Edith has about $3.4-million in savings and investments, both registered and non-registered. Her retirement spending goal is $70,000 a year after tax.Andrej Ivanov/The Globe and Mail
Edith is 51 years old and single with no children. As a professional, she has earned a good living over the years, amassing considerable savings and investments in addition to her Quebec home.
But caring for an elderly parent has led her to re-evaluate her priorities, she writes in an e-mail.
“My mother has been recently diagnosed with a neurodegenerative disease along with other medical issues due to a bad fall a few years ago,” Edith writes. “My dad is helping a lot but is over 80 years old.”
“So, I have become a caregiver. It’s a real labour of love and frankly, I like it more than my current job,” she adds. “I would be ready to leave the rat race behind and spend my time taking care of my parents and enjoying some time for myself because right now I am just drained from every direction.”
Her parents will face increased expenses in the coming years, which Edith will help pay for. “The realization that I will not have children to help me if I get sick makes me wonder if I can retire and free my days a little,” she writes.
What’s the best way for Randall and Polina to secure their disabled daughter’s financial future?
“I would still want to be able to enjoy my retirement without worrying about running out of money. I have worked really hard and really value peace of mind.”
She has about $3.4-million in savings and investments, both registered and non-registered. Her retirement spending goal is $70,000 a year after tax.
We asked Roger Massicotte, an advice-only financial planner at Objective Financial Partners in Quebec, to look at Edith’s situation.
What the expert says
“Edith can confidently consider retiring right now,” Mr. Massicotte says. “Her financial resources are more than sufficient to meet her needs.”
Edith’s goals are to “free her days a little,” renovate her home, pay for private care for her parents and still have enough to pay for her own health care when she grows old.
In the short term, she might work part-time “just for fun,” perhaps earning $40,000 a year. In addition to her investments, Edith has a defined-benefit pension from a previous job that will pay $14,380 a year, indexed, at age 65.
Based on the planner’s calculations, Edith’s retirement is funded at 132 per cent, which means she has more than enough to meet her financial goals, he says. That assumes basic lifestyle expenses of $5,835 a month or about $70,000 a year.
In preparing his forecast, Mr. Massicotte assumes life expectancy of 96 and an inflation rate of 2.2 per cent. “Her net estate value at 96 will be almost $3.6-million, or about $2-million in today’s dollars,” he adds.
With so much of her retirement income dependent on her investments, Edith wonders if she would be able to weather a major market crash. “She estimates that at least one and possibly two major market crashes could occur during her lifetime,” the planner says.
What’s the most tax-efficient way for retirees Tyson and Daniella to draw down their savings?
Using financial planning software, Mr. Massicotte assesses Edith’s risk tolerance and compares it to the risk score of her portfolio. While her risk tolerance is average, her portfolio’s risk score is high, he says.
“I recommend a more diversified and phased approach for her strategic asset allocation,” Mr. Massicotte says. He suggests that Edith gradually increase her fixed income allocation from 30 per cent now to 40 per cent from now to age 74, and to 50 per cent from age 75 onward.
“I suggest she rebalance her equity mix because she has almost no international exposure.”
With less volatility from a rebalanced asset mix, the expected rate of return after subtracting management expense ratios, advisory fees and taxes would be 4.1 per cent until age 74 and 3.9 per cent thereafter.
“The suggested asset allocation has lower expected volatility and could provide Edith with some peace of mind,” Mr. Massicotte says.
Based on financial planning assumptions guidelines, he tested her retirement scenario by asking a number of hypothetical questions:
What if the market crashes by 30 per cent in the year after her retirement, takes four years to recover, and the recovery effectiveness is only 67 per cent? Recovery effectiveness is the percentage of the loss you expect to regain over the recovery period.
“She will meet all her goals,” he says. “Her retirement funding score will drop from 132 per cent to 123 per cent. That’s still a comfortable margin of safety.” She’ll be able to pay for her parents’ private care as well as her own and still leave an estate of $2.7-million. That’s just a hypothetical number. She could well spend most of her savings over time.
Are retirees Amit and Keira, both in their 70s, too exposed to the stock market?
What if her average rate of return is one percentage point lower during her retirement years? She’ll still meet all her goals, the planner says. Her funding score will drop to 115 per cent and she’ll leave an estate of $1.95-million.
What if she lives to be 106, her average rate of return is one percentage point lower and inflation is 2.35 per cent instead of 2.2 per cent?
“She may run out of money at the age of 102 but she will achieve all her other goals.” He recommends an annual checkup to rerun the numbers and adjust if necessary. “Planning is a continuous process.”
To further stress-test the forecast, Mr. Massicotte ran a Monte Carlo simulation, a volatility analysis that Edith had asked about. “Volatility analysis assesses how sensitive the plan is to rates of return varying over time,” he says. The assumptions are run through 1,000 market simulations with return rates varied each year. “In her case that’s 45,000 random scenarios.”
The verdict? “Her odds of outliving her money are very low. In my analysis she could perhaps have to reduce her expenses around the age of 88 but those are extreme scenarios.” According to the analysis, her estate value at 96 could range from minus $397,000 to a positive $17.9-million, depending on the variables.
The following recommendations are integrated in Edith’s retirement plan:
- delay Old Age Security benefits to age 70 and Quebec Pension Plan to 72;
- set aside $86,000 in a cash reserve for unexpected expenses;
- set aside $235,000 for her parents’ private care;
- set aside $368,000 for her own future health and medical expenses;
- set aside $106,000 for home maintenance and repair; and
- “Have a specific investment policy for each goal because they don’t have the same time horizon,” he says.
“Her 132-per-cent funding score takes all those provisions for future expenses into consideration,” the planner says.
In addition, he recommends Edith draw up a decumulation plan to minimize taxable income and that she consider long-term care insurance.
She may also consider using 20 per cent of her investable assets as some point to buy a life annuity, which pays out a fixed sum for the lifetime of the holder. This would reduce her exposure to market volatility. As well, she should create a two-year cash buffer to avoid being forced to sell investments at a loss.
Finally, Edith may want to consider which discretionary expense she is willing to reduce if her financial circumstances were to change drastically. “If it ever happens, you will have a plan B ready and won’t have to negotiate with yourself in a stressful moment.”
Client situation
(Income, expense, asset and liabilities provided by the applicant.)
The person: Edith, 51.
The problem: Can she quit working to care for her parents without jeopardizing her financial security?
The plan: Move to a more diversified and less volatile asset allocation. Set aside future cash needs now. Draw up a decumulation strategy. Revisit the plan regularly.
The payoff: A sense of relief knowing she can afford to slow down and dwell on what is really important to her.
Monthly after-tax retirement income target: $5,835.
Assets: Bank accounts $80,800; non-registered investment portfolio $1,974,400; defined contribution pension plan $29,200; locked-in retirement account from previous job $260,000; RRSP $857,000; TFSA $170,200; permanent insurance $71,690; residence $750,000. Total: $4,193,290.
Estimated present value of her DB pension: $224,860. That’s what someone with no pension would have to save to generate the same retirement income.
Monthly outlays: Property tax $410; home insurance $120; electricity $225; security $40; maintenance $285; garden $50; transportation $605; groceries $400; clothing $115; gifts, charity $135; vacation, travel $585; books $45; personal care $100; club memberships $390; dining out $260; entertainment $80; sports, hobbies $70; subscriptions $95; other personal $20; doctors, dentists $300; drugstore $195; physio $170; health, dental insurance $95; communications $210. Total: $5,000.
Liabilities: None.
Want a free financial facelift? E-mail finfacelift@gmail.com.
Some details may be changed to protect the privacy of the people profiled.
