Articles

FINANCIAL FACELIFT: Should Wilfred and Wendy diversify their Canada-heavy stock portfolio as they inch closer to retirement?

0 Comments

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:
Special to The Globe and Mail
Published July 3, 2020

Now in their 50s, Wilfred and Wendy plan to hang up their hats soon, sell their Manitoba house and move to a warmer clime. Wilfred is 58, Wendy, 53. Wilfred retired from his government job a few years ago and is now collecting a pension and working part time. He plans to continue working until shortly before Wendy is 55, when she will be entitled to a full pension. Both have defined benefit pensions indexed 80 per cent to inflation for life that will pay a combined $82,956 a year.

“We want to travel more in our younger years, so we would likely need more income in the first few years of retirement,” Wilfred writes in an e-mail. Their retirement spending goal is $75,000 a year after tax plus $25,000 a year for travel. With no children to leave an inheritance to, “we want to use up all our invested funds,” he adds. “We are extremely active, healthy people who have good chances of living a long life.”

They’re considering moving to British Columbia for the “milder winter weather and greater recreational opportunities,” Wilfred writes, but would only do so if they could buy for about the same price as their existing house fetches.

The stock market drop this spring left them feeling their investments are not sufficiently diversified, Wilfred adds. “I would like to diversify our stock holdings away from Canada only.”

We asked Matthew Ardrey, a vice-president and portfolio manager at TriDelta Financial in Toronto, to look at Wilfred and Wendy’s situation.

What the expert says

Wilfred is planning to retire fully in the spring of 2021 and Wendy in January, 2022, Mr. Ardrey says. “With the goal in site, they would like to ensure that they are financially ready for the next stage in their life,” the planner says.

First off, the pair do not keep an accurate budget, Mr. Ardrey says. “As we went through this exercise, they revised their monthly spending upwards by $1,200.” The updated numbers are shown in the sidebar. “Before they retire, I would strongly recommend that they do a full and accurate budget, he adds, because a large discrepancy in their spending “could have a dramatic effect on their financial projections and their ability to meet their obligations in retirement.”

Wendy has three options for her pension, the planner says. She can take $3,874 a month with no integration of Canada Pension Plan and Old Age Security benefits. Or she can take $4,320 a month to the age of 60 and $3,688 a month thereafter with CPP integration. The third choice is $4,621 a month to the age of 60, $3,989 a month to 65 and $3,375 a month thereafter with integration of both CPP and OAS.

According to the pension administrator’s website, the purpose of integration is to provide a more uniform amount of income throughout retirement, rather than having less income initially (prior to CPP and/or OAS eligibility) and more income in the later years (when CPP and OAS commence). Integration provides an opportunity to increase the cash flow early in retirement which, for some, is preferred.

“I thought it would be interesting to compare her three options to find which would be the most lucrative over her lifetime,” Mr. Ardrey says. Option No. 1 is the clear winner, he says, giving the largest cumulative value of payments to the age of 90.

To illustrate, by 72 Wendy will accumulate $961,000 of pension with no integration, compared with $956,000 with integration of CPP and OAS.

In drawing up his plan, Mr. Ardrey assumes Wendy chooses the first option and that they both begin collecting government benefits at 65. He also assumes they buy a condo in B.C. in 2023 for about the same price as they get selling their current home. Because it is a long-distance move, he assumes transaction and moving costs total $100,000.

“Before we can discuss their retirement projection, I need to address their investment portfolio,” Mr. Ardrey says. Wilfred is right to think they need to diversify, the planner adds. They have a portfolio of nearly $800,000 invested almost all (97 per cent) in Canadian large-cap stocks. “Further concentrating their position, they have that 97 per cent spread over only 13 stocks, and of that, 62 per cent is in only five stocks,” Mr. Ardrey says. This exposes them to “significant company-specific risk,” he says.

As well, the Canadian stock market is not as diversified by industry as U.S. and international markets, so it can lag at times. “For example, in the recent market recovery, financials and energy have been lagging, which are two of the three major sectors on the TSX,” he says.

