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FINANCIAL FACELIFT: This couple started saving too late for retirement and now face some tough choices

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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 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.

gam-masthead
Written by: DIANNE MALEY
Special to The Globe and Mail
Published November 16, 2018

Sometimes, it seems you can work hard all your life and end up with less than you hoped for in your middle years.

That’s what happened to Evelyn and Rocky, who have had to help out parents and children alike over the years. He is 66, she is 54.

Their consulting business nets about $12,500 a month after taxes and business expenses, although their commission-based earnings are lumpy.

“We started late,” Rocky writes in an e-mail. “Nineteen years ago, we both came out of previous marriages with no assets to speak of other than a seven-year-old car.” Last spring, the family-related financial pressures eased and Evelyn and Rocky began saving aggressively for retirement, which for Evelyn can’t come soon enough. They hope to retire from work with $6,500 a month after tax.

They plan to sell their Toronto house, pay off the mortgage and move to a condo townhouse in St. Catharines, Ont., investing whatever is left. They’d continue to spend winters in their Florida condo. For extra income, they want to buy an investment property in the United States.

“How can we improve what we are doing?” Rocky asks.

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

What the expert says

First, Mr. Ardrey looks at whether the couple’s plan is viable.

They sell their Toronto home next spring for $675,000, net of selling costs, and buy a townhouse in St. Catharines for $325,000. They pay off their existing mortgage and use the balance to max out their registered retirement savings plans and tax-free savings accounts.

Evelyn would retire from work at the end of 2019 and their cost of living would rise by 2 per cent a year on average.

“Once Evelyn retires, they will be able to sell their business for an estimated payment of $100,000 per year over two years,” Mr. Ardrey says. This will be split equally between them. He assumes Rocky keeps working part time, earning $3,000 a month after taxes and expenses.

Rocky is already receiving Old Age Security benefits of $465 a month, reduced because he has been in Canada only since 1991. He will also get reduced Canada Pension Plan benefits, which he has opted to take at age 70. Evelyn will begin collecting CPP and OAS benefits at age 65.

For 2018, they have saved $11,630 to their RRSPs and $41,386 to their TFSAs. In addition they have saved about $39,000 for a down payment on a U.S. rental property.

A review of their investment portfolio – mainly mutual funds – shows a historical return of 4.28 per cent with investment costs of almost two percentage points. “With inflation assumed at 2 per cent, this leaves very little available for a real rate return,” Mr. Ardrey says.

To boost their income, Rocky and Evelyn plan to buy an investment property for US$120,000 that would generate about US$250 a month net of expenses.

Will their plan work?

“Based on these assumptions, Evelyn and Rocky fall way short of their retirement goal,” the planner says. They would run out of savings by 2031, when Evelyn is only 67. To make the plan work, they would need to reduce their target spending by 35 per cent to $4,250 after tax a month.

“There is no magic bullet for retirement planning. You have to retire later, save more, spend less or improve returns.” In Rocky and Evelyn’s situation, it is a combination of these four factors.

Even if they retire at the end of 2022 when Rocky is 70 and Evelyn is 58, they will run out of savings by 2045, when Evelyn is age 81, Mr. Ardrey says. Alternatively, they would have to reduce their spending by about 25 per cent to $5,000 a month.

To meet their goals, Rocky and Evelyn will have to make several changes. First, they need to improve their investment returns.

After they sell their house next spring, they will have enough money to hire an independent investment counsellor with a view to improving returns and lowering costs.

Mr. Ardrey suggests their new investment strategy include alternative assets, such as private debt, global real estate and accounts receivable factoring.

“This should increase their return to 6.5 per cent while reducing their investment costs to 1.5 per cent.”

(Many investment counsellors keep a list of alternative strategies – alternatives to stocks and bonds – that the firm has vetted and considers suitable for its clients. Investors whose income may not be high enough to buy directly from an alternative asset manager can buy these securities if they are working with a portfolio manager or investment counsellor.)

As for the U.S. investment property, Evelyn and Rocky should forget about it and direct the money instead to their investment portfolio, Mr. Ardrey says. At some point, they may also need to consider selling their Florida condo.

Client situation

The people: Rocky, 66, and Evelyn, 54

The problem: Can they afford for Evelyn to retire soon and still meet their spending goal? Should they buy a U.S. investment property?

