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Julia’s investments are up 60 per cent, but is it enough to let her squeak by in retirement?

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The challenge, expert notes, is to find a way for a person with a modest income and pension plan to retire before 65

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A woman we’ll call Julia, 51, lives in B.C. She works in a school helping special needs kids. Her income, $3,100 per month after tax plus a $100 monthly gas allowance, covers $2,763 per month of expenses including $400 for her mortgage on her $410,000 condo, $303 monthly strata fees (also known as condo fees outside of B.C.) and $100 monthly property taxes. Single, she has to manage on what is a low income in her province. Her plan — work another five years, then retire, when she will be able to travel much more than the two weeks per year that has been her custom. The question — can it work on a modest retirement income and without part-time work?

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e-mail andrew.allentuck@gmail.com for a free Family Finance analysis.

Family Finance asked Eliott Einarson, a financial planner with Ottawa-based Exponent Investment Management Inc., to work with Julia. The challenge, he notes is to find a way for a person with a modest income and pension plan to retire before 65.

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Present finances

The good news is that Julia has managed to build $346,000 of equity in her home while taking a few trips a year. She hopes to travel a good deal more when retired, especially when costs are low in various out-of-season periods, and to keep her way of life going much as it is now until age 60. Then her pension of $1,559 per month plus $537-per-month bridge to 65, will provide $2,096 per month or $25,152 per year. She will be able to take an estimated $462 per month Canada Pension Plan benefits at age 60 and Old Age Security at $635 per month at age 65. Will this pre-tax cash flow support her retirement?

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She has a couple of advantages to realizing her plan. Her investment portfolio has done well, rising about 60 per cent from $89,000 before the COVID-19 lockdowns to a recent value of $143,000. Moreover, her aging parents, ages 81 and 91, will leave their estate to her.

Capital management

She wants to retire on her income and assets alone. Her present net worth, $501,000, is the basis of her retirement plan.

Julia sees paying off her $64,000 mortgage as a priority. It has about 14 years to run. If she were to pay it off entirely within the next five years so that it would be finished at her age 56, she would have to increase her monthly payments by $713, which is more than her budget will support. The better plan would be to maintain her amortization and retire at 60. At that time, she could take $2,096 pension and bridge benefit plus $462 CPP.

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As well, her RRSPs, with a recent value of $143,000 and $1,200 annual contributions will grow to $199,140 in nine years when she is 60, assuming a three per cent annual rate of return. The RRSP would then be able to support a taxable annual payout of $9,864 per year or $822 per month for the following 30 years to her age 90.

These taxable sources of income at age 60 add up to $40,560 per year or $3,380 per month. After 11 per cent average tax, she would have $3,008 per month to spend. That works out to a replacement of 94 per cent of her present $3,200 monthly after tax income, but with her mortgage ended at 65 and no further TFSA or RRSP savings, she would have an income surplus of about $1,000 per month. At 65, her OAS benefit, $635 per month, would lift income to $4,015 per month. After 14 per cent average tax, she would have $3,450 per month to spend.

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Her tax-free savings account, with a present balance of $7,000, would grow to $29,224 in nine years with $1,920 annual contributions and growth at 3 per cent per year. She can keep the TFSA for unplanned expenses such as replacing her car, present estimated value $6,000.

Income and security

Living on $36,000 at 60 and $41,400 at 65 monthly after-tax income will not be easy. Bargain flights, off-season resorts and other economies will enable this plan to work. We have not estimated long-run returns on investments beyond our customary three per cent for a blended stock and bond portfolio on top of three per cent annual inflation. Her investments are a blend of low-fee ETFs, a few high-fee but very successful mutual funds, and a U.S. asset fund. Julia needs guidance and her portfolio’s appreciation suggests she is getting some value for her fees. Study of investment markets in her retirement would give her a perspective on the risks she faces and future returns she might expect.