To illustrate, the planner compares the performance of the TSX and the S&P 500 indexes from Dec. 31 and from their February highs to the market close on June 24. The TSX is down 10.4 per cent from Dec. 31 and down 14.8 per cent from February. The S&P, in contrast, is down 5.6 per cent from year-end and down 9.9 per cent from February.

“Having a portfolio almost entirely allocated to stocks in retirement is a risk that Wilfred and Wendy cannot afford,” Mr. Ardrey says. He offers two alternatives. The first is a geographically diversified portfolio with 60-per-cent stocks or stock funds and 40-per-cent fixed income using low-cost exchange-traded funds. Such a portfolio has a historical rate of return of 4.4-per-cent net of investment costs.

Or they could hire an investment counsellor that offers carefully selected alternative income investments with a solid track record, Mr. Ardrey says. Adding these securities to their portfolio ideally would lower volatility and provide a higher return than might be available in traditional fixed-income securities such as bonds, the planner says.

Either way, they meet their retirement spending goal of $75,000 a year after tax, plus $25,000 a year for travel until Wilfred is 80.

Client situation

The people: Wilfred, 58, and Wendy, 53

The problem: How to ready themselves financially to retire in a couple of years.

The plan: Draw up an accurate budget, continue saving and take steps to diversify their investment portfolio to lower volatility and improve returns.

The payoff: Financial security with a comfortable cushion.

Monthly net income: $11,230

Assets: Bank accounts $51,000; his stocks $78,000; her stocks $135,800; his TFSA $86,500; her TFSA $78,000; his RRSP $232,217; her RRSP $186,767; estimated present value of his pension plan $464,000; estimated present value of her pension plan $677,417; residence $425,000. Total: $2.4-million

Monthly outlays: Property tax $270; home insurance $75; utilities $185; maintenance $200; garden $50; transportation $580; groceries $600; clothing $200; gifts, charity $200; travel $2,000; dining, drinks, entertainment $350; personal care $150; subscriptions $50; dentists $30; health and dental insurance $100; cellphones $130; cable $200; internet $130; RRSPs $1,025; TFSAs $1,000. Total: $7,525

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: Should millennial savers Sid and Kamala hit pause on their plans to buy a house?

0 Comments

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:
Special to The Globe and Mail
Published May 22, 2020

Fear of missing out has inspired millennials Sid and Kamala to save diligently in hopes of buying a house in the Greater Toronto Area. They also think they’re “bleeding money” by paying rent, Sid writes in an e-mail.

Sid is 34 and earns $55,000 a year in the hospitality industry. Kamala, who is 29, earns $35,000 a year in health services. The house they are eyeing is $880,000. For now, though, the house-hunting is on hold because Kamala and their toddler are stuck overseas, where they were visiting family.

“My question is whether to stay put in the rental market and focus on investing, or get into the housing market by depleting my savings,” Sid writes. “If we buy a house valued at $880,000, will we have any savings left for retirement?” They hope to retire from work when Sid is 60 with $48,000 a year after tax in spending.

In the meantime, they are planning a big trip. “Our dream is to go to Serengeti [National Park] in Africa to see the wildlife migrations one day,” Sid writes. They also want to help their son with postsecondary education.

“Is it feasible?” Sid asks.

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

What the expert says

Mr. Ardrey explores how things might unfold financially if Sid and Kamala buy the house they want early in 2021 for $880,000. For the down payment and the estimated $15,000 in purchase costs (land transfer tax, moving costs, legal costs and furnishings), they have more than $200,000 in cash equivalents sitting in non-registered investment accounts, Mr. Ardrey says. The remaining $680,000 would be financed by a mortgage.

To help with their mortgage payments, they plan on renting out the basement for the first 10 years, Mr. Ardrey says. They expect to get about $1,400 a month. The planner assumes taxes, utilities, insurance and maintenance add another $1,500 a month over and above the $3,220 mortgage payment. One third of these costs – plus a third of the mortgage interest – will be tax deductible as long as they are renting it out.