The plan: Take steps to improve investment returns. Forget about the U.S. rental property. Consider working longer or lowering spending target.

The payoff: A more workable plan.

Monthly net income: $12,500

Assets: Cash $4,300; savings account $39,000; his TFSA $37,600; her TFSA $24,360; his RRSP $66,300; her RRSP $64,700; residence $675,000; Florida condo $175,500. Total: $1.09-million

Monthly outlays: Mortgage $1,275; property tax $350; home insurance $135; utilities $345; Florida condo fees $295; maintenance $50; transportation $620; groceries $900; clothing $40; charity $40; vacation, travel $460; dining, drinks, entertainment $260; personal care $50; pets $255; subscriptions, other $40; doctors, dentists $100; drugstore $50; health, dental insurance $355; life insurance $670; phones, TV, internet $365. Total: $6,655. Surplus $5,845 goes to TFSAs, other savings.

Liabilities: Mortgage $133,000

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

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

FINANCIAL FACELIFT: Can an uncertain investment help this 60-year-old retire early?

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Below you will find a real life case study of a woman who is looking for financial advice on how best to arrange her financial affairs. Her name and details have been changed to protect her 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.

gam-masthead
Written by: DIANNE MALEY
Special to The Globe and Mail
Published October 19, 2018

Turning 60 got Sylvia thinking about a time when she will no longer have to work for a living – and hoping it will come soon.

She earns $75,000 a year in a middle-management job and is single with no dependants. Her postwork income will come from her savings and investments, including from the Saskatchewan Pension Plan, a defined-contribution pension plan open to all Canadians. She also has an annuity that she took instead of a cash payout when a previous work pension plan was wound up.

The wild card in her retirement plan is her equity interest in a private corporation. The investment has paid well, yielding her $15,000 a year in dividends over the past five years, but this is not assured. The future value of the shares is uncertain because they are not readily marketable.

“Basically, I have no control over this investment, but it has turned out to be an excellent investment for me even if I never get another penny from it,” Sylvia writes in an e-mail.

She wonders whether she can retire from work early, whether her investments will generate her target income of $45,000 a year after-tax and when she should start drawing government benefits.

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

What the expert says

Sylvia has almost $750,000 in investments saved to date, Mr. Ardrey says. Of that, $200,000, or 26.67 per cent, comprises shares in a private corporation. “In Sylvia’s estimation, they could be worth more than this, less or nothing at all,” the planner says. “This is a potentially significant risk to her retirement plans.”

Sylvia contributes $6,000 a year to a defined-contribution pension plan, $8,400 to her registered retirement savings plan and $5,500 to her tax-free savings account. She has a cash surplus of about $7,000 a year, including her RRSP refund.

Sylvia plans to work part time for another few years after she retires, earning about $3,000 a year. Her annuity will pay her $6,036 a year starting at 65. In drawing up his plan, Mr. Ardrey assumes Sylvia retires at 62 and begins taking Canada Pension Plan and Old Age Security benefits at 65.

Sylvia plans on spending $45,000 a year, plus another $3,000 a year for travel until she reaches 80. She will need a new car before long at a cost of $22,000. “All expenses are indexed to inflation, which we assume is 2 per cent a year.”

Looking at her portfolio, Sylvia has slightly more than 25 per cent of her investments in cash and guaranteed investment certificates. “This is placing a significant drag on her portfolio performance,” the planner says. She has an average net return on her investments of 4.1 per cent a year.

Still, if she is able to realize the $200,000 value on her private shares, Sylvia will reach her retirement spending goal and be able to retire at 62, Mr. Ardrey says. With a 4.1-per-cent rate of return, she would have a cushion of $6,000 a year over and above her target of $45,000.

“My concern with her plan is it all is riding on the private shares being worth what she hopes they are worth,” Mr. Ardrey says. “If they fall to 50 per cent of her expected value, all of her spending cushion will be eliminated,” he adds. “If they end up being worthless, then she will fall short of her goal, running out of investment assets by her age 80.” She would still have her CPP and OAS, her annuity income and her home.

“Sylvia should be looking for a strategy to divest herself of the private shares,” Mr. Ardrey concludes.

Sylvia’s asset mix is 27 per cent private shares, 25 per cent cash equivalents, 30 per cent Canadian equities, 8 per cent bonds and 10 per cent U.S. and international equity, held in various accounts. Excluding the private shares from the total, her asset mix becomes 34 per cent cash equivalents, 41 per cent Canadian equities, 11 per cent bonds and 14 per cent U.S. and international equity.

