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FINANCIAL FACELIFT: Should this couple sell their house for a better 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 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:
Special to The Globe and Mail
Published March 29, 2019

“Will we have to sell our house to finance our retirement years?” Tom and Tilly ask in an e-mail.

It’s a question that comes up frequently from people nearing that age when they plan to leave the workforce for good. Tom is 59, Tilly 60.

They’ve had conflicting advice from their current and former financial advisers. Their former adviser said they’ll have to sell their Hamilton-area home in 10 years. The new one says that won’t be necessary.

Tom earns about $137,000 a year working for a non-profit. Tilly has gone back to school to satisfy her love of learning and potentially give her part-time income later on. Her tuition is covered by a scholarship.

They wonder whether Tom can afford to hang up his hat in three years or so. He has a group registered retirement savings plan to which he and his employer both contribute. Tilly has a defined-benefit pension plan from a previous employer that will pay $12,090 a year starting at age 65, indexed to inflation.

Their retirement spending target is $75,000 a year after tax, about $15,000 of which is for travel. Before then, they need to fix up their house a bit and replace one of their cars.

“Are we on track?” they wonder.

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

What the expert says

Tom is saving $1,100 a month to a group RRSP, to which his employer contributes $630 a month, Mr. Ardrey says. They are each saving $700 a month to their tax-free savings accounts. Mr. Ardrey assumes they continue saving this amount until Tom retires, after which the RRSP savings cease and the TFSA contributions fall to $500 a month each.

They have a cash-flow surplus of about $1,400 a month, which they are saving to pay for $25,000 of home renovations and to replace a car for another $25,000.

The planner assumes they begin collecting Canada Pension Plan and Old Age Security benefits at age 65, about 70 per cent of maximum CPP for Tilly and 90 per cent for Tom. He recommends they apply to share their CPP to help lower their taxes. At age 65, Tilly will begin collecting her pension.

Because parents of both Tom and Tilly lived well into their 90s, Mr. Ardrey assumes they will both live to age 95.

Looking at their investments, their asset mix has a historical rate of return of 4.4 per cent, with an average management expense ratio of 1.3 per cent, for a net return of 3.1 per cent.

“Based on these assumptions, Tom and Tilly can meet their retirement spending goals but with minimal financial cushion,” Mr. Ardrey says. That assumes Tom, who turns 60 later this year, retires at age 63. If they spend all of their investment assets, leaving only real estate and personal effects, they will have a cushion of only $2,400 a year.

“This is right on the line of success or failure,” the planner cautions. “Any one large, unexpected expense could have a significant impact on their retirement plan.”

If they sold their house, now valued at about $675,000, and downsized to a $400,000 condo at Tom’s age 85, “they would greatly increase their financial flexibility,” Mr. Ardrey says. This would give them a financial cushion of $9,000 a year. It would also give them the option of retiring earlier than planned.

An alternative would be to try to improve their investment returns. They are investing mainly through mutual funds. Given the size of their portfolio, they could benefit from using the services of an investment counsellor – particularly one who offers alternative income strategies as part of their overall asset mix, Mr. Ardrey says.

Although investment returns are not guaranteed, alternatives to stocks and bonds – funds that specialize in such things as private debt, global real estate and accounts receivable factoring – could potentially enhance returns on the fixed-income side of their portfolio while having little or no correlation to stock markets, Mr. Ardrey says. “They represent a unique diversifier.”

Their current asset mix is 40-per-cent fixed income, 20-per-cent Canadian, 15-per-cent U.S. and 25-per-cent international stock funds. He recommends 25-per-cent fixed income, 25-per-cent alternative income and 50-per-cent globally diversified stock funds. “With this new asset mix in place, we would expect a return of 6.5 per cent and investment costs of 1.5 per cent, for a net return of 5 per cent a year.”

If Tom and Tilly achieved this rate of return and downsized their house when Tom is 85, they could have a substantial cushion, the planner says: $19,200 a year. If they wanted to, they could retire when Tom turns 61 in 2020 and still have a cushion of $9,000 a year.

Client situation

The people: Tom, 59, and Tilly, 60

The problem: Will they have to sell their house to finance their retirement?

The plan: Try to improve investment returns, but keep an open mind to selling the house and downsizing in 25 years or so.

The payoff: Retiring as planned with a comfortable financial cushion.

