Family file: how big a slice?

Dana Lacey, Financial Post Business, December 2, 2008

The Morrisons own their home and have more than $1 million in savings. Nearing retirement, they don’t know if they’ve saved enough to maintain their lifestyle

When the mercury drops in Calgary, Adam and Erika Morrison daydream about retiring and spending their winters in a more golf-friendly climate. While they’re not ready for retirement just yet, they see it in their not-too-distant future and fear they’re not ready. “We’re hoping to retire in two years but we’re worried about giving up regular paycheques,” Erika admits, wondering, “What if we run out of money?”

Adam, 63, is a full-time sales manager earning $150,000 a year, while Erika, 61, receives $25,000 from a part-time job and CPP payments, bringing their total income to $175,000. Their net worth is $1.9 million, which includes $520,000 in RRSPs, $42,000 in Adam’s company pension and $647,000 in non-registered investments. The remaining chunk of their net worth – $650,000 – is tied up in their home, which they love and have no plans to leave. They plan on spending $90,000 a year in retirement to maintain their current lifestyle, but aren’t sure if they can generate that much from their savings.

The couple has been careful about spending and smart about saving. In 1991, they sold off their shared home business and split the profits. Adam’s half helped pay outright for their home, which they estimate is now worth $650,000. “That’s how we’ve been able to save up some money,” Adam says. “We haven’t had a mortgage in years.” With Erika’s half, they started their non-registered portfolio – 65% stocks, 15% bonds, 10% cash and 13% mortgage pools. (They are with a Calgary firm that uses a pool of funds from investors to finance portions of peoples’ mortgages.) “The mortgages have been very lucrative,” she says, adding that they’re not sub-prime, and so far haven’t been affected by the country’s credit crunch. “There’s always risk when you’re involved with something like that,” Erika says, “but the properties are all local, so we feel more comfortable.”

In retirement, the Morrisons want to maintain their current lifestyle? – with less work and more golf, of course – and to head south when the snow starts to fall. The couple wouldn’t mind a few overseas vacations, either. They want to know if their two-year retirement goal is realistic, and how they should manage their money in their last working years. “I’ve always heard that you should start to change your portfolio when you get close to retirement,” Erika says. “We’re probably a little heavy on the stock side given our age. It’s higher risk, but it brings in more money than bonds.” So far, they have reinvested any money earned on investments, and wonder how much they can cash out each year when they quit working. “We’re nervous,” Erika admits. “Our biggest concern is maintaining what we have worked so hard to achieve.”


While the Morrisons are hardly short of funds, the type of questions they’re asking are common for people approaching retirement. In order to figure out if they have enough, the couple needs to examine how they want to use their assets. If it’s important for the Morrisons to stay in their home and have their money last them well into their 90s, they will need to make adjustments to their current plans.

Gayle Harris, a financial planner with T.E. Wealth in Calgary, says the Morrisons are on track for a cash shortfall towards the end of their lives, assuming they rely on their portfolio and don’t factor their home into their assets. “Generating $90,000 a year is going to be very challenging for them,” she warns. Assuming a 4% rate of return (a 7% return on investments with 3% inflation), she predicts the couple will run out of money when Erika turns 85.

This doesn’t mean that the Morrisons should delay their retirement or scale down their travel plans: Harris believes they can get by on less than $90,000 a year without having an impact on their lifestyle. In retirement, they won’t have to pay for benefits and CPP, and the amount of income tax they pay will go down. “With their current assets and saving rate, I think $80,000 a year is more doable than $90,000,” says Harris. “That’s how much they can spend and not run out of money.”

Ross Young, a financial planner at Secure Capital Management Inc. in Calgary, suggests they take their spending down to $72,000 a year. He says they’ll live comfortably, enjoying extra travel and golf, and will still have money past age 100.

However, the Morrisons will need to be very careful in preserving and growing their portfolio. While they will receive CPP and OAS payments and small payments from Adam’s pension, the bulk of their income will come from investments. Harris advises the couple to hire a professional manager to ensure they are protected. “Erika seems to be doing this herself,” she says, “but these people can’t afford to lose this money.” The size of their portfolio will give the Morrisons access to high-quality managers at low fees.

According to Young, it was smart to put the portfolio in Erika’s name, since Adam is the higher income earner, but once they retire, she will get bumped into a higher tax bracket. He says they can lighten their tax load after retirement by putting all their RRSP contributions over the next two years into Adam’s name.

Young is glad to see that the Morrisons have invested in mortgage pools, and he suggests they allocate a greater percentage of their portfolio to them – as much as 50% – to ensure a steady flow of income. “Adam and Erika could withdraw money from the mortgages when the stocks are low, and cash in some of the stocks when they have shown a good gain.”

Like Harris, Young thinks the Morrisons can afford to retire in two years but “highly encourages” them to hire someone to actively manage their investments and create a to-the-penny financial plan. “It will give them something to look at each year to make sure they’re on target,” he says, “because if you don’t have that written down where you can see it, it’s pretty hard to know if you’re going to be okay.”

Tip of the Month: Consider investing in mortgage pools

Mortgage pools, where investors buy shares in a company that lends out money for mortgages, may sound scary, but they can be a lucrative part of an investment strategy. They provide monthly income, but can give higher returns than bonds or GICs. The keys include investing in mortgages that only finance a portion of a home’s value, and diversifying geographically to avoid impact from regional downturns

For an update to this story in the context of the recent financial crisis, visit Family Files Revisted

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