At the age of 57, Paul Richard and his wife, Mary, 50 (not their real names), have retired into what many Canadians would regard as the best of all possible worlds, at least in terms of weather.

In summer, they roam Canada and the United States in a recreational vehicle and the winters are spent at their home in Puerto Vallarta, Mexico.

But the retirement the Richards planned is not going well in financial terms. At retirement seven years ago, Paul was earning $130,000 a year plus bonuses as manager of a manufacturing plant in Calgary. Mary owned and managed a small fashion shop that barely paid its rent.

However, the stock market has been cruel to the family fortunes, eroding what was $1-million at retirement to less than half that sum. Now, as Paul says, "the only ones making money on our investments are the mutual fund managers and our financial planner. We need to know if our plan was wrong or if our investments were poor. Or maybe we are concerned unnecessarily."
What our expert says

Facelift asked David Cox, a financial planner with IPC Corp. in Edmonton, to speak with Paul and Mary. He reviewed their situation and put the issue candidly.

"Much of their million dollars has evaporated in the market or been spent. Their investment strategy of holding the majority of their financial assets in managed global asset funds with some telecom and energy growth stocks has produced grave consequences in accrued and realized losses. Their plan turned out to be too risky for what has happened in the last few years."

Going back to basics, Mr. Cox says their present, $3,000 a month budget that includes $600 a month for condo fees and $625 a month for eating out and entertainment, $167 a month for road tolls, $1,200 for Canadian taxes and $366 for gifts and miscellaneous, is not sustainable.

"More money has gone out than has come in. This year, the budget been cut by $25,000. Their investment income is negative and they have been eating up their capital at a rate of $36,000 a year."

Deeper economies are needed, Mr. Cox says. Mary is 50 and can expect to live another 33 years. Add another seven years just to cover the good luck of long life to age 90 and the family fortune may have to last for another 40 years.

For now, the Richards have to recognize that their fortune is in a downward spiral, Mr. Cox says. There is not even a contingency reserve for unexpected expenses. Their asset base can be expected to yield $22,950 a year at 5 per cent before tax or $32,130 if they can get 7 per cent a year from their assets before tax. In the present bond market, even 5 per cent pretax is hard to achieve with government bonds bought retail from investment dealers.

The 7-per-cent yield is achievable with income trusts or corporate bonds, but such investments are accompanied by the usual risks that go with any business investment. Income trusts can be combined in a diversified portfolio to reduce but not eliminate risk.

Real return bonds, which pay approximately 5.2 per cent and which provide automatic inflation protection, can also be part of the Richards' revised financial plans, Mr. Cox says. Five per cent is a benchmark return that allows their spending power to be preserved.

When Paul reaches age 60, he can add $339 of Canada Pension Plan benefits and at age 65, $442 of Old Age Security to his monthly income. Mary has not generated sufficient income in her short work history to qualify for CPP benefits and will not receive OAS for another 15 years, Mr. Cox notes. For now, the Richards must rely on their investments.

Repairing the Richards' finances won't be easy, Mr. Cox says. He suggests that the couple buy a variable joint life annuity. It guarantees income for life and the underlying value can be set to vary with equity-linked investments. The insurance-based annuity protects income and provides a hedge against inflation, he says. A typical joint and survivor policy that would pay until the death of the last partner that is purchased at their present ages for $450,000 would pay about $2,200 a month.

The problem remains that Paul and Mary spend too much money for what remains of their capital. They could do part-time work if they are willing to give up some of their nomadic life and settle down for several months of the year somewhere in Canada, the planner explains.

Their choice boils down to cutting spending another $8,000 to $10,000 a year or finding new sources of income.

"Paul and Mary must become conservative investors and consumers or run the risk of losing their dream," Mr. Cox says. "Any plan that goes for broke, might."

Paul is reluctant to make changes in his lifestyle.

"The RV lets us be close to our children and to our grandchildren," he says. "We can continue to draw down capital and hope that our remaining capital will bounce back.

"Or I can go back to work. I have a U.S. green card and do consulting for insurance companies. That should add $25,000 (U.S.) per year and that would solve our problems. I'll need a new computer and other equipment but the income should make up for those costs," Mr. Richard says.
ajames@total.net
Client situation

Paul Richard, 57, and his wife, Mary, 50, reside in Alberta, spending half the year roaming Canada and the U.S. in their recreational vehicle and half the year in their condo in Mexico.

Vehicle

2001 Toyota $22,000; RV truck and trailer $35,000

Other assets

Condo in Puerto Vallarta $250,000; cash $8,000; mutual funds and stocks $257,000; RRSPs $194,000

Income

Negative; expenses covered by spending capital

Monthly household expenses

Condo fees $600; campground fees in summer $233; food $325; entertainment & dining out $625; vehicle maintenance & fuel $175; vehicle insurance $96; medical insurance $94; prescription drugs $95; clothing $50; hotels, mexican toll roads $167; phone and internet $74; taxes $100; gifts & miscellaneous $366; Total: $3,000

Liabilities

None