Monthly net income: $8,455

Assets: Cash in bank $60,000; his personal and group RRSPs $395,000; her RRSP $245,500; his TFSA $44,500; her TFSA $37,000; estimated present value of her DB pension plan $187,250; residence $675,000. Total: $1.6-million

Monthly outlays: Property tax $460; home insurance $90; utilities $285; maintenance, garden $75; transportation $580; groceries $650; clothing $205; gifts, charity $250; vacation, travel $700; other discretionary $50; dining, drinks, entertainment $600; personal care $100; subscriptions $30; dentists, drugstore $20; life insurance $185; phones, TV, internet $270; his group RRSP $1,100; TFSAs $1,400. Total: $7,050Surplus $1,405

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: To buy or rent a condo? Montreal couple search best route for saving towards 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 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: CHRISTINNE MUSCHI
Special to The Globe and Mail
Published March 8, 2019

To buy or not to buy, that is the question for Ron and Rosemary, a couple living and renting in the Montreal area.

Ron is 43 and works as a project manager, Rosemary is 35 and works for a non-profit. Together they bring in about $190,000 a year. They’re considering a condo rather than a house because it would require less upkeep. They have no plans to have children.

Their question: Which is better, buying a condo in the $600,000 range “or continuing to rent throughout our lives?” Rosemary asks in an e-mail. “If we continue to rent, we would definitely be looking at renting a unit in a newer building with all of the amenities we want, possibly pushing the rental price per month to $2,500 or higher,” she adds.

Longer term, they are concerned about saving for retirement. Their postwork spending goal is $100,000 a year after tax, rising with inflation.

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

What the expert says

First, Mr. Ardrey looks at a scenario in which they continue to rent. They would move to a building with better amenities, increasing their rent by $500 a month to $2,500 a month, he notes. All other expenses would remain the same. The planner’s assumptions are based on a life expectancy of 90 for both.

Ron is contributing $645 or 8 per cent of his salary to a defined contribution pension plan with a 6-per-cent company match. Rosemary is contributing $475 a month to an RRSP with a $475-a-month match from her employer. They are stashing away another $1,000 a month in a bank account.

If they decide not to buy, the planner assumes they would transfer the $39,900 they have in their bank account to their tax-free savings accounts. Their budget allows for additional TFSA contributions of $500 a month each, money that is now going toward a down payment.

Ron plans to retire at 65 and Rosemary at 70. When they do, they will receive Canada Pension Plan and Old Age Security benefits. Because Ron is an immigrant to Canada, the plan assumes he will get 80 per cent of maximum CPP and OAS. Rosemary will receive 100 per cent. In addition, her monthly CPP benefit will be 42-per-cent higher than if she had started receiving it at 65.

Mr. Ardrey looks at the couple’s investments. Based on their current portfolio structure, they have a historical average rate of return of 4.4 per cent. The average investment cost of their portfolio, excluding Ron’s DC pension plan, is 1.7 per cent, leaving them a net return of 2.7 per cent. After inflation, forecast to be 2 per cent, their real rate of return is 0.7 per cent.

In retirement, Rosemary and Ron want to spend $100,000 a year. “Based on the assumptions above, they fall slightly short of their goals, running out of funds near the end of Rosemary’s life,” Mr. Ardrey says. If they cut their spending a bit, they could reach their goal, but they would have “zero financial cushion.”

Now he looks at a scenario in which they buy a condo for $600,000. They have almost $40,000 saved, so they will need a mortgage for $560,000 at an estimated 3.5 per cent, amortized over 25 years. Their payments would be about $2,570 a month.

Offsetting the mortgage expense is the fact they would no longer be paying rent. Living expenses in retirement would be $76,000 a year after the mortgage is paid off, substantially less than if they were still paying rent. Any budget surplus is assumed to be saved to the TFSAs each year.

“Based on these assumptions, Rosemary and Ron can reach their retirement goal,” Mr. Ardrey says. Not having to pay rent when they retire “is a major factor,” he notes. This cost reduction more than offsets the reduction in savings.

If they decided to spend all of their investment assets, leaving only their real estate and personal effects, they could increase their spending by $1,000 a month, inflation adjusted, the planner says.

“So of the two scenarios, the decision to purchase the condo is the financially preferred one,” he concludes. “In addition to the cash flow numbers being stronger, Rosemary and Ron would also have a real estate asset that in an emergency they could borrow against or sell if need be.”

Finally, Ron and Rosemary should review their investment strategy to improve their investment returns and lower their costs, Mr. Ardrey says. Their current asset mix is about 90-per-cent stocks and stock funds, and 10-per-cent cash and fixed income.

Instead, he recommends 65 per cent stocks and stock funds, 25 per cent alternative income investments and 10 per cent fixed income. Alternative income funds – which can be bought through an investment counselling firm – include strategies such as private debt, global real estate and accounts receivable factoring. “This would broaden their diversification into an asset class that has historical returns of 7 to 9 per cent a year and little to no correlation to equity markets,” the planner says.

Making this change could increase their returns to 6.5 per cent and reduce investment costs to 1.5 per cent.

