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FINANCIAL FACELIFT: Can Chelsea and Chad ‘make it all work’ with a second baby on the way and a possible career change?

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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 October 4, 2019

Chelsea and Chad are earning big and saving mightily, but with a second baby on the way, Chelsea is mulling a possible career change that would cut her income substantially. They are both 34 with a toddler, a mortgage-heavy house in Toronto, and two rental condos.

Chelsea earns $250,000 a year in sales, Chad $115,000 a year in technology. Their condos – their principal residences before they got together – are both generating positive cash flow. With the “main breadwinner” taking a year off and big mortgage payments, they are wondering how to “make it all work.”

They ask whether they should continue paying down their home mortgage aggressively, and whether they should borrow against their rental units to invest. “There is a lot of money coming in and out of our accounts monthly, with property tax, condo fees, and so on,” Chelsea writes in an e-mail. They wonder whether they are managing it optimally.

“We just keep saving but with no clear goal in mind or understanding if our planning is sound,” she adds. They have a “strong desire to maintain a safety net,” and to have a “sound strategy for retirement.”

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

What the expert says

Mr. Ardrey started by running the numbers Chad and Chelsea provided for their income, savings and expenses. To his surprise, his software showed the couple had a $45,000 a year surplus – even after accounting for savings and tax refunds from RRSP contributions. “I believe this is significant leakage in their spending that they have not recorded,” he says.

“Because most people know what they earn and what they save, I can only assume this is being spent,” the planner says. He has included an additional $45,000 worth of expenses in their plan to account for the discrepancy. This takes their adjusted spending to $205,000 a year, including mortgage prepayments.

“This is the primary issue that Chelsea and Chad need to address before any others,” Mr. Ardrey says. “A material change in expenses will affect all financial projections and analysis, including making sure they have sufficient life and disability insurance,” he adds. “I recommend that they go through a detailed budgeting process as soon as possible.”

Both Chelsea and Chad have defined contribution pension plans or group registered retirement savings plans at work to which both they and their employers contribute. As well, they both make maximum contributions to their tax-free savings accounts.

In addition to the registered savings, they make an extra payment of about $12,000 each quarter ($48,000 a year) on their mortgage, and tuck away $2,000 a month ($24,000 a year) in a non-registered savings account. In the past, they have used this money for RRSP top-ups, TFSA contributions and mortgage payments. More recently, they have been setting it aside to help offset the drop in income during Chelsea’s mat leave. Chelsea will get 60 per cent of her salary for the first 16 weeks and employment insurance benefits thereafter.

Their rental properties bring in an additional $19,800 a year for Chelsea and $14,820 for Chad after expenses, but before taxes.

Chelsea and Chad have a $719,000 mortgage on their principal residence and a $42,000 mortgage on one of the rentals.

It is unfortunate that Chelsea and Chad have so little debt against their rental properties and so much against their principal residence, because the rental mortgage interest is tax deductible, but interest on their principal residence mortgage is not.

Although a common thought would be to leverage the equity in the rentals to pay off the principal residence, the Canada Revenue Agency has recently disallowed a similar strategy. For interest to be tax deductible, the use of the borrowed money must be to produce income, the CRA says. The intention of the transaction and the assets pledged for security are both immaterial in this determination. The agency is reviewing tax deductibility on a case by case basis.

Chad and Chelsea ask whether they should use their surplus cash flow to pay off the mortgage or invest. They might be better off financially investing, Mr. Ardrey says. That’s because the after-tax cost of the mortgage interest is low: 2.54 per cent based on the current mortgage rate on their principal residence.

“To break even on investing instead of making extra mortgage payments, assuming a 50 per cent tax bracket and earning interest income, they would need to earn 5.1 per cent on their investments,” he says. This would be even more appealing if they engaged in tax-efficient investment planning and had more of their returns coming from dividends and capital gains, Mr. Ardrey says.

