“Financial Checkup” is an ongoing series that discusses financial planning options. In this issue, Investment Executive speaks with Christine Butchart, registered financial planner, certified financial planner, senior financial planning advisor and branch manager with Assante Capital Management Ltd. in Hillsburgh, Ont.; and Margaret Cameron, RFP, CFP, fee-only financial planner and president of Cameron Leadership Development Inc. in Ottawa.

The Scenario: Anne is a public-sector manager earning $105,000 a year. Sixty years old and living in Toronto, she and her common-law spouse of more than 20 years have just split up, negotiated a financial settlement and sold their home. They have one daughter, Sarah, 21, who is completing her third year of university. Anne will be paying half of Sarah’s estimated $20,000 in tuition and living expenses for the fourth year.

At the end of August, Anne will have $295,000 from the sale of the house; $35,000 in non-registered assets, including $15,000 in a tax-free savings account; and $208,000 in RRSP assets.

Assuming Anne doesn’t lose her job in the current environment of government spending restraint — and she is concerned that she will lose it — her pension will be $17,800 if she retires at 65 and $27,600 if she retires at 70. Anne also will have a pension of $7,200 from a previous job. Both pensions are indexed to inflation. Anne’s work benefits include $210,000 in life insurance while she is working.

Anne wants to find accommodation relatively close to downtown Toronto with two bedrooms. This could be a house, which she thinks would cost up to $550,000, or an apartment, which she thinks would cost up to $2,800 a month. Anne thinks she can live on $2,500 a month in today’s dollars excluding shelter costs.

Anne’s goals are to fund whatever further education Sarah wants, as Anne believes that education is the best gift she can give her daughter. Anne expects Sarah to obtain a master’s degree and perhaps a PhD as well. Anne hopes Sarah’s father will contribute to half of these expenses, but Anne will pay it all if need be.

Should Anne require medical care as she ages, she wants to avoid becoming a burden on Sarah.

A key question is whether Anne should buy long-term care insurance. She is a smoker in good health, but her mother died in her early 60s of a heart attack and her father died in his mid-70s from an aneurysm.

The Recommendations: In But-chart’s view, renting for $2,800 a month wouldn’t work at all, because Anne would run out of money while in her 70s. However, Butchart thinks Anne wouldn’t run out of money until she was around 89 — and would still be able to fund half the cost of four more years of education for Sarah — if Anne did the following: buy a house for $550,000; immediately reduce her non-shelter expenses to $2,500 a month; work until she is 65; make full RRSP contributions each year; and use virtually every cent of the rest of her income after shelter costs to pay down her mortgage. (Butchart notes that mortgages that allow the mortgagee to pay as much as they want each month are now available.)

The trick to making this scenario work, Butchart says, is for Anne to save enough to pay off $155,000 of the $255,000 mortgage by age 65. At that point, Butchart suggests, Anne should change her mortgage amortization to around 15 years. That would reduce her monthly payments, including property taxes, to about $1,100 a month — much less than what she would pay in rent.

Then, at around age 81, Anne should sell the house. Butchart is assuming 4% nominal (1% real) appreciation a year for the house, which would allow Anne to pay rent on a one-bedroom apartment — which should be sufficient, as Sarah would be living elsewhere and financially independent — until Anne is about 89.

Cameron takes a different approach. She doesn’t think buying a house is a reasonable option at this point, given the possibility that Anne could lose her job. Cameron notes that if Anne does lose her job, it could take a year or more for her to find another and she might not get one that pays as well. So, Cameron says, it’s best that Anne not purchase a home until she’s reasonably certain what her income level will be in the next 10 years.

Thus, Cameron would advise Anne to rent for at least one year. She suggests Anne keep track of everything she spends for at least three months, so she has a good idea of what she’s spending and where, and can see where she could reduce her expenses.

During this year of renting, Cameron suggests, the proceeds from the sale of the house should be in a cashable guaranteed income certificate, so the money will be available if Anne decides to buy a house.

