FINANCIAL FACELIFT

Affluent Ottawa couple aims to keep up good life

BY ANDREW ALLENTUCK

In Ottawa, Mary and Frank Gray are living the good life. As a marketing executive for a high-tech firm, Mary, 45 has recently earned salary and bonus of $200,000 a year. Her husband, Frank 52, works for the federal government in a middle management job on a salary of $78,000 a year.

The Grays (not their real names) have a home they figure is worth $430,000, a country cottage worth $105,000, a couple of cars, and $200,000 of investments inside and outside, their registered retirement savings plans. Their debts we modest in relation to their assets.

Two of their three children are grown, but they wonder how long they should continue working and how best to maintain their current way, of life in retirement for Frank in as little as two years and for Mary in another seven years.

What out expert recommends

Facelift asked Daniel Stronach, a fee-only financial planner in Toronto to speak with Mary and Frank. His analysis suggests that with their combined incomes, financing a comfortable retirement won't be a problem. But making the most of their assets will take planning and accurate assessment of their spending needs in future, Mr. Stronach explains.

"They will have more assets than they'll need to support their lives well into their nineties," Mr. Stronach says. With an apparent surplus of money even for a planning horizon beyond their normal life expectancies, they can either spend more in retirement, retire before 2009, as Mary expects to do, make gifts or create legacies for their children.

At the base of the Grays' good fortune is that they have largely attained their life's goals for housing and other major expenditures. The house has a small mortgage of $24,000, their cottage and its land have $117,000 owing, and even with total monthly household expenses of $7,514, including debt service of $3,600 a month, they save $5,250 of their monthly take-home family income of $13,828 and have cash left over.

The easiest move to save money is to pay off non-deductible mortgages that cost 6 per cent a year on their city house and 4 per cent on their country house, Mr. Stronach says.

For every $1,000 the couple pays in interest, they have to earn almost $2,000 before tax. Those are, therefore, effectively 12 and 8 per-cent mortgages.

Building up RRSP’s for retirement should not be a serious problem. Currently the Grays RRSP’s have $170,000 and, if the couple contribute at their maximum rates, they should have $407,000 by the time Mary is ready to retire in 2009. That goal would be attained with an annual real rate of return of 4 per cent, Mr. Stronach says. They can begin to withdraw their funds through registered retirement income funds when Frank reaches age 70 in 2019.

Until retirement, Mr. Stronach conservatively assumes Mary will earn a minimum of $150,000 a year, which is the average of her income over the past five years, and that Frank will continue to earn $78,000 each year until 2004, when he will end his full-time work for the federal government. Thereafter, he expects to earn $25,000 a year as a consultant. His pension will begin at 60 per cent of his final year's income or about $49,600 a year and decline to $47,000 in indexed money by 2014.

The couple also need to refine their investments, reducing their 24 mutual funds in nine plans to a small number that provide meaningful diversification and easier administration. With $63,000 of annual savings going into RRSP’s and non-registered investments, they have a lot at stake in the reorganization.

The planner notes that the couple has split incomes to put most RRSP assets in Mary's accounts through spousal contributions and to avoid having Frank have too much income on top of his indexed federal pension.

"Their portfolio is a dog's breakfast of income funds, Latin American and Asian funds, specialty sector funds, global bond funds, style management funds and money market funds," Mr. Stronach says.

ajames@total.net