For their children’s education, the annual RESP savings of $2,500 for each child will fall short of the future costs by about 50 per cent, the planner says. The current average cost of postsecondary education is $20,000 a year. Historically, these costs have outpaced inflation, so he assumes the education costs rise at the rate of inflation plus two percentage points. If Chad and Chelsea want to fully fund their children’s education costs, they will be in a position to do so at the time simply by redirecting the surpluses from their non-registered investing to the education expenses, he says.

Next, Mr. Ardrey looked at how Chelsea’s lower income would affect the family finances. If Chelsea changes careers, earning $125,000 a year, they will not be able to make extra payments to their mortgage for the time being. As well, they would not be able to add to their non-registered savings. They would have to reduce their spending by a significant amount: $20,000 a year after-tax, to $137,000 a year. That’s a reduction of the $48,000 for the extra mortgage payments and $20,000 of actual spending. This would continue until their first child is 12, in 2029. If they are both working full-time with good income, they will likely have to have some form of before and after school care, the planner says. By the time the older one is 12, most agree that they can be responsible enough to babysit.

The reduced savings would affect their retirement, but they would still be able to retire comfortably, Mr. Ardrey says.

Finally, Chad and Chelsea would benefit from having a full financial plan prepared, Mr. Ardrey says. “A comprehensive financial plan will create a road map for them to follow.” In their case, it is not the retirement that is unclear, it is the next 10 years, he adds. “Having a plan will help them make the right financial decisions for both today and tomorrow.”

Client situation

The person: Chad and Chelsea, both 34, and their children.

The problem: How to prepare themselves financially for the career change Chelsea is considering. Should they keep paying down the mortgage, or should they borrow to invest?

The plan: Draw up a budget that tracks their actual spending to determine where the leakage is. If Chelsea changes jobs, be prepared to cut spending and halt the mortgage prepayments for a few years.

The payoff: A clear road map across the next decade or so when their cash needs will be greatest to open roads later on.

Monthly net income: $22,900

Assets: Bank accounts $100,000; her TFSA $69,000; his TFSA $71,000; her RRSP (including group RRSP) $233,000; his RRSP $83,000; his DC pension plan $8,000; RESP $9,500; principal residence $1-million; her rental condo $700,000; his rental condo $350,000. Total: $2.6-million.

Monthly outlays: Mortgage $3,820; property tax $695; home insurance $160; utilities $160; maintenance, garden $75; extra mortgage payments $4,000; transportation $455; groceries $350; child care $1,300; clothing $200; gifts $50; vacation, travel $1,000; dining, drinks, entertainment $380; grooming $75; subscriptions, other personal $60; drugstore $10; life insurance $275; disability insurance $225; phones, TV, internet $70; RRSPs $3,500; RESP $210; TFSAs $835. Total: $17,905. Surplus: $4,995.

Liabilities: Residence mortgage $719,000 at 2.54 per cent; rental mortgage $42,000 at 3.15 per cent. Total: $761,000.

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: Rosy projection for long European vacation, then retirement in B.C. hides ‘substantial risk’

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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 August 2, 2019

To celebrate the sale of their house for an impressive sum, Dave and Deborah are planning a long European holiday followed by a big move: from Toronto to a popular retirement destination in British Columbia, where they plan to buy a new home.

Dave, who is 67 and self-employed, will be retiring from a successful career in communications. Deborah, who is 57, is self-employed in the human-resources field. She plans to continue working part-time after they return from overseas. Together, they have substantial savings and investments.

“Our big change is that we have just sold our house in Toronto for $1.7-million net and will be taking a year and a half to travel in Europe when the sale closes,” Deborah writes in an e-mail. “The idea is to invest the proceeds from the house sale in a self-directed [discount brokerage] account consisting entirely of dividend equities,” Deborah adds. “My husband doesn’t like bonds as an investment.”

They would live off the dividends while they are in Europe, Deborah adds, then use the lion’s share of the principal to buy a house in B.C. Dave manages their investments. “He is the first to admit he is not a professional investor and feels he’s in a bit over his head,” Deborah writes. Once they return to Canada, their retirement spending target is $90,000 a year after tax.

