Below you will find a real life case study of an individual who is looking for financial advice on when he can retire and how best to arrange his financial affairs. His name and details of his personal life have been changed to protect his identity. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.
Written by: DIANNE MALEY
Special to The Globe and Mail
Published December 22, 2017
Upheaval, both personal and financial, has characterized Logan’s life over the past year or so. He and his former wife divorced and they’re sharing custody of their 15-year-old son.
“My personal circumstances are in the midst of a change, and I need to start thinking about the next five, 10 and 20 years in terms of overall financial planning,” Logan writes in an e-mail.
They have sold the family home and soon the cottage will go up for sale as well.
A few months ago, Logan bought a house in the Toronto bedroom community where he lives and his son goes to school.
The plan is to keep the house until his son goes off to university. At that point, Logan would sell the suburban place and look for a waterfront lot up north on which to build a house and workshop.
In the meantime, he is thinking of buying an investment condo to rent out. At the age of 52, Logan is also beginning to think about retiring from his job of more than 20 years in the tech industry. He is grossing $154,000 a year.
Logan’s goal is to retire at 60 with $80,000 a year after tax, substantially more than he is spending now. He is setting his sights high to pay for travel, a couple of expensive hobbies, and recreation. Is he on track?
We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Logan’s situation.
What the expert says
Logan is thinking of buying a condo for $350,000 with $240,000 down. The balance would be financed by a mortgage of $110,000, Mr. Ardrey says. Logan figures the property would generate $5,000 a year in net income before tax.
In four years, Logan hopes to buy some land up north and build a house. This would cost about $450,000. “Some short-term financing will be needed to buy the land and build, but this will be paid off by the sale of his current home,” Mr. Ardrey says.
Selling expenses are assumed to be $70,000, including real estate, legal and moving costs. The planner suggests Logan secure a homeowners’ line of credit on his current house to finance the build.
“The remaining $185,000 cash surplus that year (2022, when his house is sold) will be saved to Logan’s non-registered account,” Mr. Ardrey says. Logan’s current budget shows a “significant surplus,” a recent occurrence, the planner notes. “Starting in 2018, this surplus will be allocated to retirement savings.”
Logan is currently saving $18,480 a year in his registered retirement savings plan. He has $50,000 of RRSP room available. Logan has not contributed to a tax-free savings account, so he has the maximum room of $57,500 available at the beginning of 2018. With the surplus generated each year, Logan can catch up with his TFSA room by the end of 2019 and his RRSP room by the end of 2020. Any additional surplus after annual contributions to his TFSA and RRSP will be directed to his non-registered savings.
In drawing up his projections, Mr. Ardrey assumes Logan will earn a rate of return of 4.67 per cent before fees based on the historical averages of his current asset mix. His lifestyle expenses will be subject to an inflation rate of 2 per cent. The planner further assumes that Logan will receive maximum Canada Pension Plan and Old Age Security benefits at the age of 65 and that he will live to 90.
Currently, Logan is spending $42,000 a year after savings and child support are subtracted. His retirement spending goal is $80,000 a year.
“Unfortunately, based on the above assumptions, Logan falls short of his goal,” Mr. Ardrey says. “His investment assets are exhausted by 2042, when he is 77.” At that point the planner assumes Logan sells the rental property, but that will only carry him until 2046, when he is 81.
“To make it to 90, Logan will need to reduce his retirement spending by $17,000, to $63,000 a year.”
If he really wants to spend $80,000 a year, he would need to work longer and still sell the condo.
Mr. Ardrey explores a couple things that could improve Logan’s financial position.
Instead of buying a rental condo, Logan could invest the money. The anticipated $5,000 a year profit on a $350,000 rental-property investment is equivalent to a 1.42-per-cent rate of return before tax, and 0.71 per cent after tax, the planner says. So Logan would be depending on capital appreciation that may or may not be forthcoming.
Second, Logan could shift his asset mix to improve the rate of return on his investment portfolio. As mentioned, based on historical averages, he can expect to earn 4.67 per cent on his existing portfolio before fees. Subtracting a management expense ratio of 1.5 per cent leaves Logan with a net return of 3.17 per cent.
“Take inflation away from that, and he is making just over a 1-per-cent real return.”
Instead, Logan could shift to an asset mix that includes alternative investments, along with traditional stocks and bonds, Mr. Ardrey says. By doing so, “he should be able to increase his return to 6.5 per cent, or 5 per cent net of investment costs.” He suggests 50-per-cent equities, 30-per-cent fixed income and 20-per-cent alternative investment strategies.
The person: Logan, 52
The problem: How to get his life back on track to meet his ambitious retirement spending goal.
The plan: Take full advantage of RRSP and open a TFSA. Rethink the investment condo. Diversify investment portfolio to include alternative investments to boost returns.
The payoff: A road map to a secure financial future.
Monthly net income: $8,853
Assets: Cash $6,000; RRSP stocks $10,000; RRSP mutual funds $434,000 (the bulk of this from a former employer plan); RESP $44,000; residence $660,000; expected proceeds from cottage sale $240,000. Total: $1.39-million
Monthly outlays: Property tax, home insurance $425; utilities $280; maintenance, garden $60; transportation $540; groceries $500; child care $1,100; clothing $105; gifts, charity $100; vacation, travel $600; dining, drinks, entertainment $650; personal care $20; sports, hobbies $120; pets, subscriptions $40; health, dental insurance $10; phones, TV, internet $70; RRSP $1,540. Total: $6,160
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Some details may be changed to protect the privacy of the persons profiled.