The difference would be material. “If they remain renters, then they go from falling just short to being able to increase their retirement spending by $18,000 per year,” the planner says. In the condo scenario, the potential for extra spending would be even greater.

Client situation

The people: Ron, 43, and Rosemary, 35

The problem: Should they rent or buy?

The plan: Go ahead and buy the condo, but review investments to diversify their holdings, potentially improve returns and lower investment costs.

The payoff: Retirement goals met with a financial cushion besides.

Monthly net income: $10,800

Assets: Cash $39,900; her TFSA $5,470; his TFSA $5,300; her RRSP $88,030; his RRSP $79,030; market value of his defined contribution pension plan $10,000. Total: $227,730

Monthly outlays: Rent $2,000; tenant insurance $25; utilities $180; furnishings, decorating, maintenance $350; transportation $605; grocery store $900; clothing $320; gifts, charity $1,000, vacation, travel $1,000; dining, drinks, entertaining $900; personal care $350; pets $115; sports, hobbies $490; dentists $50; drugstore $10; phones, TV, internet $340; his DC pension plan $645; her RRSP $475. Total: $9,755 Surplus goes to saving.

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

Retirement Shouldn’t be a Taxing Transition

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When people think of retirement, they make think of relaxing at the cottage, traveling the world, or maybe with the recent blasts of winter we have been receiving, spending some time in warmer climates. What most people don’t think about is how my taxes are going to change. Yes, with April just around the corner, it is time to think about taxes and how they will affect you in retirement could be the difference from lying on a beach in February and shoveling your driveway for the fifth time this week.

If like many Canadians, you are a couple where both spouses work, the opportunities to split income are few and far between. In retirement that changes for the better. A number of years ago the government introduced legislation that allows pension income to be split between spouses. If you are already the lucky recipient of income from a defined benefit (DB) pension plan, you can further benefit by splitting up to 50% of this income with your spouse. The obvious benefit to this is the lower income spouse would pay less tax on the pension income than the higher income spouse.  Also, he/she would now receive the pension credit, which is a non-refundable federal tax credit that maxes out at $2,000. So depending on the disparity of the tax rates between spouses and size of the pension, this could be a material benefit to their tax returns saving thousands of dollars a year in taxes.

Ok, that is great for those Canadians who have a pension, but what about the rest of us?

Once a taxpayer is over the age of 65, they can split life annuity, RRIF and LIF income in the same manner as DB pension income. This can lead to some interesting tax planning for someone who is doing a RRSP meltdown strategy. If one spouse has a much larger RRSP/RRIF than the other, they can double the meltdown amount by taking it from a RRIF instead of a RRSP after the age of 65. In doing this, the RRSP (or RRIF in this case) meltdown strategy could be extended to age 70, with CPP and OAS deferrals.

Other benefits to income splitting include being able to claim the age amount tax credit and possibly reducing or eliminating OAS clawback.

The mechanism for doing this in your taxes is relatively straightforward and does not have to be implemented until you file your taxes the following April. There is a form T1032 in your tax return where you make the pension election. Most tax software these days will do the calculation for you. Once all of your other information is entered for you and your spouse, the software will optimize the pension splitting between spouses. Even if you both have a pension, it can do this for you.

The topic of income splitting continues with your government pensions. Though OAS is not eligible to be shared, the CPP is. You and your spouse can apply to share your CPPs. You both have to be contributors at some point in your lives and both be receiving the pension. The amount eligible to share is based on your joint contributory period, which is just a fancy way of saying the time you were married or cohabitating. The benefit increases with the difference between CPP payment amounts.

While we are on the topic of CPP, I thought it was important to mention the child rearing drop out provision. Unlike the general drop out provision, which is calculated automatically, the child rearing must be applied for.

How does it work?

Let’s take you back to grade school where we learned about fractions. The CPP you receive is a fraction of the maximum payable, ignoring any early penalties or deferring benefits. The total number of years is 47 (age 18-65). The general drop out provision eliminates the lowest eight, making the denominator 39. Any year you make the maximum contribution you get a 1 in the numerator and if not, then a number between 0 to less than 1.

The child rearing drop out provision allows a spouse who may have stopped or reduced their work due to child care, to eliminate up to seven years per child (no double counting years if you have children close in age). The benefit is any year that has less than a 1 in the numerator that is eliminated, will increase the overall CPP payable to you.

Another tax surprise for many retirees is tax installments. If you were self-employed, you will be familiar with these, but many salaried employees are not. Tax installments are requested by CRA once your taxes payable less your taxes deducted at source exceed $3,000. While working, your employer took taxes at source. In addition, you probably had RRSP deductions and other things that reduced your taxes or generated you a refund. Now with RRIF payments, CPP, OAS and other incomes, you may end up owing taxes.