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

What the expert says

When their house sale closes, Dave and Deborah plan to use $53,000 of the $1.7-million proceeds to top off Dave’s tax-free savings account, Mr. Ardrey says. They plan to invest the remainder in “dividend aristocrats” and live off the dividend income while overseas. When they return to Canada at the end of 2020, they plan to buy a home for an estimated cost of $1.3-million.

Mr. Ardrey’s calculations include spending of $120,000 a year in Europe (which would not be covered entirely by the dividend income), retirement spending of $90,000 a year after tax, an inflation rate of 2 per cent a year, and that Deborah earns $20,000 a year working part-time to the age of 65. Both save the maximum to their TFSAs each year, but they no longer contribute to their registered retirement savings plans. They delay collecting Canada Pension Plan and Old Age Security benefits until the age of 70 to get the higher payments.

In addition to their house sale proceeds, the couple have $685,000 in RRSPs and $98,000 in TFSAs. Dave also has $544,000 in a corporate investment account that he can draw tax-free.

Next, Mr. Ardrey looks at the couple’s existing investments. Their current asset mix is 9-per-cent cash equivalents, 1-per-cent bonds and 90-per-cent stocks and stock funds. Of the 90 per cent in stocks, 45 per cent is in Canada, 38 per cent in the United States and 7 per cent is international. The historical rate of return is 5.4 per cent. Because they have a substantial proportion in exchange-traded funds, their investment cost is only 0.39 per cent a year, leaving them with a rate of return net of costs of 5.01 per cent.

“Based on these assumptions, Dave and Deborah will be able to meet their retirement goals,” Mr. Ardrey says. Deborah would still have total assets of $5.3-million by the time she is 90, the planner says. If they wanted to spend more and leave only their home as an estate, they could increase their spending by $24,000 a year to $114,000.

What could go wrong?

“Though this projection looks quite rosy, I would be remiss if I did not address the substantial risk in their plan,” Mr. Ardrey says. “Equity volatility.” Including the house-sale proceeds, Dave and Deborah would have 96 per cent of their assets invested in stocks during their stay in Europe.

They’d be ignoring a basic rule of investing: Don’t invest money that is needed short term in marketable securities.

“What if, during their European dream vacation, stock markets had a major decline?” the planner asks. That would affect their retirement plans dramatically. He looks at a second case where their portfolio suffers a 20-per-cent drop during that time. Rather than being able to surpass their spending target, they’d have to pare it from $90,000 a year to $84,000.

Mr. Ardrey suggests some alternatives. The $1.3-million they’ll need to buy a new home in a year or so should be invested in guaranteed investment certificates, or GICs, where they’d be sure to get their money back. “The primary goal of these funds needs to be capital preservation,” the planner says. Dave and Deborah should keep in mind deposit insurance limits, he says. Canada Deposit Insurance Corp. insures Canadian-dollar deposits at its member institutions up to a maximum of $100,000 (principal and interest) for each account. For example, they could open an account in Dave’s name, another in Deborah’s and a joint account at each of four institutions for $100,000 each. “So they could fill their need with four institutions for most of the savings and $100,000 more at a fifth,” he adds.

“Another option would be to purchase the home in B.C. before leaving on their trip,” Mr. Ardrey says. This would remove any uncertainty about what they will have to pay.

With the remaining investments, Dave and Deborah should look at revising their strategy to reduce their stock-market risk, the planner says. They should have a balanced portfolio of large-capitalization stocks with strong dividends and a mix of corporate and government bonds of different durations. Although Dave isn’t keen on bonds, they could enhance their fixed-income returns – and reduce volatility in their portfolio – by investing a portion of their capital in carefully vetted private debt and income funds, Mr. Ardrey says.

