TriDelta President Ted Rechtshaffen appeared on BNN TV as a guest speaker to discuss retirement income from selling a house in Toronto.
Below you will find a real life case study of a couple who are looking for financial advice on when they can retire and how best to arrange their financial affairs. The names and details of their personal lives have been changed to protect their identities. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.
Written by: DIANNE MALEY
Special to The Globe and Mail
Published Friday, May 19, 2017
Mike and Jade are raising three children on a single – albeit good – salary in an Ontario town where real estate prices are not especially high.
He is 45, she is 51. Mike earns $125,000 a year in a managerial job while Jade stays home with the children, who range in age from 8 to 11. Jade and Mike have paid off their mortgage, but they’re still having trouble getting ahead.
“I am well paid,” Mike writes in an e-mail, “yet I never seem to have any free cash flow.” His extended family has helped, gifting him and Jade money to invest 20 years ago when they were just starting out. Another relative lent them money to buy a vehicle.
“I want to pay back my $16,000 family loan,” Mike writes, but instead he is wrestling with a $29,500 line of credit that seems to keep going up rather than down.
“All of my peers are jetting off to vacations in the Caribbean, talking about their tax-free savings account performance, and making plans to spend the summer at their cottages,” Mike adds. “Why do I feel like a financial lightweight?”
We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Mike and Jade’s situation. Mr. Ardrey holds the certified financial planner (CFP) designation.
What the expert says
Jade and Mike’s problems with budgeting and debt management are growing more common, Mr. Ardrey says. Short term, they want to repay their debts and at the same time spend money on the roof (at least $5,000), eye surgery ($5,000) and a vacation ($15,000).
“These two cannot be achieved simultaneously.”
They do not have a good handle on where the money is going, the planner says. “The budget is a key concern for me with this couple. From their comments, they seem to have a real desire to keep up with the Joneses, but what they really need to focus on is getting their own financial house in order.” The first step is to track their spending and prepare a detailed income and expense statement.
To repay the family loan, they could liquidate some of their non-registered investments, the planner says. They could sell about $4,000 a year for two years, which would pay off half the loan. With some budgeting, the remaining $8,000 could be paid off at the rate of $2,000 a year for four years.
In his calculations, the planner assumes the couple borrow on their line of credit to cover their short-term spending goals such as the roof, eye surgery and the vacation.
This “does not address the real problem of cash-flow management,” Mr. Ardrey says. Without a detailed cash-flow plan in place, they will “end up right back where they started.”
The next goal is the children’s education savings. They are saving $500 a month and the planner assumes they allocate their $500 surplus to the RESPs as well. As it is, the plan falls short of meeting total education costs for three children. That assumes costs of $20,000 a year for each child, rising with inflation.
Once the children begin studying, the planner assumes no further RESP contributions, so Jade and Mike will be able to use the money that had been going to the RESPs to help pay for the additional education costs. They could borrow to cover any shortfall. After the children graduate, the couple can direct their attention to paying off the line of credit.
With no surplus cash flow, the only way they can take full advantage of their substantial unused TFSA contribution room would be to shift some of their non-registered investments to TFSAs. Mr. Ardrey suggests Mike use the two accounts (he has three) with the least capital gains to fund the tax-free savings accounts: $45,500 split evenly between them this year and $49,500 in 2018. From 2019 onward, they can sell enough from their more profitable dividend fund to make annual TFSA contributions of $5,500 each.
Jade and Mike plan to retire at the age of 65. Mr. Ardrey assumes that Mike will get full Canada Pension Plan benefits at the age of 65 and that Jade will get 25 per cent of the maximum. Both will begin collecting Old Age Security at the age of 65. They will have Mike’s work pension, their RRSPs and their non-registered investments to draw from.
They will be in good shape financially, but they could do better if they upped their anticipated rate of return and lowered their cost of investing, Mr. Ardrey says. They are invested mainly in bank mutual funds, which can have relatively high management fees.
Based on their current spending (less savings) and adding a buffer in case their spending is understated, Mr. Ardrey figures the couple can spend at least $5,000 a month, or $60,000 a year, when they retire. By following the saving and budgeting plan noted above, they could increase their retirement spending to $90,000 a year from $60,000.
Given that they have about $750,000 outside of Mike’s work pension, the couple can afford to hire an investment counsellor to create a personalized portfolio strategy that would likely increase their returns, lower their risk and cut investment costs, Mr. Ardrey says. If, for example, they could earn 6.5 per cent with investment costs of 1.5 per cent, they would have more than twice as much as the original $60,000 target to spend in retirement.
The people: Mike, 45, Jade, 51, and their three children.
The problem: Trying to figure out where the money is going so they can pay off their loans and meet some short-term spending goals.