“If we improve Sylvia’s investment strategy across all her accounts to 50 per cent geographically diversified equities, 25 per cent fixed income and 25 per cent alternative investments – strategies such as private debt, global real estate and accounts receivable factoring – she should be able to achieve a conservative net return of 5 per cent,” Mr. Ardrey says.

This would improve her returns (because alternative investments tend to yield more than her fixed-income holdings), and lower her equity risk because the alternative investments tend not to move in lockstep with the stock market.

If, instead of getting her current 4.1-per-cent return on investments, Sylvia could achieve that 5-per-cent rate of return, she would meet her retirement spending goal, though without a cushion for extra spending. “This is a vast improvement over running out of investment assets at age 80.” If the private shares can be sold for $200,000, and she earns 5 per cent on her investments, then she would have a spending cushion of $12,000 a year, over and above the $45,000 target.

Client situation

The person: Sylvia, 60

The problem: Is she on track to retire before 65 with $45,000 a year?

The plan: Rejig portfolio for greater diversification with a target return of 5 per cent a year. Explore ways to sell the shares in the private company.

The payoff: If all goes well, not having to keep her nose to the grindstone until she is 65.

Monthly net income: $4,535

Assets: Bank accounts and GICs $78,000; potential value of shares in private corporation $200,000; TFSA $69,000; defined-contribution pension plan $141,105; other RRSP accounts $256,915 (of which $112,395 is cash and cash equivalents); residence $250,000; present value of non-indexed annuity $85,070. Total: $1.08-million

Monthly outlays: Property tax $145; home insurance $40; utilities $240; maintenance, garden $100; transportation $285; grocery store $500; clothing $100; gifts, charity $200; vacation, travel $250; dining, drinks, entertainment $320; personal care $40; pets $75; sports, hobbies, subscriptions $100; health care $150; phones, TV, internet $180; DC pension plan $500; other RRSPs $700; TFSA $460. Total: $4,385 Surplus 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.

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

FINANCIAL FACELIFT: Great savers, not so great at investing

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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.

gam-masthead
Written by: DIANNE MALEY
Special to The Globe and Mail
Published August 31, 2018

Logan and Tina are clear about their goal: to retire in four years with more money in their pockets than they are spending now. He is 63, she is 54. They have two grown children, a house in Southwestern Ontario and no debt.

Both have good jobs, he in education and she in an office. Together, they bring in about $187,000 a year. Logan has a defined benefit pension plan, indexed to inflation, and Tina a defined contribution pension plan, where the benefit depends on the performance of financial markets.

They’re prodigious savers, contributing regularly to their various investment accounts as well as their pension plans. They also have a substantial amount of money sitting in the bank. They keep the cash partly because “we are uncertain about a potential market crash, so are holding this until the market is on firmer footings,” Logan writes in an e-mail.

When they retire, they plan to sell their city house and move north to a place on Georgian Bay. They plan to take one big trip every five years. Are they on track?

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

What the expert says

Altogether, Tina and Logan have a total of $1.4-million in investment assets and savings, Mr. Ardrey says. They add to these investments regularly, making the maximum $5,500 TFSA contribution each year. Logan maximizes his RRSP – he has $6,185 of contribution room this year – and also contributes about $11,600 to his defined benefit pension plan. Tina makes $9,700 a year in defined contribution pension plan contributions and receives an employer match of $6,480. She also saves $10,320 a year in her employee share purchase plan.

“Even after all of these savings, they still have substantial surplus cash flow,” Mr. Ardrey says. This money goes to a combination of their investment and the bank savings accounts.

When Logan retires from work, he will get a pension of $34,100 a year, indexed to inflation, with a 75-per-cent survivor’s benefit. He can split his pension income with Tina. Tina will begin collecting Canada Pension Plan benefits at the age of 65 and Logan at the age of 67 in Mr. Ardrey’s plan.

“They are currently spending about $37,000 per year and expect to increase that to $70,000 in retirement,” Mr. Ardrey says. “They want increased financial flexibility and to ensure they never have to worry about money.”