Sid is expecting to inherit $50,000 in a few years. When he does, they plan to travel to Africa at a cost of $10,000, depositing the remaining $40,000 in their tax-free savings accounts.

“Based on these numbers, and assuming no large increases in their income, the house purchase is only viable with the renter in place” at least until the couple retires in 2046 rather than the 10 years they are planning for, Mr. Ardrey says.

As for the child’s education, their registered education savings plan contributions of $210 a month will fall short, the planner says. With food and housing, each year at university is estimated to cost $20,000, rising at double the rate of inflation, or 4 per cent a year. “With their savings, they will be able to cover about half these costs,” he says. The remainder will have to be covered by loans, grants “or other means.”

When they retire at Sid’s age 60, he is estimated to get 75 per cent of the maximum Canada Pension Plan benefit he would otherwise be entitled to and Kamala 50 per cent. By the age of 65, both will have 40-plus years of residency in Canada, allowing for full Old Age Security payments.

Their investments have a historical rate of return of 4.95 per cent a year, with an average management expense ratio of one percentage point, for a net return of 3.95 per cent. After subtracting inflation, estimated at 2 per cent a year, they will have a real return of 1.95 per cent, Mr. Ardrey says.

“Based on the above assumptions, they just break even with their $48,000-a-year spending goal,” the planner says, “with no room for unforeseen expenses or emergencies.”

To improve their circumstances, the couple could buy a less expensive home. It could be a smaller one in their desired neighbourhood or one farther afield, making their commute to work longer. Either way, they would not likely be able to command such a high rent from the lower-level apartment, the planner says.

Instead, they might want to consider one or more of the following:

Increase their annual savings now through a forced savings program, but “this would be difficult to do when they are already pushed to the edge of their budget,” Mr. Ardrey says. Or they could plan on renting out the apartment throughout their retirement years. “This would allow a non-investment asset – their home – to generate income for them,” the planner says. “They need to decide if they want to continue to have someone in their home and if so, for how long.”

Alternatively, they could sell the house and downsize after they have retired from work. Or they could work longer or spend less when they retire, “not a preferable choice,” the planner says.

The best alternative, Mr. Ardrey says, would be to improve their investment strategy. They have multiple accounts at several different financial institutions. They should consolidate at one financial institution and develop a diversified strategy using exchange-traded funds, he says.

As their portfolio grows, they should look to move to an investment counselling firm that can offer private investments to supplement the couple’s diversified equity and fixed-income strategy. If all goes well, they should be able to increase their returns net of fees by about one percentage point, the planner says. This would give them more of a financial cushion without having to sacrifice their lifestyle.

One thing that could work in Sid and Kamala’s favour is the potential effect of COVID-19 on house prices. Canada Mortgage and Housing Corp. recently estimated that in a worst-case scenario, house prices could fall as much as 18 per cent over the next 12 months, which would knock $158,000 off the price of their desired home. “If that were to happen, it would certainly make their financial goals that much more achievable,” Mr. Ardrey says.

Client situation

The people: Sid, 34, Kamala, 29, and their toddler.

The problem: Can they afford to buy the house of their dreams?

The plan: Gain a solid understanding of the potential risks and trade-offs involved in buying the house they want.

The payoff: A greater potential for financial security.

Monthly net income: $5,900

Assets: Cash and cash equivalents $210,655; his RRSPs $45,425; his TFSAs $23,505; her RRSPs $3,760. Total: $283,345

Monthly outlays: Rent $1,900; home insurance $20; electricity $40; transportation $450; groceries $400; child care (grandparents are main caregivers) $100; clothing $25; charity $20; personal care $50; dining out $200; subscriptions $30; drugstore $20; cellphones $100; internet $45; RRSPs $700; RESP $210; TFSAs $425. Total: $4,735. Surplus of $1,165 goes to unallocated spending and saving for down payment.