These private funds can be bought through an investment counsellor. If they hired one and put a portion of their fixed-income assets in private debt and income funds, they would have a projected return of 6.5 per cent with 1.25 per cent a year in investment costs, for a net return of 5.25 per cent. That’s better than the 5.01-per-cent historical rate of return on their existing portfolio and it would reduce their investment risk.

Client situation

The person: Dave, 67, and Deborah, 57

The problem: How sound is their plan to invest the proceeds of their house sale in blue-chip stocks and live off the dividends for the time they are in Europe?

The plan: Invest the money needed to buy the new house in GICs, or consider buying the house in B.C. now.

The payoff: Greatly reduced investment risk

Monthly net income: $8,335

Assets: Cash $15,000; stocks $544,070; her TFSA $79,640; his TFSA $18,775; her RRSP $419,995; his RRSP $264,640, residence $1.8-million. Total: $3.1-million

Monthly outlays: Property tax $685; home insurance $195; utilities $250; maintenance, garden $125; transportation $400; groceries $290; clothing $175; gifts, charity $80; vacation, travel $200; personal care $90; dining, drinks, entertainment $255; subscriptions $35; doctors, dentists $165; drugstore $35; phones, TV, internet $280; RRSPs $1,500; TFSAs $900. Total: $5,660

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

The Spousal RRSP – Does it still have a place in Retirement Planning?

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One of the more frequent questions I get from clients regarding their retirement planning is, with the pension income splitting legislation, are spousal RRSPs worthwhile anymore? The answer is yes, in several situations.

Before I outline the planning situations that are useful for spousal RRSPs, first a little primer on what they are and how pension income splitting changed the view of them.

Spousal RRSPs

A spousal RRSP is a RRSP account in which one spouse makes contributions based on his/her room to a RRSP in the other spouse’s name. This is a way to income split in retirement, as future withdrawals, subject to restrictions noted below, would be in the recipient spouse’s name and presumably in a lower tax bracket than the contributor spouse.

The restriction is on the withdrawal timing. If the recipient spouse withdraws any amount from the spousal RRSP in the year of a contribution or the two years following, the amount withdrawn attributes back to the contributing spouse. The only exception to that is a minimum RRIF payment.

In summary the contributing spouse receives the RRSP deduction at his/her current marginal tax rate and the future income is withdrawn at the recipient spouse’s lower tax rate in retirement, maximizing the RRSP tax deferral advantage.

Pension Income Splitting

The pension income splitting legislation introduced in 2007 allowed not only defined benefit pension income to be split between spouses, but also RRIF payments after the age of 65. No matter who owned the RRIF, both spouses could share equally in the income for tax purposes. As the RRIF payment could be divided 50/50 between spouses, the income splitting advantage of the spousal RRSP diminished.

The Case for the Spousal RRSP – Tax Efficient Decumulation

After years of saving, much of today’s tax planning is around decumulating assets. My clients not only want to drawdown their registered accounts but do so in the most tax efficient manner possible. For many, this opportunity often lies in time period between retirement and the receipt of CPP and OAS.

This is one of the most advantageous times to employ a RRSP meltdown strategy. With no further employment income, before receiving government pension income and with presumably little to no other income, RRSP withdrawals can be made with minimal tax consequences.

Take the example of an Ontario resident with no other income. If they withdrew $43,900 from their RRSP, they would only pay about $6,450 in taxes, or 14.7%. This is quite a minimal price to pay, especially if deductions for contributions were made at rates in the 40%-50% range. By adding in a spousal RRSP, for someone who would otherwise not have one, both spouses can make the same withdrawal, giving them almost $75,000 of after-tax dollars to live on.

To note, in order to maximize the advantage, the couple would need to plan the timing of the spousal RRSP contributions to avoid attributions on the withdrawals.

Even if the couple does not require this level of income, drawing it out at a lower tax bracket still makes sense. Subject to contribution limits, excess amounts can be saved into a TFSA, creating future tax-free withdrawal availability when incomes are higher due to government pensions.

