion of her portfolio.

Melina asked that Mr. Collins's forecast assume a 3-per-cent rate of return on guaranteed investments and 4 per cent for stocks and stock mutual funds.

So, can she put her feet up?

No worries, the planner concludes. Melina will start collecting Canada Pension Plan at age 60. In the meantime, she will live on her non-registered holdings and withdraw $6,000 a year from her RRSP.

By the time she turns 65 in 2018, Melina will be collecting $7,000 a year in OAS, $6,200 in CPP, $4,000 in income from her investments and $4,700 from her RRSP, for a total of $21,900. That is $11,100 less than her income target, which by then will be equal to $33,000 a year. She will have to make up the balance by drawing on her non-registered investments.

At 72, she will begin withdrawing an estimated $28,600 from her registered retirement income fund, which will pretty much cover her expenses. She can continue with her RRIF withdrawals until age 90, at which time she will have $94,000 (after buying a new car) of savings left, not including her house, Mr. Collins estimates.

The key variable for Melina is financial market performance.

"A strong market, with returns of 5 per cent a year, all other assumptions the same, would leave Melina with $377,700 of savings at age 90," Mr. Collins says.

"However, a softer market, with an average return of 3 per cent a year, in the absence of any adjustment to expenses, would have Melina running out of funds by age 85."

Client Situation

Special to The Globe and Mail