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Below you will find a real life case study of a couple who are looking for financial advice on how best to arrange their financial affairs. Their names and details have been changed to protect their identity. 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 June 22, 2018

After working in the United States for a spell, Joyce and Bill are back in Canada and wondering how to allocate their income to meet competing goals. He is 41, she is 42. They have two children, ages 4 and 6.

Bill makes about $260,000 a year, including bonus, working for an international company. Joyce earns about $45,000 a year working part time in the health-care field. Their goal is to retire at 58 with $90,000 a year after tax.

In the meantime, they want to buy a cottage, take a month-long vacation with the children, pay off the mortgage on their B.C. house and ensure they save enough money for their children’s education.

They have more than $100,000 sitting in the bank and are wondering what to do with it: top up their registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), buy a vacation property, or pay down some of the $800,000-plus mortgage.

“We would like to retire in 17 years,” Bill writes in an e-mail. “How can we make this a reality?”

We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial Partners in Toronto, to look at Joyce and Bill’s situation.

What the expert says

The first and most obvious challenge for Bill and Joyce is budgeting, Mr. Ardrey says. They do not seem to know where their money is going. “They need to get a solid understanding of their spending and ability to save. This is a cornerstone of their financial plan.”

Short term, Joyce and Bill plan to buy a cottage for $300,000 in about three years and take a big vacation this year costing $20,000. They are trying to decide how to use the $100,000 or so they have in the bank.

Bill has about $82,000 of unused RRSP room and Joyce $33,000 of TFSA room, the planner notes. “Based on their tax rates, these are the areas in which to focus their investments,” Mr. Ardrey says. In 2018, he assumes $33,000 goes to Joyce’s TFSA, $40,000 to Bill’s RRSP, and $20,000 to vacation expenses.

From the RRSP contribution Bill will get a $20,000 tax refund, which will go to savings. “In addition, the monthly surplus of $1,800 continues to accumulate for their short-term goals.” In 2019, Bill contributes another $40,000 to his RRSP, generating another $20,000 refund.

In 2021, they buy a cottage for $300,000 with a down payment of $75,000 and mortgage of $225,000. They expect to rent it out for a good portion of the year. He assumes a net rental income after expenses of $1,000 a month. “The property being a rental would also have the benefit of making the mortgage partly tax deductible.”

After 2021, Bill and Joyce start to focus on their longer-term goals, which include paying off their mortgage. The $1,800 of monthly savings is now assumed to go to additional payments on their mortgage. “With this strategy, they should pay off their mortgage by 2032, which is just before they plan to retire.”

Once the mortgage is paid off, the planner has them taking the $1,800 a month surplus, plus the $3,790 a month that had been going to the mortgage, and putting it toward longer-term savings.

Bill and Joyce want to provide for their children’s postsecondary education. Mr. Ardrey assumes an annual cost of $20,000 for each child. Education costs are forecast to rise by 4 per cent a year, double the inflation rate. They contribute $2,500 a year for each child to a registered education savings plan until the children turn 18. Even so, they will fall short. “By allocating about half of their postmortgage surplus to these costs, they will be able to foot the bill.”

The plan assumes that Bill continues to take full advantage of his RRSP contribution room, that he and his employer continue making contributions to his deferred profit sharing plan at work, and that both Bill and Joyce contribute the maximum to their TFSAs for the rest of their lives.

The final part of the plan is their investments, which historically have returned 4.83 per cent a year before fees. Mr. Ardrey assumes this drops to 4.28 per cent a year after they have retired and shifted to more conservative investments.

“Based on these assumptions, Bill and Joyce cannot meet their goal,” he says. “They exhaust their investment assets by age 82.” If they sold their cottage at that point, the extra capital would tide them over another five years to age 87. At this point they could sell their house and downsize.

Instead, he recommends they diversify their investment portfolio to include some alternative investments such as funds that hold private debt, global real estate, and accounts receivable factoring to boost their returns and offset stock market cycles. Their existing portfolio holds mainly stock funds and real estate investment trusts (REITs).

“A market correction at the wrong time could really have a significant impact on their ability to retire.” He recommends a portfolio of 70 per cent stocks, 20 per cent alternative investments and 10-per-cent fixed income, with the equity portion falling and the fixed-income rising as they near retirement.

“This portfolio should produce a 6.5-per-cent rate of return before investment costs of 1.5 per cent, providing a net return of 5 per cent,” Mr. Ardrey says – enough to allow Bill and Joyce to achieve their retirement goals.