Even after the age of 65, the spousal RRSP can work in situations where the contributing spouse has income not eligible to split (i.e. non-registered investment income, executive top-up pensions or corporate earnings/dividends). In this case, having the recipient spouse earn the RRIF income solely on their own, instead of splitting 50/50 would be advantageous for tax planning in retirement.

The Case for the Spousal RRSP – Other Situations

Finally, there are some situations in which spousal RRSPs can be beneficial beyond income splitting in retirement.

If only one spouse is employed or has RRSP assets, by creating a spousal RRSP they can double the amount they withdraw to purchase a home under the home buyer’s plan (HBP). Currently the HBP allows for $35,000, based on the 2019 federal budget, to be withdrawn per spouse for the purchase of a qualifying home. If there is only one RRSP, then this is limited to half of the available amount if both spouses had a RRSP, either spousal or personal.

The spousal RRSP also works well if the spouses have a gap in their ages and the contributing spouse continues to work after the age of 71. After 71, they would be forced to convert their RRSP to a RRIF and could no longer contribute to a personal RRSP; however, if they have a spouse younger than age 71, they could continue to contribute to a spousal RRSP.

Though the spousal RRSP lost some of its luster when pension income splitting was introduced, there are still many situations where it is still applicable. Using this as part of your tax planning in both your accumulation and decumulation of your registered assets can save you thousands of dollars in taxes.

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

Financial Post columnist (Rechtshaffen) shows how many Canadians can afford Retirement Homes

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A financial expert and Financial Post columnist compares the costs of senior housing options including home care, long-term care and a retirement home.

A newspaper columnist recently contacted Amica to research an article on the cost of private retirement living. This wasn’t any reporter: it was Ted Rechtshaffen, a personal finance columnist for the Financial Post and the president and CEO of TriDelta Financial, a wealth management company he launched for Canadians looking for objective financial advice. He’s been named one of the Top 50 Financial Advisers in Canada by Wealth Professional Magazine. He’s also the son of a resident at Amica senior living.

Rechtshaffen’s column carried this headline: “Here’s what it costs to live in a retirement home — and the bottom line is less than you might think.” His article looks behind the monthly fee for a high quality seniors’ residence to debunk myths about the cost of private retirement living.

His aging clients often wonder if they can afford to live in a private retirement community, and how much extra in expenses they’ll pay. As he says, some seniors get “sticker shock” when they see that a nice residence costs $6,000 per month. “They wonder how they can suddenly add $72,000 to their annual expenses,” writes Rechtshaffen.

As the financial expert explains, it’s worth looking beyond the price tag to consider how moving to a residence for seniors would impact both your quality of life and your monthly expenses. (You can download this senior living financial planning worksheet to see how your finances compare with retirement expenses.) He says it’s important to consider these five factors behind the cost of retirement homes:

#1 Living at home isn’t free. Even if you have no mortgage, you may still be paying for rent, property taxes or condo fees, maintenance, utilities and food. Monthly expenses vary widely, but Rechtshaffen tallies how you’ll free up funds by moving out of a home. For more info, see six myths about the cost of senior living.

#2 How much does your lifestyle cost? You might be traveling, dining out, buying new clothes and spending on entertainment at age 70. By the time you’re considering a retirement residence you might be 15 to 20 years older: how might your spending change at 88?

#3 Get help from tax credits. If you’re paying for assisted living or a-la-carte health services in a private residence, these might be deducted from income under Medical Expenses or the Disability Tax Credit.

#4 You can tap multiple income sources. If you’re attracted to the high-level service, convenience and camaraderie associated with a good senior living residence, remember that you may have various sources of funding, including Canada Pension Plan, Old Age Security, RRSPs/RIFs and more.

#5 Will your long-term care insurance cover some costs? Some people carry this kind of insurance, which can help if you find yourself needing assistance and care as you age.