The plan: Track their spending carefully and draw up a detailed list of income and expenditures.
The payoff: A better understanding of how to get from here, where they’re feeling pinched, to a future where they will be financially comfortable.
Monthly net income: $7,185
Assets: Cash $1,750; non-registered investment portfolio $278,600; his RRSP $268,800; her RRSP $203,200; market value of his DC pension plan $144,000; RESP $89,000; residence $315,000. Total: $1.3-million.
Monthly outlays: Property tax $500; home insurance $30; utilities $380; maintenance, garden $175; transportation $570; groceries $450; child care $75; clothing $150; line of credit (varies) $300; personal loan $100; gifts $125; charity $250; vacation, travel $100; dining, drinks, entertainment $250; grooming $100; clubs $10; pets $45; subscriptions $25; children’s activities, special needs $300; vitamins $25; life insurance $180; disability insurance $210; telephone, cellphones, cable $280; RRSPs $1,500; RESP $500. Total: $6,630. Surplus: $555
Liabilities: Line of credit $29,500 at 3.7 per cent; personal loan $16,000 at no interest. Total: $45,500
Want a free financial facelift? E-mail email@example.com.
Some details may be changed to protect the privacy of the persons profiled.
Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Investment Counsel, was the guest portfolio manager on BNN’s Market Call tonight on Thursday, April 20th discussing large cap dividend paying stocks, portfolio strategy, the market and the economy.
After a great first quarter for our clients, stemming from high exposure to U.S. stocks, preferred shares, and high yield bonds, our investment direction is shifting slightly.
We’re witnessing some exhaustion in U.S. stocks, signs of some greater opportunity in Canada and Developed Markets outside of the United States. We’re reducing our high yield bond weighting as those valuations have become expensive.
We remain positive on Alternative Investments and we are comfortable with Preferred Shares. Our bond portfolios are leaning more defensive after strongly benefitting from a more aggressive approach over the past 6 months.
The net effect is that there are still some good investment opportunities heading into the summer, but for U.S. stocks at least, we are pulling back from our heavily overweight position. The U.S. market has been leading the way globally over the past three years, and this has led to higher valuations in the U.S. than most other markets.
In terms of Canadian stocks, we have been very underweight for a few quarters, and will likely be adding to our current positions this quarter. This is based on surprisingly positive economic numbers, and a belief that there is some upside in energy related stocks from here.
We will also be increasing our cash holdings as a tactical defensive move – as we watch Trump try to get the support of the Republican Congress, tensions with Russia over Syria and North Korea, and the latest EU developments.
In the quarter, the TSX was up 1.7%, while the U.S., Europe and Japan were up 4%+ in Canadian dollars.
Preferred shares were very strong, with the TSX Preferred Share index up over 7%.
Canadian bonds were up just over 1%, although High Yield Bonds were up over 2%.
The key positive fundamental trend is global reflation and better growth, particularly in Europe and Emerging Markets. Overall, this should be positive for stocks.
The key political issue is whether the U.S. can drive ahead with meaningfully lower corporate tax rates and infrastructure spending. If they can make this a reality in the coming months, it will provide a further lift to U.S. stocks. Our fear is that there are enough signs to suggest that this expected change will take longer to come to life (and could be more watered down) than the market had hoped.
Q1 2017 was one of our best ever. Most clients ended the quarter up between 3% and 5%. Those with higher returns tended to have more exposure to Preferred Shares, as our portfolio was up over 10%, and were also invested in our Pension portfolios which had stock returns of over 6%.
Our TriDelta Growth Fund had a healthy 4% return on the quarter.
While the Canadian bond universe was up only 1%, our TriDelta Fixed Income Fund was up 3%.
The TriDelta High Income Balanced fund continued its strong result – the Fund has had 14 consecutive positive months. It was up over 4% on the quarter, and up over 20% over the past year. This 5 star rated fund (Globe Fund), is meant to provide a much higher yield than bonds (currently a 5.1% yield), and stock like returns, but with lower volatility than stocks. The fund has now moved from monthly to daily pricing. This means that it can be purchased or sold on any market day, greatly enhancing liquidity.
Most of our Alternative Income strategies continued to do what they are supposed to do, which is provide consistent annual income and growth of 6% to 10% a year. Unfortunately, in a quarter as strong as Q1, those 1.5% to 2.5% returns on Alternative Income felt underwhelming.
Overall, it was a great start to 2017.
At the risk of oversimplifying things, here is the synopsis:
*The U.S. equity market has been too good of late, and with higher than average valuations, we believe there is less upside from here, especially if corporate tax changes don’t come soon or as fully as the market expects. We accurately timed an overweight position in the U.S., but will now be trimming our positions back to a more neutral or slightly under neutral weighting.