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However, when her parents pass away, which might be a decade or two, she can expect an inheritance of presently unknown value. We cannot time the event or estimate what she might get after final tax returns. Nevertheless, using today’s numbers, a six-figure inheritance — subject to unknown market changes and taxes, will probably produce a six-figure net sum. Assuming a value of $500,000 invested at three per cent per year, she would be able to add $15,000 to her income subject to 11 per cent tax, net $13,350 per year. That would be a significant addition to her pre-inheritance income. We do not include that in our projections.

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As a cost-saving measure, Julia can use the abundant free time she will have in retirement to schedule travel to low seasons. On the other hand, she may face unknown strata (condo) fee increases and future costs of a new or newer car.

The income this analysis estimates will have a sufficient surplus for a car update and modest increases in strata fees. Should Julia decide that a three or more decade retirement is boring without work, she can add to income with tax rates using pension and age credits likely to be modest or make substantial contributions to her TFSA with no tax consequences.

She will also have the gift of being able to time her spending and shopping without competition from work. “On the whole, her situation is good. Her present assets are rather modest, but time is on her side,” Einarson concludes.

Retirement stars: Three retirement stars *** out of Five

email andrew.allentuck@gmail.com for a free Family Finance analysis                        

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Saudi Arabia’s Most admired Companies in 2022

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Insights Success is an archway that caters to Entrepreneurs’ quench of technology and business updates which are currently ruling the business world.
We are ceaselessly proving the best platform for leading companies, which aids indefinite progress while creating meaningful learning experiences for the visitors and invaluable brand awareness for the clients.



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Bank of England raises base interest rate to 1.75%

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The Bank of England has raised the base interest rate by half a percentage point to 1.75 per cent, the biggest rise since 1995, in an attempt to combat runaway inflation.

The nine-strong monetary policy committee voted eight to one in favour of a 50 basis point rise, defying some market expectations for an increase by 25 basis points.

It is the Bank’s sixth consecutive tightening in monetary policy and follows in the footsteps of the US Federal Reserve and European Central Bank, which have begun aggressively raising rates by larger increments.

Interest rates are now the highest since 2009 as the Bank attempts to bring down inflation, which is running at a 40-year high of 9.4 per cent and is on course to exceed 11 per cent later this year.

These would be the worst inflation rates in the G7, caused in large part by rising global energy prices driving household bills higher this year. The UK economy is also heading for a slowdown this year as consumer incomes are squeezed more tightly than since the 1950s.

Andrew Bailey, the Bank’s governor, has hinted that it will also announce how it intends to begin unwinding the £850 billion of government debt pumped into the economy since the financial crisis, offloading bonds worth between £50 billion and £100 billion from as early as next month.

The Bank will also deliver its quarterly outlook, with Bailey expected to forecast that inflation will rise beyond 11 per cent and remain in double digits into next year. The Bank’s target is 2 per cent.

Commenting on today’s Bank of England interest rate rise, David Bharier, Head of Research at the British Chambers of Commerce (BCC), said: “This rise is the clearest signal yet of the Bank of England’s intention to get inflation under control. Spiralling prices are cited by businesses as by far and away the top concern right now.

“However, given the extremely precarious state of the economy, this decision is not without risk for businesses and consumers that are exposed to banking or overdraft facilities.

“There are many causes of the current inflation crisis – global supply chain problems, trade barriers, soaring energy costs, increased taxes, and labour market shortages. Interest rate rises alone will do little to address these.

“Worryingly, our research indicates strongly that most small businesses are not investing for growth, and that longer-term confidence is beginning to wane.





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Opinion: OSC appointment fuss is a tempest in a teapot

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Jeffrey MacIntosh: The government has the legislated right to have a say in the agency’s course

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Ed Waitzer’s recent op-ed (“The issue at the OSC is integrity, not debate,” July 14, 2022) expresses surprise and disappointment in my recent op-ed (“Conflict at the OSC: Why the regulator needs to make room for dissent,” July 7, 2022). In that op-ed, I argued that lawyer Heather Zordel’s appointment as non-executive chair of the OSC in March of this year should be met with open arms, as it introduces new points of view into what seems to be a rather intellectually closed shop. I don’t suppose it will come as a shock to Ed Waitzer or anyone else that I am surprised and disappointed at his rebuttal.