Read the full article by Rechtshaffen to find a list of key issues to consider for your own retirement situation. You can also see his table comparing typical costs associated with living at home with private care, living in a private retirement residence and living in a public nursing home. Living at home with full-time care could wind up costing more than you think, while living in a decent retirement home can offer comparatively great value. Check out the article to see the surprising math behind common senior housing options.

Reproduced from Amica Conversations.

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

FINANCIAL FACELIFT: Can this couple retire at 60 and afford to keep the cottage in the family?

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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 24, 2019

François and Jacquie are wondering if they’re on track to retire at the age of 60 and still live comfortably. He is 54, she is 53. They have two children, ages 17 and 19.

François earns $105,000 a year before tax, while Jacquie earns $230,000. They both have defined contribution pension plans to which their employers contribute.

In the meantime, they want to pay off the home equity line of credit (HELOC) taken out to expand their Toronto bungalow. Their next project will be to landscape their yard. Their retirement spending goal is $70,000 a year after tax.

A key goal is to maintain the Muskoka-area cottage François and his sister inherited and pass it on to their children in turn. The cottage is self-sustaining, with rental income covering expenses, François writes in an e-mail. They also want to travel.

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

What the expert says

First, Mr. Ardrey looks at cash flow. Although their spending is taking up much of their income today, that will not be the case once their daughters have graduated from university, he notes. All postsecondary spending is anticipated to end by 2024.

François and Jacquie are aggressively paying down their HELOC – making regular monthly payments plus annual lump-sum ones – and plan to have it paid in full by mid-2020. When that is done, they will landscape their house for $30,000 and buy a new car for $60,000. “After that point, we assume excess cash flow will be saved toward their retirement.”

The surplus funds will go first to catch up with their tax-free savings account contributions. They will be caught up by 2022, after which they will contribute the maximum each year. The remaining surplus will go to a non-registered investment account.

François is saving $100 a month to his TFSA and Jacquie $300 to hers. François is also saving $917 a month to his RRSP and $533 to his defined contribution pension plan (DCPP), which is matched by his employer. Jacquie is saving $1,600 a month to her DCPP, with her employer contributing $610 a month. They also have $210 going to a registered education savings plan.

Jacquie and François plan to downsize their home when he is 70 and move into a condo that is half the value of their current home. They plan to begin taking Canada Pension Plan and Old Age Security benefits at 65.

Next, their investments. Based on the underlying asset mix (60-per-cent globally diversified equities and 40-per-cent Canadian and global bonds), they have a historical rate of return of 4.88 per cent. Their non-DCPP investments are invested primarily in “F”-class mutual funds with wrap account fees. The total fee is 1.99 per cent. (F-class funds have lower management expense ratios because they do not pay trailer fees to the adviser.) The planner assumes their pension assets will have the same asset mix when they retire. He uses an inflation rate of 2 per cent, retirement spending of $70,000 a year, including $10,000 a year for travel, and that both of them live to the age of 90.

“Based on these assumptions, they will have more than enough wealth to carry them through retirement,” Mr. Ardrey says. At Jacquie’s age 90, they will have an estate of $8.7-million, of which $4-million is in investments and $4.7-million is in real estate and personal effects. If they chose to spend the $4-million of investment assets, they could increase their spending by $4,000 a month or $48,000 a year.

“That being said, there is a significant tax liability remaining on the cottage when passing it to their two daughters,” Mr. Ardrey says. If the cottage rises in value along with inflation, there would be a $2-million capital gain on François’s half when he dies.

To effectively prepay the tax for their children, François could consider buying some permanent life insurance. The funds from the policy could be used to pay the taxes owing on the cottage and make it less likely the beneficiaries would need to sell it to pay the tax.

Depending on François’s health, this could be expensive, Mr. Ardrey says. But it would give François and Jacquie the freedom to spending their savings without worrying whether there will be enough left in their estate to pay the capital-gains tax.

By the time François and Jacquie retire in a few years, they will have about $2-million in investments. “Paying 2 per cent in investment costs and using mutual funds to execute their strategy is not the best plan,” Mr. Ardrey says.