*The Canadian equity market has been underperforming most other markets over the past 9 months, and we have been highly underweight Canada vs. our benchmark. We will now be increasing our weight a little in Canada, mostly driven off better than expected economic numbers. While we are aware of the residential real estate risks, until mortgage rates meaningfully rise we believe the general rise in real estate values will continue. We also believe that oil prices seem range bound in the $50 to $60 zone, but have some room and support to rise within that range, from today’s prices.
*We will be slightly increasing our weighting in developed global markets. This is largely a shift from the U.S. where stock valuations are much higher than long term averages, to markets that are currently trading at or a little below long term averages.
*An eventual rate hike from the Bank of Canada is unavoidable if the Canadian economy continues to improve, but for now, the lack of any move by the Bank of Canada will keep short term bond yields largely unchanged.
*For fixed income, we are keeping our powder a little dry with lower bond durations/terms to maturity. We are doing this as we see longer term bond yields increasing from current levels.
With yields starting off near the lower portion of the trading range, our defensive duration posture will allow for a more opportunistic investment in the longer end of the yield curve once interest rates work its way higher. Ultimately, the force of Canada’s gradually improving economic situation will convince the Bank of Canada Governor that an eventual rate hike is unavoidable.
*We will likely boost cash positions tactically for a short period as we take some profits and wait out a couple of areas of concern. As discussed, one area is the ability or inability of Trump to push through major Corporate Tax cuts. The expected cuts have been a meaningful driver of U.S. market growth, and any delays will be seen negatively by the markets. Another concern is Syria and events in North Korea and the impact on U.S.-Russian Relations. A final worry relates to E.U. solidarity or lack thereof, which will be tested in national elections.
*Canadian Dollar/U.S. Dollar – We have been seeing weakness in the Canadian dollar for quite some time, and while it has declined a little, it has mostly maintained its value of late. While we do see room for declines if NAFTA changes hurt Canadian trade, we also see some economic strength in Canada, strength on the oil front and a lack of willingness to restrict foreign buyers of real estate. As a result, our current view is a relatively range bound Canada/US dollar trade.
The news requires a headline every day, but how many of those headlines should really change the management of your investments? Mostly we focus on earnings, valuations, and interest rates to drive the portfolio decisions. This quarter sees some changes in our thinking – but likely the only headline that played into our investment thinking was Trump’s inability to pass a new Health Care bill.
The best ways to build long term wealth and income are buying quality assets at reasonable prices, diversifying your holdings, being patient when valuations are not in your favour, and having the fortitude to switch when prices become more attractive.
We hope everyone will be able to fully enjoy the splendors of spring.
TriDelta Investment Management Committee
VP, Fixed Income
President and CEO
Exec VP and Portfolio Manager
VP, Portfolio Manager and
How can investors reduce taxes on investments? TriDelta Financial’s Lorne Zeiler, Portfolio Manager and Wealth Advisor was one of two wealth management professionals interviewed by Globe and Mail reporter Terry Cain to answer this very question (article printed on March 1, 2017).
It’s an old saying but it still holds true – nothing is certain but death and taxes. However when it comes to investing and saving for retirement, there is plenty Canadians can do to minimize the amount they end up paying to the tax man.
First off, it’s important to realize just how important tax considerations are when planning your portfolio, experts say.
“Taxation in a non-registered portfolio is one of the major deterrents to building wealth,” says Carol Bezaire, senior vice-president of tax, estate and strategic philanthropy at Mackenzie Financial Corp. She notes that different types of investment income attract different tax treatment, so the portfolio being built should factor this in.
Interest income attracts the highest tax – on average in Canada, for every $1 earned in interest or foreign income about 50 cents goes to the government in tax. The dividends tax rate means on average 35 cents goes to the government for every $1 paid. Capital gains at the current 50-per-cent inclusion rate means on average 25 cents in tax is levied for every $1 in capital gains. “Paying attention to tax in a portfolio allows the investor to build wealth more effectively by paying less tax,” says Ms. Bezaire.
Lorne Zeiler agrees. Mr. Zeiler is a vice-president, portfolio manager and wealth adviser at Tridelta Financial. “Taxes are very important in determining how we structure our clients’ portfolios,” he says. He notes that many of his company’s clients are high-income earners and therefore in higher tax brackets, so taxes can have a big impact on their overall portfolio growth.
Mr. Zeiler says if clients have cash accounts, corporate accounts and registered accounts, his company allocates as many income-producing securities (such as bonds, GICs, and REITs) as possible to their registered accounts first, as taxes on investment income are substantially higher than on dividends or capital gains.
As far as specific tax-sheltered vehicles go, the place to start is the best-known options: registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). Mr. Zeiler says TFSAs are an excellent source to minimize tax, as any gains or income on investments within the TFSA are tax-free. For example, a couple taxed at the highest marginal rate with $125,000 in TFSAs invested in REITs paying a 6-per-cent return would save more than $4,000 annually in taxes.
