BY ANDREW ALLENTUCK, FINANCIAL POST AUGUST 18, 2010

Montreal Gazette: August 18 2010

In Toronto, a single mother we’ll call Carol, 42, is raising her two children, ages 10 and 13. She nets $3,500 per month after tax from her home-based business and $1,300 in child support for total monthly after-tax income of $4,800. She is able to finance some expenses through the business, but there is not a lot of money left over at the end of the month.

Carol pays $1,200 a month on her mortgage and $220 for property taxes. The mortgage, with a 3.74% rate of interest for four more years, will be paid off in 8 1/2 years when she is 50.

Carol is making ends meet, but she seeks a degree of freedom that she does not have now. Surplus income that she can save after her kids leave home will go into her RRSPs, she says. Her biggest concern is that she may not be saving enough for her retirement.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Carol to plan her financial future. “The situation is less dismal than she suspects,” he says. “Carol has common sense and great discipline. She manages her savings well.”

Carol’s disposable income should increase over time. Her car payment will be eliminated in four years. The child support she receives is payable until each child is 19, but could continue through their university years. Some child support could end in six years when her eldest child is 19 and all could terminate when the younger child begins post-secondary education.

The pension plan

If Carol works to age 65, she would be eligible for what might be 80% of maximum Canada Pension Plan benefits, currently $11,210 per year. That would provide $8,968 per year. She will also be eligible for full Old Age Security benefits of $6,222 per year. Both amounts are indexed and taxable. To her current RRSP balance of $80,900, she adds $200 per month plus a $4,000 lump sum from her husband, from whom she is separated. If these numbers continue, with 3% average annual real growth, she will have a balance of $357,300 at age 65, Mr. Moran estimates.

This RRSP balance will enable Carol to draw $21,093 from age 65 to age 90. If potential savings from eliminating her debts are ignored, then from age 65 to 90, her total income would be $36,283 per year in retirement.

That will be a respectable but hardly a lavish retirement. A more expansive retirement, perhaps with a few trips each year, will take a lot more money. Currently, she has 14 mutual funds in her RRSP. They have high management fees, but good track records for the most part. However, she has scant bond exposure to stabilize the stock funds. Moreover, the funds are held in erratic amounts — $15,000 in one Canadian stock fund, $17,000 in another Canadian stock fund, $12,000 in yet another and $8,900 in a balanced fund with Canadian stocks. The picture is one of overlap and fee inefficiency. Carol is paying multiple managers to do the same thing.

Reducing investment costs

The portfolio should be rebalanced to introduce some government and corporate bonds laddered with terms of two to perhaps seven years. She should be able to get an average of 3% to 5% annual interest from her bond blend with the chance to reinvest principal as the bonds mature. A 40% allocation to bonds would provide stability, cash flow and steady compounding, Mr. Moran says.

Montreal Gazette: August 18 2010

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