Instead, they should consider hiring an investment counsellor to develop a well-rounded and lower-cost portfolio of large-cap stocks with strong dividends as well as corporate and government bonds. Investment counselling firms have a fiduciary duty – like a trustee – to act in the best interests of their clients.

If Jacquie and François wanted to diversity the bond portion of their portfolio to boost their returns, they could look into fixed-income securities not available to the average investor, Mr. Ardrey says. Like government bonds, these fixed-income alternatives tend to have little correlation to the stock market. “We would recommend carefully vetted private debt and income funds with solid track records.”

Client situation

The person: François, 54, Jacquie 53, and their children, 17 and 19

The problem: Can they retire at 60 with $70,000 after tax? Can they afford to keep the cottage in the family?

The plan: Retire as planned with a comfortable cushion. Consider taking out permanent insurance to help offset capital-gains tax that will be payable on François’s share of the family cottage when he dies. Review investment portfolio to lower costs and perhaps boost returns.

The payoff: Financial security with the option of spending more than planned.

Monthly net income: $17,100

Assets: His TFSA $6,000; her TFSA $15,000; his RRSP $351,000; her RRSP $227,000; market value of his DCPP $91,000; market value of her DCPP $350,000; RESP $77,000; residence $1.95-million; share of cottage $1.5-million. Total: $4.56-million

Monthly outlays: HELOC $3,480; property tax $760; property insurance $300; utilities $385; maintenance $100; transportation (insurance, fuel, maintenance for two cars) $930; grocery store $900; clothing $50; university expenses $800; additional HELOC (annual lump-sum payment divided by 12) $2,700; gifts, charity $220; vacation, travel $1,000; other discretionary $100; dining, drinks, entertainment $885; personal care $250; pets $100; dentists $50; life insurance $76; TV, internet $180; his RRSP $917; RESP $210; TFSAs $400; pension plan contributions $2,133. Total: $16,926

Liabilities: Line of credit $120,000

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: This 72-year-old’s portfolio is 97% in stocks. Is she taking on too much risk as retirement nears?

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Below you will find a real life case study of an individual who is looking for financial advice on how best to arrange their financial affairs. Their name 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 April 26, 2019

After a long and successful career, Ellen has retired from consulting and is winding down her corporation. She is 72, single and well off.

Still, she has concerns. She has roughly $1.8-million in savings and investments, the lion’s share of which is in stocks. She does her own investing, choosing stocks that pay steady and rising dividends with good management and solid earnings.

“I understand the risk is high,” Ellen writes in an e-mail. “If a recession like the one in 2008 hits, it will greatly reduce the asset value,” she adds. “Any advice on the portfolio and risk management would be much appreciated.”

Ellen is healthy and active and aims to do her best to stay that way so she can continue to travel extensively. Yet aging will impose constrains on travel, Ellen acknowledges, so she’ll likely be spending less on travel over time. “Other emerging issues,” such as health care, will increase the demands on her savings in her later years.

She is concerned about having enough money to “live in a first-rate senior residence and eventually a first-rate nursing home if necessary,” Ellen writes. Her retirement spending target is $65,000 a year after tax, although her actual spending is lower.

We asked Matthew Ardrey, vice-president of TriDelta Financial in Toronto, an investment counselling firm, to look at Ellen’s situation.

What the expert says

First, Mr. Ardrey looks at Ellen’s income. She plans to wind the corporate account down over 10 years to minimize the taxes owing on the withdrawals. To do this, she will need to withdraw about $38,500 a year, which will be taken as taxable dividends. She had been drawing a bit less than $10,000, so this will increase her income.

Ellen gets $7,121 in Old Age Securities benefits and $7,872 in Canada Pension Plan benefits, numbers that will rise in line with inflation. She also makes mandatory minimum withdrawals from her registered retirement income fund (RRIF) and receives dividends from the stocks in her taxable investment accounts.