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

Ted Rechtshaffen: Why I made my daughter pay for her first year of university

0 Comments

Teaching financial responsibility and financial lessons should be an important part of a university education

A few years back I wrote an article that was not very popular with high school students. I suggested that a great financial lesson to teach a child or grandchild is to have them pay for at least one year of post-secondary tuition, ideally the first year. Among the many reasons is that the child becomes a partner in their own education and it helps them to take school seriously from day one.

Well, now my oldest child is in first year university and she has paid her first year’s tuition. So far, it didn’t turn out to be that difficult.

One of the key lessons is that I told my daughter of this expectation when she was in Grade 8 or 9 so she had time to work and save up money. Thankfully, she took on the challenge and she has been a good worker and saver along the way. I know that this will not work so smoothly with different personalities. One important benefit of having a responsible oldest child is that my two younger children looked at their sister and have said, “I better start working at 14 or 15 so I will have money to spend and have enough for tuition in first year.” The bar has been set and the expectation communicated.

This all sounds nice, but the important financial lessons are just getting started.

In the days before heading off to school, my daughter asked me a good question. Who will pay for my basic expenses that aren’t covered? Clothes, food beyond the meal plan, some extra spending money. We could answer one of three ways: 1) You are covering all of it; 2) We are covering all of it;
3) We will help cover it.

I know what I don’t want to happen. I have seen many young adults graduate from university without ever being responsible for their own bills and their own budgets. Suddenly at 22 or 23 or 24 the parents are surprised that their kids do not have any of these important financial skills. We view this as an important part of her university education.

What we want to do is to teach financial responsibility and financial lessons. After some thought, we decided that we were not comfortable with either of the first two answers. We were more comfortable with number three, but that still leaves important questions such as: How much will we help? How will you receive the help? What happens if you “run out of money”?

Here is how we answered them.

I reviewed this with my daughter to come up with what we thought was a reasonable budget for these expenses. I told her that we would review it in January to see how it was going.

I told her that I want to pass financial responsibility for her spending to her. That meant that we were going to transfer a monthly amount to her bank account at the beginning of each month. That was hers to use as she saw fit, but she is not getting any more money if she runs out. We don’t want to tell her how to spend her money, we want her to figure it out. If she wants to spend all her extra money on Zola, her African Grey Parrot (don’t ask), and nothing else, it is up to her.

If she does run out of money, it isn’t a crisis. She has a roof over her head and a food plan. She can last until the following month.

Another area for financial lessons comes from credit cards. I actually want her to get a credit card. I want her to understand that putting things on a card is simply deferred payment. If she is late paying, I want her to understand the interest rate. I want her to understand that a minimum monthly payment is not the amount owing.

If the credit card bill comes to her parents, she will not learn these important lessons.

There are a few cards with no fees that require no personal income, and can be obtained by a student as long as you are a Canadian resident over 18.

A great resource to find these cards can be found here:

https://www.savvynewcanadians.com/best-student-credit-cards-canada/

Most importantly, we want to raise someone who appreciates that money doesn’t simply come from her parents. She needs to work for the money and understand its’ value.

She needs to learn to be a good shopper.

She needs to learn how to pay bills.

She needs to feel the consequences of being a saver or a spender.

Ultimately, just like the other parts of being a parent, we want her to develop the skills to be a strong, smart and independent person. The only way that will happen on the financial side is by giving her the freedom to succeed and fail financially. The best way I know to ensure financial problems is to not give your child any of these tools until they have a full-time job.

As someone once told me, “Little people, little problems; big people, big problems.” Just as in other parts of life, it is much easier to learn lessons from the little problems so that you don’t have to face big problems unprepared.

Reproduced from The Financial Post – October 29, 2019.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

What a couple of kids at the CNE can teach the government about budgeting

0 Comments


In September everything is back in swing. Kids are back in school. Governments are back in session. Money will be spent on juice boxes and money will be spent on pipelines. Before the juice boxes get packed for school though, I had the pleasure of being at the CNE in Toronto with my son and my nephew.

As we walked among the crowded midway, I was asked a few times whether they could try this game or that. I said “not now” a few times until I eventually told them “I will give you $20 to share. It is your games budget. Once it is done, no more games.”