Client situation

The People: Bill and Joyce, in their early 40s, and their two children.

The Problem: How to catch up with savings and investments now that they are back in Canada.

The Plan: Direct cash and surplus to Bill’s RRSP and Joyce’s TFSA for the tax benefits. After the mortgage has been paid off, redirect the surplus first to the children’s RESP. Review investment portfolio.

The Payoff: A better chance of achieving all their financial goals.

Monthly net income: $16,870.

Assets: Joint account $104,000; cash $2,500; stocks $13,500; U.S. retirement savings $174,261; his TFSA $36,140; her TFSA $7,100; his RRSP $172,970; her RRSP $35,350; commuted value of her DB pension $40,000; RESP $13,300; residence $1,360,000. Total: $1.96-million.

Monthly outlays: Mortgage $3,790; property tax $435; water $130; home insurance $75; heat, hydro $250; maintenance, garden $275; transportation $410; groceries $1,200; child care $785; clothing $425; gifts, charity $135; vacation, travel $835; dining, drinks, entertainment $510; subscriptions $35; other personal $600; TV, internet $145; spending that is unaccounted for $1,870. Total lifestyle spending: $11,905.

Plus: RRSP $400; RESP $415; TFSAs $915; his and his employer’s group pension plan contributions $1,435. Total Savings: $3,165. Total monthly outlays: $15,070. Surplus: $1,800.

Liabilities: Mortgage $808,475 at 2.8 per cent.

Want a free financial facelift? E-mail finfacelift@gmail.com.
Some details may be changed to protect the privacy of the persons profiled.

Presented By:
Matthew Ardrey
VP, Wealth Advisor
matt@tridelta.ca
(416) 733-3292 x230

Below you will find a real life case study of a couple who are looking for financial advice on how best to arrange their financial affairs. Their names and details have been changed to protect their identity. 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 June 1, 2018

Darryl and Don hope to hang up their hats in four years when Don will be entitled to an unreduced pension. When they do, they’re thinking of selling their Toronto house, moving to Victoria and travelling extensively, Darryl writes in an e-mail.

Darryl is age 52, Don is 53. Together, they bring in about $258,000 a year. While Don has a public sector work pension, Darryl has a group registered retirement savings plan at work, to which his company contributes, as well as a personal RRSP.

Their retirement spending goal is $100,000 a year after tax, a lot more than they are spending now, excluding savings. They wonder whether they are on track to achieve this. They wonder, too, about the investment fees they are paying their mutual fund company and whether they are getting value for their money.

“We’re not sure we are getting maximum return on our investments,” Darryl writes. (They are in a wrap program for which they are being charged advisory fees plus management expense ratios on the underlying mutual funds.) “Also, there was sticker shock when the adviser fees were disclosed, and we have a sense that we are overpaying.”

We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Darryl and Don’s situation.

What the expert says

Darryl and Don are saving substantial sums for their retirement, Mr. Ardrey says. Darryl contributes 7 per cent of his salary to his group RRSP and his employer another 6 per cent. As well, he contributes to his personal RRSP. Don contributes about $12,400 a year to his defined benefit pension plan and tops up his RRSP to the tune of $2,500 a year.

Based on the numbers they provided, they are showing a substantial surplus in their monthly budget, Mr. Ardrey notes. They admit they may have underestimated their current spending by a bit, the planner says.

“This is where their ability to review their budget and create a realistic savings plan becomes important.” If their budget is “only marginally off, the effect would be minimal,” Mr. Ardrey says. “But if they are significantly off, the effect will be substantial.”

Darryl and Don figure they will pay about the same for the West Coast house as they net from the Toronto one. In his calculations, the planner assumes they sell for $800,000, net $700,000 after selling costs and use the proceeds to buy the Victoria house for cash.

In 2022, when Don begins drawing his pension, he will get about $49,000 a year, plus a bridge benefit of $6,800 a year to the age of 65. Mr. Ardrey assumes both begin collecting Canada Pension Plan and Old Age Security benefits at the age of 65.

In his calculations, the planner assumes an inflation rate of 2 per cent a year.

Looking at their investments, Mr. Ardrey says the historical rate of return on the asset classes they hold has been 4.91 per cent a year. They are paying 2.25 per cent a year in management expense ratios and fees. That means they are getting a meagre 0.66 per cent annual return after inflation and fees.

Even so, Don and Darryl will still achieve their retirement spending goal with money to spare. At the age of 90, they will have assets of about $2.5-million, of which $750,000 is liquid. If they spent all of their savings, leaving only their residence, they could increase their retirement spending by $6,000 a year to $106,000.