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To begin with, it contains a number of inaccuracies. It states that Ms. Zordel was denied reappointment to her earlier position (2019-2021) as part-time commissioner. In fact, given her busy legal practice, she took herself out of the running. This puts a rather different complexion on the matter.

And I never stated or implied that Ms. Zordel was not reappointed as part-time commissioner because of two dissenting opinions that she wrote as commissioner. My point was that for Ms. Zordel’s critics the dissents were a factor in opposing her appointment as chair of the board.

The nub of my argument was that the OSC could benefit from greater variety of viewpoints among its brass as to what investor protection and other aspects of the OSC’s mission entail. By contrast, Mr. Waitzer argues: “the importance of debate and dissent is not the point here.” I beg to differ. As I indicated, some prominent accounts of Ms. Zordel’s appointment have put a pejorative cast on her disagreements with her fellow commissioners. That puts the issue of debate and dissent front and centre.

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I certainly agree with Mr. Waitzer that the independence of administrative agencies is a cornerstone of our democracy. But does that mean that every administrative agency should be entirely divorced from any government oversight whatsoever — a little fiefdom unto itself and in no sense answerable to its political masters? Not a whit. It is the government that creates the agency, defines its mandate, gives it the powers that it needs to carry out that mandate and defines its organizational structure. And it is entirely within the purview of the government to enlist its legislative power to re-define that mandate, powers, and organizational structure if it chooses.

We don’t have to look into the distant past to find an example. On the advice of a non-partisan blue ribbon panel — the Capital Markets Modernization Taskforce (“CMMT”) — the Conservative government has recently substantially reorganized the OSC via the Securities Commission Act, 2021 (declared in force in April). That legislation splits the adjudicative function (the “Capital Markets Tribunal”) from the regulatory function. Moreover, where before the reorganization the OSC Chair and CEO were the same person, the two offices are now split. As expressed by the CMMT, “The Board of Directors, led by the Chair, (will) focus on the strategic oversight and corporate governance of the regulator,” while “The CEO (will) be responsible for the overall management of the organization and execution of the OSC’s mandate.” The directors, including the chair, are all government appointees.

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This new structure, recommended by a non-partisan committee, gives the government of the day the power to influence, at the highest level, the strategic direction of the OSC. But why should it not? If the government is dissatisfied with the strategic vision or regulatory philosophy of the regulator or the manner in which it is being implemented, it would be profoundly anti-democratic — and at odds with the rule of law — to forbid the government from seeking to alter the agency’s course.

Indeed, the Ontario Securities Act states “The Commission is an agent of the Crown in right of Ontario.” The key word here is “agent.” It is not “hegemony,” “fiefdom” or “satrapy.” At the end of the day, the OSC is a government creation performing regulatory functions ceded to it by the government.

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Do Ms. Zordel’s conservative connections compromise the independence of the institution of which she is now head? Absolutely not. In the making of such appointments, the twin issues of competence and integrity will take up a lot of shelf space. But why should the government not also consider, if it chooses, whether potential nominees share the government’s regulatory philosophy

The true worry about political interference is that the government might attempt to dictate or influence the result of particular cases. But the new legislation builds in the important protection of ceding no operational powers to the board of directors. Thus, aside from the government’s power to approve or decline proposed rule changes (a longstanding feature of securities regulation), its sole discretionary avenue of influence lies in its power to appoint directors and hence influence high-level strategic direction.

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What is left of the argument that there has been inappropriate political interference over the OSC? Only the assertion that Ms. Zordel and three other part-time commissioners were appointed without the government having consulted the OSC, as has customarily been done. Yes, it would have been better if the government had consulted the OSC. In all likelihood, however, the outcome would have been the same. The OSC might not like not having been consulted but at best this is a foible not a fiasco.

In the end, this tempest easily fits within a standard-issue teapot.

Financial Post

Jeffrey MacIntosh is a professor of law at the Faculty of Law, University of Toronto, and a director of the Canadian Securities Exchange.

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