RRSPs are ideal for tax minimization, as they offer the benefit of tax deferral and tax-free compounding, since taxes are paid only when the funds are withdrawn. Mr. Zeiler notes their biggest tax advantage is typically from tax arbitrage. Investors are often getting a tax credit for contributions made when they are in higher tax brackets, but then are charged taxes on withdrawals when tax brackets are lower.
Ms. Bezaire has a number of tips for tax minimization.
First, hold high-tax investments, such as interest-bearing vehicles (particularly foreign income) in a TFSA or RRSP so the interest can compound without taxation.
Next, look for investments where most of the return is through capital gains, since these receive the lowest tax rates. These investments can include stocks, mutual funds and ETFs.
Ms. Bezaire also highlights the tax-advantageous forms of mutual funds. She notes there are mutual funds that are structured as trusts and the portfolio earnings flow out net of expenses to investors. There are also corporate class funds that flow out only dividends or capital gains, never interest or foreign dividends, so these can be helpful to many investors by providing tax-efficiency. Finally there are T-series mutual funds. Most of the distributions from these funds are classified as tax-free return of capital payments, while the bulk of an investor’s savings can continue to grow in the fund.
Mr. Zeiler notes one of the areas where investors often do not do enough tax planning is their estate, as often the estate can be subject to significant taxes that could have been minimized.
Another overlooked area is planning for contingencies in the event that one spouse passes away earlier than the other. Mr. Zeiler says his company often uses insurance as part of the strategy to reduce taxes, particularly for the estate, especially if the investor’s holdings are structured as a corporation.
Mr. Zeiler also notes that income splitting is very important for retirees. By splitting income, marginal tax rates for the higher-income spouse can be reduced significantly and it can enable both spouses to earn their full Old Age Security (OAS) payments.
Ms. Bezaire also cites the value of income splitting, including selling some income-generating investments to a lower-income spouse by way of a spousal loan, using a spousal RRSP to save for retirement, pension income-splitting for seniors, or even the higher-income spouse gifting cash to a spouse who can then invest the money in a TFSA for the future.
There are two final issues to consider.
While tax considerations can be very important, Mr. Zeiler notes taxes should never drive an investment decision, such as deciding not to sell a security due to large capital gains owing.
He also highlights a related issue for many retirees: having a large position in a few securities that have substantial gains, such as owning Canadian bank shares for 20 years or more. For those clients, his company often looks at selling the shares over a period of time so that some capital gains are realized each year at a lower marginal tax rate instead of all at once.
When stock markets have risen significantly, often some of the best investing opportunities is in the sectors that have been unloved and overlooked. Lorne Zeiler, Portfolio Manager and Wealth Advisor at TriDelta Investment Counsel was one of three portfolio managers asked where to look for value investments today by Globe and Mail reporter Joel Schlesinger (February 28, 2017).
As stock markets reach new heights, especially in the United States, investors might be recalling the adage “what goes up must come down.”
But by the same token, what has been down – the unloved, undervalued and overlooked – usually bounces back, eventually. With that in mind, consider these investments.
Even though the U.S. equity market has experienced a record-breaking runup, health-care stocks still have attractive valuations, says Lorne Zeiler, portfolio manager and wealth adviser with TriDelta Financial in Toronto.
“The sector was held back in 2016 due to concerns of increased regulation affecting drug pricing, first by a potential Clinton presidency and then from comments by President-elect Trump,” Mr. Zeiler says.
But these fears are likely exaggerated, he says. Earnings are forecast to grow by 8 per cent in 2017, and stocks are trading at about 15 times forward earnings around their five-year average, while nearly every other sector trades significantly higher.
Here are two stocks to consider:
These generally fast-growing economies have faced a laundry list of problems, says Navid Boostani, a portfolio manager and co-founder of ModernAdvisor, a robo-advisory in Vancouver.
“Slowing growth in China, political turmoil in Turkey and Brazil, and economic sanctions against Russia have all been headwinds,” Mr. Boostani says. “But we think the bad news is already priced in, and long-term investors have a unique opportunity today” to buy low.
Here are two exchange-traded funds (ETFs) for investors who want to tap into emerging-market growth:
Mark Yamada, portfolio manager and chief executive officer of PUR Investing in Toronto, cites two ways to capitalize on volatility. For those who can handle large swings in price, China has been unloved of late. Yet it offers a lot of upside, he says. At the opposite end of the spectrum, consider low-volatility equities, such as banks, utilities and consumer staples, which have fallen out of favour recently as investors set their sights on recovering energy and other commodity related stocks.
Two to consider: