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

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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:
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

Renting as a senior might make more financial sense than downsizing and buying

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Many seniors are presented with the option of downsizing their home once they reach retirement.

Ted Rechtshaffen, President and Wealth Advisor of TriDelta Financial says this may make sense for some seniors, but so might renting.

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

Tips for helping your kids buy a house

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TriDelta President Ted Rechtshaffen joins House Money on BNN with advice for parents possibly looking to help their kids buy a home.

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

Our housing market – is this the top?

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The explosive growth of the Canadian housing market in the last decade may finally be coming to an end.

Interestingly there is good logic on both sides of the debate and it is anyone’s guess where markets go in the short term:

The reasons for it to continue growing:

  • Foreign buyers remain very active despite a slowdown in Vancouver due to the new 15% BC foreign buyers tax. This has however likely boosted Toronto sales.
  • Three decades of low interest rates.
  • Job growth in the major centres outpaces the national average, particularly Toronto and Vancouver, which collectively accounted for all of Canada’s increases in 2016
  • Demographics reflect that there are more people aged 25 to 40 in these two cities and they have grown faster relative to other age groups. This segment is also in their prime home buying and child producing years, further stimulating home sales.
  • The number of single detached homes built in Toronto in 2015 was the lowest since 1979 according to a BMO report. This imbalance in supply and demand is a big reason prices for single-family houses are experiencing double-digit price jumps. In May 2016 the average detached home price jumped 18.9%, while condos only saw a 5.9% increase.
  • Housing market speculators flipping properties are very much part of this process although hard data on this activity is sparse.
  • A continued weak Canadian dollar is stimulative to the housing market. Since 2011, the Loonie has lost 27% of its value against the greenback, while Canadian homes appreciated by 26%.
  • If houses were priced in U.S. dollars, a very different perspective emerges. Canadian home prices aren’t appreciating, but show a decline of about 9% against the average benchmark price. The same trend is evident when pricing Canadian homes in Chinese yuan. This is worrisome because Canadians are actually being devalued on a global scale.

Among reasons for the long boom to end:

  • Steven Poloz, head of the Bank of Canada says the Canadian housing boom is unsustainable for a number of reasons including overall household financial stresses and climbing debt.
  • The anticipated interest rate trend, changing from the past three decade decline to a rising rate environment, appears to have already started in the U.S.
  • Continued weakness in the price of oil as is anticipated by many given slow global growth and excess oil supply.
  • Asset prices inevitably revert to their historical mean, which is overdue in Canadian housing prices.
  • Buyers believing the real estate market is different this time.  Canada’s housing market dropped about 15% in 1957 over six years and a whopping 25% in the early ‘90’s so maybe this market needs to digest some of the recent gains, which are more than double our long-term averages.

The correction may already have begun. Consider that the Teranet-National Bank index of house prices in Canada’s 11 largest metropolitan regions rose 6.1% in November, yet only four cities—Toronto, Hamilton, Vancouver and Victoria actually posted gains. Values in the other seven cities contracted, suggesting that a correction is well underway.

Here are two recent articles that provide more food for thought on our real estate market:

The first article from Maclean’s suggests that population growth isn’t driving Toronto house prices as many have claimed.

The second article from MoneySense magazine, takes a broader approach and provides the Canadian Real Estate Associations (CREA) perspective.

Anton Tucker
Compiled by:
Anton Tucker, CFP, FMA, CIM, FCSI
Executive VP and Portfolio Manager
anton@tridelta.ca
(905) 330-7448
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