When they move up north, they plan to buy a house in roughly the same price range. Mr. Ardrey includes moving costs of $38,200 in calculating their initial retirement income. As well, he has added $15,000, adjusted for inflation, to their retirement spending target in 2022, the year they retire, 2027 and 2032.

While Logan and Tina are great savers, they are not so good at investing. “Currently, Tina’s and Logan’s asset mix is almost 30 per cent in cash and cash equivalents!” Mr. Ardrey points out. “This is creating a substantial drag on portfolio returns.” The rate of return on their overall holdings is 3.87 per cent. In addition to the cash, they have a broad mix of mutual funds, some with relatively high fees, so their investment cost is 0.8 per cent.

Even with the modest return, the couple could meet their retirement spending goals because they have saved enough, Mr. Ardrey says. “They will have an estate of $3.3-million, including their real estate and personal effects, at Tina’s age 90.”

Still, Logan and Tina could benefit from simplifying their investments by moving from an investment dealer to an investment counsellor, a firm that has a legal duty to act in the best interests of its clients, Mr. Ardrey says. Investment counsellors charge an annual fee that is a percentage of the client’s assets.

For the fixed-income side of the portfolio, he suggests supplementing traditional fixed-income securities with some alternative income investments such as private debt, international real estate and accounts receivable factoring. This would improve fixed-income returns and lower overall risk because alternative investments are less correlated to the broader financial markets.

By changing their asset mix to 50-per-cent equities, 30-per-cent fixed income and 20-per-cent alternative income, and using the services of an investment counsellor, they should be able to achieve a return around 6.5 per cent with investment costs of 1.5 per cent, for a net return of 5 per cent a year, Mr. Ardrey says. “With an improved strategy, they could retire right now if they wanted to do so.”

Client situation

The people: Logan, 63, Tina, 54, and their two grown children

The problem: Are they on track for a prosperous retirement in four years?

The plan: Not much to do, but if they improve their investment returns, they could quit working tomorrow.

The payoff: The comfort of knowing they have more than enough.

Monthly net income: $12,615

Assets: Cash in bank $134,000; stocks $106,300; mutual funds $214,430; his locked-in retirement account $34,470; his TFSA $73,900; her TFSA $83,540; his RRSP $114,895; her RRSP $278,075; market value of her DC pension plan $364,520; estimated present value of his DB pension plan $784,300; residence $350,000; undeveloped land $30,000. Total: $2.57-million

Monthly outlays: Property tax $185; home insurance $60; utilities $185; maintenance, garden $125; transportation $410; groceries $650; clothing $125; gifts, charity $225; vacation, travel $35; other discretionary $40; dining, drinks, entertainment $250; personal care $50; pets $50; hobbies $10; subscriptions $50; other personal $210; drugstore $90; health, life, disability insurance $250; phone, internet $75; RRSPs $685; TFSAs $915; pension plan contributions $1,775. Total: $6,450. Surplus of $6,165 goes to savings and Tina’s employee share purchase plan.

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.

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

FINANCIAL FACELIFT: Home upgrade could saddle couple with too much debt to easily meet retirement dreams

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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.

gam-masthead
Written by: DIANNE MALEY
Special to The Globe and Mail
Published August 3, 2018

Roy and Leah are in their early 40s with three young children, a mortgage to pay off and a house in Toronto that is too small for a family of five. They want to add another storey at an estimated cost of $250,000.

Roy earns a healthy income in his information technology job, while Leah is working part-time. Together, they bring in about $166,000 a year. Their goal is to keep this work arrangement for as long as possible, Roy writes in an e-mail.

“Can we afford to do the house renovation with Leah still part-time?” Roy asks. The plan is for her to supervise the house renovation starting in the spring of 2019 and go back to work full-time in 2020. They’d have to borrow to finance the renovation.

They wonder what effect the additional debt will have on their retirement plans. “When can we comfortably retire?” Roy asks. He’s planning to work to the age of 65, although he’d naturally like to retire earlier. She plans to retire at the age of 60. They both have company pensions – his a defined contribution, hers a defined benefit.

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

What the expert says

Roy and Leah are facing the conundrum that many others in their position face, Mr. Ardrey says: balancing off life today with their retirement dreams of tomorrow.

“They want to find a way where Leah can remain working part-time, complete the $250,000 renovation to add a second floor to their house and still save enough for retirement.” There is little room in their budget for the added expense of carrying new debt, the planner says. That assumes the loan is amortized over 25 years at a cost of $14,000 a year, tilting them into a cash-flow deficit.

