How to lead an active retirement on a tight budget | Family Finance ...

Situation Active woman looks for simple retirement with enough money for her favourite sports, $60,000 a year will be enough, she thinks

Strategy It is all about boosting investment returns, to stabilize income. Working to age 65 will also help, of course

In Ontario, Harriet, as we?ll call her, is still handing most of the feeding and sheltering costs of her two children ages 21 and 18.

She gets little financial support from her ex-husband other than a one-third contribution for education costs for one child in first year university and the other on track to start first year this fall. The kids each pay a third of their costs from jobs and Harriet covers the balance. Her ex-husband manages a small Registered Education Savings Plan for the kids as well. Her plan ? retire at age 60 if possible, 65 if necessary. Her goal ? a $60,000 pre-tax retirement income.

At age 55, she has a take home salary of $5,000 a month, and would like to have a $60,000 annual pre-tax income in retirement. ?I figure I can live pretty well on $5,000 a month before tax. It would cover what you might call my core living expenses.?

Harriet?s life is active ? golf on weekends, yoga on weekdays, gardening in summer, a little skiing in winter. ?My life revolves around my kids, still at home, and I use the time left over for me. But when I retire, the time won?t be leftovers, it will be all mine. Some of that will be volunteer work, some for travel. $60,000 may not seem like a lot to many people, but the thing is, it will be all mine.?

Family Finance asked financial planner and portfolio manager Adrian Mastracci, head of KCM Wealth Management Inc. in Vancouver, to work with Harriet. ?The problem is to boost the investment returns, but to do so without excessive risk. So this is a problem of generating current income and future income.?

Financing retirement

Harriet has put 16 years into her job and will have a $37,000 annual pre-tax base pension at age 60. That puts her shortfall with no CPP benefits, which would be subject to a 36% reduction, at $23,000. The cost of taking early CPP benefits is too large and too far from her goal, Mr. Mastracci says. It is not a viable plan, he concludes.

If Harriet works to 65, her combined CPP and employment pension, which are integrated by her employer, would provide $49,500 before tax, a 33% boost over her age 60 pension. Old Age Security would start at 65 and add $6,553 in 2013 dollars, making her pension income $56,053. Her present savings rate which adds $3,600 a year to $97,000 of present RRSP assets, would boost total savings growing at 3% a year to $173,000 by the time she is 65. Maintaining 3% annual growth, that capital would generate $5,190 annually, bringing her total income to about $61,250 a year before tax.

She will have met her goal with and have the capital of her retirement savings to pass on to her children together with the value of her house, which will be paid off a year after she retires at age 65 according to the present 11-year amortization schedule.

Generating a net return of 3% after inflation, is not an insurmountable challenge, but Harriet is far from attaining that rate of growth. Her investments are a blend of a large cap energy producer, a senior chartered bank, a mutual fund structured to chase growth stocks, a global small cap fund, and a gold fund. It is a handful of picks, not all bad, but it is not a portfolio for income or a financially secure retirement. With few stocks that produce dividends and provide some stability, it is far too risky for a retirement plan, Mr. Mastracci says.

Restructuring investments

It is time to start over and to aim for a simple structure of income producing stocks and investment grade corporate bonds. It should be easy to understand and to manage.

For Harriet?s Canadian-source income, it is important to have a third of the portfolio in large cap companies? whose shares qualify for the dividend tax credit. Through the dividend tax credit, which reduces taxes on dividends, $1 of dividend becomes the equivalent of about $1.35 (it varies with province and tax bracket) of ordinary interest income. Senior Canadian companies with average 3% dividends ? banks and big utilities and telecommunications companies meet this test ? would be appropriate, Mr. Mastracci says.

Another third of the portfolio should be U.S. large cap companies that offer 2% annual dividends and perhaps 3% annual price gains. The companies should have dependable and rising dividends. Many S&P 500 companies meet this test. For Harriet, that?s important, for she would like to spend a few months of the year south of the border. Having U.S. income with no foreign exchange costs would give her a sense of comfort. And the last third of the portfolio should hold a ladder of 1 to 10 year investment grade corporate bonds that produce as much as 2% more than Government of Canada bonds, which pay about 2% at present. The bonds will tend to stabilize the value of the portfolio.

These allocations can go into low-fee exchange traded funds with the stock funds chosen among those that equally weight their holdings, thus removing the winner?s bias which inflates the value of the latest hot ideas, many of which eventually tumble. This portfolio should have a blended return of 5% composed of 4% dividends and 3% growth from the stocks and 4% from the bonds. It averages 6% before 3% inflation. It is tailored for her risk tolerance and for her income needs, Mr. Mastracci says.

?This plan doesn?t involve a lot of sacrifice,? he notes. ?Rather, it takes the patience to wait to 65 to retire and a restructured portfolio to generate more income. When Harriet retires, she will have secure income in the amount she wants.?

Need help getting out of a financial fix? Email andrewallentuck@mts.net for a free
Family Finance analysis

Source: http://business.financialpost.com/2013/06/07/woman-on-tight-budget-plans-for-retirement/

ncaa march madness cbs march madness bracket ncaa basketball scores Harry Reems ncaa basketball ncaa tournament schedule