Butchart agrees that a detailed list of expenses is necessary because it won’t be easy for Anne to lower her standard of living sufficiently to get by on the $2,500 a month Anne thinks she can live on, excluding shelter. And Anne will have to know where she can reduce spending in order to make up for the necessary additional expenses that will occur in other areas.@page_break@Cameron would urge Anne to find an apartment for around $2,000 a month because Anne can’t afford the $2,800 a month she originally had budgeted for rent. Cameron points out that Anne shouldn’t need a full-size second bedroom, as Sarah will be away at university most of the time. Cameron also thinks Anne may find that she likes renting.

If Anne insists on buying a house at the end of the year, Cameron would urge her to buy a condominium in the $350,000-$400,000 price range. At that price level, Anne should be able to pay off the mortgage in 10 years, assuming she continues to work until 70.

Cameron is in favour of Anne working until 70, as both her earnings for the additional five years and the resulting higher pension, assuming she keeps her job, will make her retirement more comfortable.

Butchart agrees that this would be financially beneficial but created her plan with Anne retiring at 65 for two reasons. First, Butchart didn’t want to assume Anne would work until 70 because of Anne’s concerns about losing her job. Second, Butchart wanted to see if Anne could retire at 65 in case she dies as young as her parents did.

Cameron notes that an informal Internet search suggests a large number of new condos are available in Toronto, so Anne should be able to buy one that doesn’t have high condo fees or the prospect of large assessments for major repairs.

If Anne buys a house, even in the $350,000-$400,000 range, Cameron says, major repairs, such as a new roof and new furnace, will probably be necessary in the coming years. These expenses could dangerously lower Anne’s capital. Cameron adds that Anne could look at something a bit farther from downtown Toronto, which would lower her housing expenses. She still would not need a car but would get more value for her money.

Butchart also recommends that Anne try to find a house or condo in the $350,000-$400,000 price range, so it would be feasible for her to live to 95 without running out of money and give her some funds for unexpected expenditures.

Neither advisor thinks Anne should cash in her RRSP to help pay for a house. As Cameron points out, Anne not only would have to pay taxes on the withdrawal, but she also wouldn’t be able to replace the RRSP assets. In addition, it’s much easier to pay off debt than to force yourself to save.

Both advisors recommend that Anne continue to make RRSP contributions. That should be her first priority, with further contributions to her TFSA made only if she has the cash. Of course, if Anne went with the renting option, she would have no trouble putting $5,000 a year into her TFSA as long as she has non-registered assets.

Besides maximizing Anne’s RRSP contributions, putting fixed-income investments in her RRSP and TFSA, and investing in tax-efficient equity mutual funds, Anne can save taxes by using Sarah’s tuition tax deduction — if Sarah doesn’t need it and assuming Sarah’s father isn’t using it.

Neither advisor suggests LTC insurance because Anne can’t afford it. If she needs institutional care, she will have to make do with what is provided by the government.

If Anne hasn’t already done so, she needs to update her will and her personal care and property powers of attorney.

For Anne’s investment portfolio, Cameron assumes a 5% average annual return. She recommends a 50% fixed-income/50% equities asset mix to start, perhaps increasing the equities portion to 60% once Anne feels secure in her employment to age 70. Because Anne does not spend time managing her investment portfolio, Cameron suggests mutual funds that are well diversified by geography, sector and investment style.

Cameron is assuming 3% inflation — as measured by the year-over-year increase in the consumer price index, which is used to index Canada Pension Plan and old-age security benefits — for both the CPI and Anne’s personal rate.

Butchart suggests a 40% fixed-income/60% equities mix from the beginning. She is assuming only 4.5% average annual return in her projections.

Furthermore, Butchart assumes that inflation will be 2% for the CPI, while Anne’s personal inflation rate will be 3%. That means Anne will be losing purchasing power on CPP and OAS benefits every year.

Butchart also likes managed products, particularly the multi-manager approach. She might also include some exchange-traded funds and real estate investment trusts. Butchart would split the equities between Canadian and foreign, with perhaps a slight tilt toward Canada, and would include emerging markets. Butchart urges holding 5%-10% of equities in those fast-growing regions, even for her risk-averse clients.

Butchart’s fee, if she isn’t going to manage the portfolio, is $200 an hour. In a case such as Anne’s, the fee for the development of the initial plan would probably be $1,500-$3,500.

Cameron, who does not manage money, charges $225 a hour. Her minimum fee for developing a financial plan is $1,500. In this case, the fee would probably be around $2,500, given the complexity of Anne’s situation. IE