Darryl and Don have about 80 per cent of their portfolio in stocks. This is high given that they are looking to retire in only four more years. If the stock market were to plunge like it did in 2008-09, “it could have a catastrophic impact on their portfolio and delay their retirement.”

Instead, Mr. Ardrey suggests they increase their fixed-income holdings to 30 per cent. He recommends another 20 per cent in income producing, alternative investments (funds, pools or limited partnerships) that specialize in mortgages, global real estate, private debt and factoring, that is, the purchasing of business accounts receivable. These strategies should produce higher returns than fixed income while having little or no correlation to the stock markets, the planner adds.

Altogether, this new portfolio should achieve a return of 6.5 per cent a year. If they switch to an investment counselling firm, lowering their costs to 1.5 per cent a year (from 2.25 per cent), their real return after inflation would jump to 3 per cent a year.

When they move, Darryl and Don should look at redoing their wills and powers of attorney, or at least consulting with a B.C. lawyer to ensure the documents they have will work in British Columbia, Mr. Ardrey says. He suggests they hold their non-registered investments jointly so that the holdings pass automatically to the survivor without going through the will to reduce their exposure to provincial probate tax. “As an example, on $1-million of assets, probate would be $14,000 in British Columbia.”

Client situation

The people: Darryl, 52, and Don, 53

The problem: Can they pack it in and move to British Columbia in four years, buy a house and still have $100,000 a year after tax?

The plan: Review their budget in case their monthly outlays below are substantially understated. Diversify their asset allocation and take steps to lower their investment costs. Review estate planning after the move.

The payoff: Financial peace of mind

Monthly net income: $16,012

Assets: Cash $15,000; Don’s non-registered savings $85,365; Darryl’s TFSA $62,515; Don’s TFSA $69,250; Darryl’s combined RRSPs $589,820; Don’s  RRSP $115,155; estimated present value of Don’s DB pension: $389,700; residence $800,000. Total: $2.1-million

Monthly outlays: Property tax $395; home insurance $145; utilities $940; maintenance $665; garden $200; transportation $450; grocery store $1,000; clothing $50; charitable $30; vacation, travel $415; dining, drinks, entertainment $565; grooming $10; vitamins and supplements $5; life insurance $75; phones, TV, internet $365; RRSPs $2,380; TFSAs $915; Don’s pension plan contributions $1,035. Total: $9,640

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com. Some details may be changed to protect the privacy of the persons profiled.

Presented By:
Matthew Ardrey
VP, Wealth Advisor
matt@tridelta.ca
(416) 733-3292 x230

Below you will find a real life case study of a couple who are looking for financial advice on how best to arrange their financial affairs. Their names and details have been changed to protect their identity. 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 April 14, 2018

As their 50th birthdays approach, Bill and Hannah are planning to leave behind their big-earning and big-spending oil patch lifestyle and move back to Ontario to help care for ailing relatives.

“Our world has taken a bit of a crazy turn,” Bill writes in an e-mail. “We decided to leave our life here in Alberta this summer and move back to Eastern Ontario.” They’ll be uprooting their two children, ages 11 and 14.

Bill will be leaving behind a salary of more than $220,000 a year, plus a substantial bonus and company stock. Hannah is not employed at the moment. In Ontario, Bill figures he will be making about $30,000 a year working part time. He hopes to retire fully in 2024, at which point they would downsize again to a condo.

Their lifestyle spending will be “pared down in retirement, and when the kids leave home,” Bill writes. They wonder whether their plans pose long-term financial risks. “Can we afford to retire soon?” he wonders. Their retirement spending goal is $80,000 a year after tax.

We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Hannah and Bill’s situation.

What the expert says

Moving across the country will be expensive, Mr. Ardrey says. As well, Bill and Hannah will face selling expenses, legal fees and costs to redecorate their new house. The planner puts these costs at $100,000 on an $800,000 house, or 12.5 per cent of the sale price. He assumes they buy a house in Ontario for $700,000.

After six years, their goal is to net $250,000 from downsizing. After costs, estimated at 10 per cent of the sale price, they would be able to purchase a home worth $400,000 in today’s dollars, the planner says.

Bill and Hannah want to put their children through university. Mr. Ardrey assumes university will cost $20,000 a year for each child, rising at double the rate of inflation, or 4 per cent a year. They are tucking away $2,500 a year for each child in a registered education savings plan to take advantage of the Canada Education Savings Grant.