I immediately noticed an incredible transformation in their behaviour and approach to the games. No longer would they do the rope ladder game at $10 a pop that 30 minutes earlier they had been so interested in. The $5 whack a mole was no longer worth it, given the prizes. They suddenly became the ultimate in value shoppers. Each game was studied in terms of price, prizes, and perceived difficulty. Questions were asked of the people running the games, and even lengthy observations took place of the crowds playing to determine who was winning and what paddle, gun or ball they used to get there.

As I watched this transformation, it became perfectly clear. Their earlier requests required nothing of themselves. It wasn’t their money. It was from some mysterious and seemingly deep well of funds that you could ask for, and even if the answer was no, you knew you could try again at some point. Now it was different. This was their money. It was limited. Decisions and tradeoffs were required. They knew that they had to treat the funds with respect and care.

The end result of their game adventure was that the $20 had been spent, but they stretched it for a good hour, while managing to win a taco pillow and a hat that I think was a turd emoji (they are 11 and 12 year old boys after all). I recognize that with some kids, this transformation would not have happened, but in this case I found it fascinating. What could be learned from this? How can the CNE experiment be applied to the greater good?

Now I turn my attention to the federal government of Canada. They too are essentially back at school, actively running our country to the best of their ability. The question is whether they run this massive enterprise by asking their parents for money from a seemingly bottomless pit or do they act as if they have $20 and they have to make it work. I think you know the answer to that one.

Here are the basics for the federal government:

2018 Projected Total expenditures: $338.5 billion

2018 Projected Total revenue: $323.4 billion

2018 Projected Deficit: $18.1 billion (including a $3 billion adjustment for risk).

These figures are for just the one year.

The federal government’s market debt — the debt on which Ottawa pays interest — topped $1 trillion in March of this year.

In a year where the economy is in relatively good shape, how can we project an $18.1 billion deficit? To learn from the CNE example, how about this ‘You have $323.4 billion to spend, and that is it. Once it is done, there is no more money.” How hard is that? This isn’t 2009. There is no economic crisis. This is a year where there is absolutely no excuse for running an annual budget deficit.

How about the debt? How would I talk to my kids about that one? I would tell them that you are very fortunate to be able to go to the CNE and have fun. You have $20 for games, but I really think you should set aside $2 from that and use it to give to someone that isn’t as fortunate, or to save it for something later this year that you might want to spend it on.

I know this isn’t a perfect analogy, but my son and nephew don’t owe anyone $1 trillion. However, I know someone who does. Guess what that group plans to do in 2018 instead. They plan to add another $18 billion to the amount they owe. If my son and nephew did owe someone $1,000, guess what they wouldn’t have been doing at all. They wouldn’t be using $20 for games at an amusement park. The $20 would have gone to paying down that debt.

I know that it isn’t right to compare federal government spending to games at an amusement park, but maybe it isn’t so far off. In the small category of questionable government spending, we have the $155,000 that was spent last year to have a red couch travel the country by RV to celebrate Canada150. In the large category, we have the $4.1 billion that has been provided by the Federal Government to Bombardier in the form of grants, loans and other investments since 1966 — a significant amount of which took place in the past three years.

I understand that setting budget priorities is a very difficult job, and even the examples above can be argued as to whether they were appropriate or not. The key point is that if federal government employees had some feeling that this was their own money being spent, it is hard to imagine these and other expenditures would have happened.

So where does this leave us?

Whether it is with your kids or our elected officials and their staff, there needs to be a greater connection to and ownership over spending. Perhaps with the federal government, there could be a reduction in government pension contributions equal to 3 per cent of annual budget deficits. As an example, for 2018, if we end up with an $18 billion deficit, there would be a $540 million deduction in government pension contributions. That would at least be a start when it comes to helping all federal government employees feel like it is their money being spent.

As it stands today, it often feels as though our government’s spending discipline is like a kid asking for money to play the ring toss game at the fair.

Reproduced from the National Post newspaper article 10th September 2018.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221
↓