“If they could find a way to reduce their spending by $10,000 a year, both the renovation and the part-time work can co-exist,” Mr. Ardrey says. This seems unlikely. Instead, he looked at a more feasible option in which they delay the renovation until 2023 after Leah has returned to work full-time. “Or they could do the renovation now and Leah could return to full-time work now.”

In both scenarios, Mr. Ardrey included $2,500 a year for each child for education savings, a contribution of 6 per cent of salary to a defined contribution pension plan for Roy with a matching contribution from his employer and a top-up to his group registered retirement savings plan at work of $2,940 a year. Leah retires at the age of 60, as planned, with a pension of $59,725 and a bridge benefit of $7,642 from the age of 60 to 65, indexed to inflation. The planner assumes they will begin collecting full Canada Pension Plan and Old Age Security benefits at the age of 65.

In Scenario 1, where the renovation starts in 2023, they will have taken on substantial new debt, so their focus will be on paying it back, Mr. Ardrey says. “Being debt-free is a cornerstone to financial independence.”

All surplus will be directed toward debt, except for a pause between 2030 and 2032, when they will stop making additional mortgage payments and instead focus on their children’s postsecondary education costs because the registered education savings plan funds will be running out. That assumes education costs of $20,000 a year for each child, rising at 4 per cent a year or double the rate of inflation.

Lump-sum additional mortgage payments continue in 2033 until the debt is paid off in 2038. Roy retires the following year at the age of 65 and the cash flow surplus from that one year of $37,000 is saved in his tax-free savings account.

Their retirement expenses are $84,000 a year after tax in current dollars, plus $10,000 for travel to the age of 80. If they wanted to spend all their savings, leaving only their house, they could increase their retirement spending by $9,600 a year, rising with inflation, Mr. Ardrey says.

In Scenario 2, where Leah returns to work now, the focus would again be on debt repayment. By the time their children are in university, the mortgage will be lower so they will be able to make reduced lump-sum payments while they catch up with the education expenses.

“Paying down the debt earlier has a positive effect on Leah and Roy’s cash flow,” Mr. Ardrey says. They are debt-free by 2034, ahead of target. Roy can retire three years earlier than planned at the age of 62. Between 2034 and 2036, they use their surplus cash flow of $21,000 each to contribute to their TFSAs. They meet their retirement goal. If they wanted to leave only real estate behind, they could increase their spending by $6,000 a year. Although that is less than Scenario 1, Roy does retire three years earlier.

“Unfortunately, there are no magic bullets in retirement planning,” Mr. Ardrey says. “It usually comes down to working longer, saving more, spending less or investing better.”

Client situation

The People: Roy and Leah, both 43, and their three children, ages 7, 9 and 11.

The Problem: Can they afford to add a second storey to their house with Leah continuing to work part-time for a few more years?

The Plan: Either postpone the renovation until after Leah is back full time, or do it now and have her return to work immediately.

The Payoff: They avoid overextending themselves financially and having it affect their retirement plans.

Monthly net income: $10,610.

Assets: Cash in bank $1,000; his RRSP $58,735; his employer pension plan $182,600; estimated present value of her DB pension $208,890; RESP $111,815; residence $800,000. Total: $1.4-million

Monthly outlays: Mortgage $1,410; property tax $350; home insurance $85; utilities $285; maintenance $280; transportation $625; groceries $2,055; child care $400; clothing $200; line of credit $10; gifts, charity $350; vacation, travel $345; other discretionary $1,000; dining, drinks, entertainment $660; sports, hobbies $275; subscriptions, other $40; prescriptions $25; life insurance $140; phones, TV, internet $255; RRSP $115; RESP $625; pension plan contributions $1,040; professional association, group benefits $127. Total: $10,697.

Liabilities: $317,180; line of credit $4,000. Total: $321,180.

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

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

FINANCIAL FACELIFT: Returning Canadians aim to manage competing goals of travel, saving, retirement

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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.

gam-masthead
Written by: DIANNE MALEY
Special to The Globe and Mail
Published June 22, 2018

Cottage in Muskoka

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.

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

FINANCIAL FACELIFT: This couple making $258,000 a year are worried they are paying too much in investment fees as their retirement nears

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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.

gam-masthead
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.

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