“Even with the amount of savings they have accumulated, they will fall slightly short of achieving their [education savings] goal,” Mr. Ardrey says. As well, the asset mix of the RESP is almost all in equities. “If markets were to fall in the next few years, it would have a substantial impact on their financial plan – and require a much more significant capital infusion.”

Bill and Hannah contribute the maximum to their tax-free savings accounts each year and Mr. Ardrey assumes they will continue to do so throughout their retirement years. In drawing up his forecast, he assumes Hannah will get 50 per cent of the maximum Canada Pension Plan benefits and Bill will get 70 per cent. They will start drawing government benefits at the age of 65 and the inflation rate will average 2 per cent a year.

As with the RESP, virtually all of their investment portfolio is in stocks. “When markets fall again, this will have a severe impact on their retirement plans,” Mr. Ardrey says. He suggests some alternatives.

In the first plan, Bill and Hannah reduce their equity exposure to 60 per cent, with 40 per cent in fixed income. Historically this balanced mix has returned 4.25 per cent a year net of investing costs. They would still achieve their goal of spending $80,000 a year. At 90, they would have an estate of $4-million, including real estate and personal effects. If they wanted to spend all of their savings instead, they could increase their spending to an inflation-adjusted $99,000 a year.

In the second plan, Bill and Hannah make no changes to their asset mix and suffer a 20-per-cent portfolio loss near the beginning of their retirement. Their asset mix historically has returned 4.75 per cent a year. “Even with this major loss, they can achieve their retirement goal of spending $80,000 per year, but they are in worse shape than if they took on a more conservative mix,” Mr. Ardrey says. At 90, they would have an estate of $3.2-million, or if they wanted to spend all their savings, they could increase their spending to $92,000 a year.

A third scenario has the couple including some alternative investments in their asset mix. They would shift their portfolio to 50-per-cent stocks, 30-per-cent fixed income and 20-per-cent alternative investments. (Examples of “alternative” investments include global real estate, private debt and private equity.) Their returns would be expected to average 5 per cent a year “while providing additional insulation from a severe market downturn,” Mr. Ardrey says. They’d have an estate of $6.8-million. Or they could deplete their savings and not leave an estate, which would increase their spending to $111,000 a year.

Because they are moving from Alberta to Ontario, there are some other financial implications to consider, the planner says. Taxes in Ontario are higher than in Alberta, especially at Bill’s income level. Deductions from his employment in 2018 would be based on Alberta rates, but he would be an Ontario resident for tax purposes because he would reside in Ontario on Dec. 31, 2018. This could result in a larger tax bill than expected next April.

Hannah and Bill should keep a record of all of their moving expenses because they could be deductible against employment income earned in Ontario, the planner says. Because estate planning is a provincial jurisdiction, they should redo their wills and powers of attorney. “Also, they may want to change executors and/or attorneys to someone local.”

Ontario has a probate fee of 0.5 per cent of the first $50,000 of an estate and 1.5 per cent on the remainder. “This contrasts sharply to Alberta, where the maximum probate fee is $400,” he says. “They should consider putting investment accounts in joint names with the right of survivorship to reduce exposure to these costs.”

Client situation

The people: Bill and Hannah, both 49, and their two children.

The problem: Will the big move they are making entail too much long-term financial risk or will they be able to retire comfortably in a few years?

The plan: Shift the asset mix in the children’s RESP and their own portfolios to a more balanced approach so they will not be so vulnerable to a market downturn. Seek expert advice about differences in tax and estate-planning law between Ontario and Alberta.

The payoff: Much less risk to their financial goals.

Monthly net income: $11,350 (excluding bonus)

Assets: Bank accounts $108,500; stocks $950,000; his TFSA $56,000; her TFSA $55,000; his RRSP $290,000; her RRSP $77,000; his defined-contribution pension plan $290,000; her defined-contribution pension plan $190,000; RESP $116,000; residence $800,000. Total: $2.9-million

Monthly outlays: Property tax $375; home insurance $100; utilities; $300; maintenance, garden $260; transportation $505; grocery store $1,000; clothing $100; gifts, charity $400; vacation, travel $1,200; dining, drinks, entertainment $660; grooming $25; pets $125; sports, hobbies $50; health care $105; phones, Internet, TV $245; RRSP $200; RESP $500; TFSA $1,000. Total: $7,150. Surplus of $4,200 a month goes to savings.

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com. Some details may be changed to protect the privacy of the persons profiled.

Presented By:
Matthew Ardrey
VP, Wealth Advisor
matt@tridelta.ca
(416) 733-3292 x230