Keeping your retirement goal in sight

CanWest News Service
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Divorced businesswoman, Gloria aged 62, wants to ensure that the nest egg will see her through retirement. Her preference is to start retirement within two to five years.

Divorced businesswoman, Gloria aged 62, wants to ensure that the nest egg will see her through retirement. Her preference is to start retirement within two to five years.



Background

Gloria is into fitness - for both herself and her finances. Personally, she enjoys walking, exercising and running for charitable causes around Vancouver. Her active lifestyle has her travelling. She typically spends around $5,000 to $6,000 per year for a main holiday, and $1,000 to $2,000 a year on side trips.

Her main goal is to make the finances fit for retirement. Gloria noted, I need to apply the same care to my finances as I apply personally. Preserving capital is a priority.

Some financial concerns linger.



Current Situation

Gloria owns a residence and has a substantial deposit on a condo slated for completion in about a year. Her plan is to live in the new one and sell the present one.

Income draws from her business have been $60,000 to $100,000. She expects about $50,000 in 2008, with a saving capacity near $10,000. There is no employer pension plan, although she is entitled to one at age 65.

She makes her RRSP deposit as early as possible, so unused room is usually zero. The 2008 RRSP deposit will be made shortly. Mortgage interest is deductible, and there is no credit card debt. A plus is her ability to adjust the budget in the leaner income years.

Personal and RRSP accounts now hold 14 different investments.

She says, The makeover questionnaire got me thinking about several things that require attention. Im in need of a simple game plan.

Fixed income represents a large component. The mix needs less exposure to equity risks. However, Gloria would benefit from more diversification and more equity content. Some reduction in the number of holdings would also help.



Affording retirement

Retirement for Gloria is a $60,000 before-tax income, in todays dollars, starting in two to five years. Her planning horizon is estimated at 29 years. Inflation is assumed at 2.5 per cent, and return on investment at six per cent per year. Gloria will have partial entitlements to CPP and OAS.

My estimate is that in two years Gloria will require $950,000 of investment assets to fund retirement. This sum is over and above the residence, CPP, OAS, and former employer pension.

She has attained her goal, but has to be careful. The picture could change if her business cannot be sold or if shes stuck owning two residences. Gloria also needs to continue investing diligently and be mindful of inflation, health issues and market risks.

Managing the unknowns.

I suggested making business tweaks with the goal of improving profitability and ultimate salability. Finding a mentor for it provides a sounding board. Someone who can suggest an ounce of sanity when the storm clouds drift by.

I asked Gloria to reflect on the financial ramifications and who will take over in case of her disability, retirement, or death. This helps prepare her vision for the business succession. It also keeps the business plan fresh.

Using part of the $750,000 capital-gain exemption on its sale means that the business must be a qualifying small business. It must qualify for 24 months before the exemption can be used.

Another must is to avoid owning two residences. Neither the current one nor the one being built is suitable for rental. Accordingly, she needs to arrange the sale of the current home to coincide not later than occupancy of the new one.



Investment plan

My conclusion is that a plan seeking income with some growth is suitable for Gloria. It provides comfort within her risk tolerances and investor profile. She does not need to incur extra risks. Her aggressive picks should be replaced. Tax considerations are minimal.

Asset mix has a direct impact on her portfolio. Allocating 40 per cent to equities and 60 per cent to fixed income should be appropriate. If inflation becomes a problem, the equity component can be raised to 50 per cent. The new mix has equities of 25 per cent in Canadian, 10 per cent in U.S., and five per cent in global selections. Fixed income is allocated to a four- or five-year ladder.



Closing reflections

Gloria has some decisions on her plate. She explains, I feel better about my prospects for retirement. I will ensure that my portfolio is as financially fit as possible.

Geographic location: Vancouver, U.S.

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