Ellen’s lifestyle spending is $40,500 a year, plus $10,000 a year for travel. Her only savings is the maximum annual contribution to her tax-free savings account (TFSA).

Looking ahead, Ellen figures she’ll sell her Toronto condo when she is 80 or so and move into a high-end retirement residence that will allow her to transition onsite to a nursing home if need be, Mr. Ardrey says. In drawing up his forecast, he assumes she sells the condo for $589,000 at the age of 80, minus 10 per cent for selling costs, and the balance is added to her investment portfolio. Her living costs rise from about $50,000 to $72,000 a year in current-year dollars.

Now for her portfolio. A full 97 per cent of Ellen’s investment assets are in stocks. If she leaves it as is, she could earn 6.4 per cent a year on average, the planner estimates. He assumes an inflation rate of 2 per cent a year.

“Based on these factors, Ellen will have more than enough to retire,” Mr. Ardrey writes. “In fact, she has a substantial financial cushion.” To illustrate, if she keeps her spending roughly the same, she would leave an estate of $3.4-million at the age of 90, he says. If she wanted to spend it all, she could increase her spending by a whopping $90,000 a year, more than double what she is spending now. That would mean an increase in her current spending from $50,000 to $140,000, and her spending after she moves into a retirement home from $72,000 to $162,000.

Still, the plan as it stands has considerable risk, Mr. Ardrey says. Of the 97 per cent in stocks, Ellen has 6 per cent in one U.S. holding. The remaining 93 per cent is in Canadian stocks. Seventy per cent of her holdings is invested in just four stocks.

If the stock market dropped in the near future the way it did in 2008-09, “it could have a substantial impact on her portfolio and her retirement plans,” Mr. Ardrey says. The main Toronto stock index lost 35 per cent of its value in 2008 and did not return to its former high until 2014, he notes.

To help manage risk, the planner suggests a portfolio that is diversified geographically and by sectors. He also recommends asset class diversification by adding both fixed-income (bonds) and alternative income investments that are carefully vetted by an investment counsel firm for sale to its clients.

“The ones we would recommend for Ellen are more on the conservative side, focusing on income-generation strategies through private debt, accounts receivable factoring and global real estate,” Mr. Ardrey says. “These strategies have been shown to add value to portfolios by increasing returns over traditional fixed income while having little to no correlation to stock markets.”

If Ellen shifts to a portfolio of 50-per-cent stocks, 20-per-cent fixed income and 30-per-cent alternative income, she could expect a rate of return of about 6.5 per cent a year, the planner says. “She would be earning that return with substantially less risk.” She would have investment costs of about 1.25 per cent, 60 per cent of which would be tax-deductible in her non-registered and corporate accounts, he says.

She’d leave an estate of $2.7-million, or if she wanted to spend it all, she could increase her spending by $81,000 a year. That would mean an increase in her current spending to $131,000 a year, and her spending after she moves into a retirement home to $153,000.

“Ellen is in excellent shape to enjoy her retirement,” Mr. Ardrey says. “In fact, I would encourage her to enjoy it more!”

Client situation

The person: Ellen, 72

The problem: How to reduce the risk in her overly concentrated portfolio.

The plan: Diversify by country, industry and asset class. Cut stock holdings and add fixed-income and alternative income securities.

The payoff: Greater peace of mind.

Monthly net income: $6,655

Assets: Cash and short-term $16,180; taxable investment accounts $679,506; corporate account $310,579; TFSA $98,426; RRIF $680,627; condo $505,000. Total: $2.29-million

Monthly outlays: Property tax $240; home insurance $30; utilities $70; condo fee $645; handyman $40; transportation $490; groceries $250; clothing $430; gifts, charity $90; vacation, travel $800; personal care $300; dining, drinks, entertainment $285; subscriptions $31; study courses $100; health care $190; phones, internet, TV $179; TFSA $500. Total: $4,670. Surplus of $1,985 goes to travel, spending that might be underestimated and investment account.

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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