CRA wants to get its taxes earlier rather than waiting until April. So it will request them of you in four quarterly installments over the year. This is CRA’s estimate of what you will owe this year based on previous years’ filings. You can choose to pay what they request or not if you feel your situation is different this year. But be warned, if you underpay your taxes you will be charged installment interest. If you overpay them, CRA does not pay you any interest on the overpayment. Nice work if you can get it!

After all this talk of taxes, maybe all you do want to do is lie on a beach or somewhere warm.

When you do, if you are like many Canadians, you will head to our neighbours to the south. However, before you do, consider some of the tax implications of doing so.

If you fall in love with the warm weather, you may be tempted to purchase a vacation home in the U.S. In doing so, you have opened yourself up to U.S. Estate Tax exposure. By owning U.S. real property, you are considered to have U.S. situs property, which falls under the U.S. estate tax laws. The likelihood that you will end up paying any estate tax these days is low because of the increase threshold limits, but consult someone familiar with the rules before making a purchase.

Another exposure with spending time in the U.S., is actually the time you spend in the U.S. The U.S. has a substantial presence test where they could deem you a resident for U.S. tax purposes if the calculation shows you spent over 182 days there in the past three years.

Consider the calculation for someone who spends 4 months (120 days) in the U.S. per year.

Current Year each day counts as 1 = 120 X 1 = 120
Previous Year each day counts as 1/3 = 120 X 1/3 = 40
Second Previous Year each day counts as 1/6 = 120 X 1/6 = 20

Thus, by spending four months in the U.S., this person’s substantial presence test calculation is at 180 days, very close to the threshold.

In cases, where you plan to spend a significant amount of time in the U.S. each year, you should file a U.S. form 8840, Closer Connection Form. This form establishes that even though you spend a substantial amount of time in the U.S., your connection to and therefore tax filing obligation is to Canada.

So thought the pressures of work may be days gone by, the tax complexity often ramps up in retirement. Make sure you are set up to optimize your tax situation in retirement, as proper planning can allow you to have your fun in the sun instead of being left out in the cold.

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

FINANCIAL FACELIFT: With ambitious retirement goals, will this couple have enough to meet their lifestyle needs?

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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 January 18, 2019

Shawn and Sharon plan to retire together in a year or so, leaving jobs that pay a combined $195,885 a year. He is 59, she is 56.

Shawn has a defined benefit pension plan that will pay him about $21,000 a year starting in 2020. Both have substantial sums in defined contribution pension plans, which depend on financial market performance for their value. Shawn’s is from a previous employer.

They have a house in Saskatchewan with a mortgage and two grown children, one of whom is living at home. They are helping one of the children pay off a student loan.

Their retirement goals are ambitious: winters down south, frequent trips to visit family and some overseas travel, as well. This leads them to a spending target of $90,000 a year for the first 10 years, falling thereafter. Their plan to retire early would require them to draw heavily on their DC pension plans in the first few years.

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

What the expert says

Mr. Ardrey looks at how Shawn and Sharon would fare if they retired in a year and a half – on June 1, 2020 – and deferred Canada Pension Plan benefits to age 65 as planned.

Further saving potential is limited. While they show a surplus in their cash-flow statement, this money is going to travel and helping their son pay off his student loan, the planner notes.

When Shawn retires, he will get $21,000 a year from his DB pension plan. They will retire with a mortgage and line of credit outstanding, Mr. Ardrey notes. The mortgage of $126,000 is scheduled to be paid off by November, 2024, and the $10,000 line of credit by October, 2020.

“Once they retire, they will need to draw on their registered assets almost immediately,” Mr. Ardrey says. Their DC pension plans are a bit different from most. Usually DC pension plans are converted into locked-in retirement accounts (LIRA) when a person retires and then to a life income fund (LIF) when they begin drawing a pension. Sharon’s DC plan can stay with the Saskatchewan government’s Public Employees Pension Plan administration and be transferred to what is known as a variable pension benefit account. Or it can be transferred out to what is known as a prescribed registered retirement income fund (PRRIF). Shawn’s locked-in retirement account (from his DC plan) can be transferred into a PRRIF as well.

The advantage of a PRRIF is that you can take locked-in money from a pension (a LIRA) between the ages of 55 and 72 instead of putting it into a LIF, which has maximum withdrawal restrictions. “So essentially, it is allowing locked-in money to be used like regular RRIF money” from an RRSP, the planner says.

“The advantage here is that there are no maximum withdrawals in these accounts, allowing them the necessary financial flexibility to draw on their savings,” he says.

But are their savings enough to last a lifetime?

Shawn and Sharon are currently spending about $76,000 a year once debt repayment and savings are subtracted. They would like to raise this to $90,000 a year when they retire to allow for additional travel in the first 10 years.

“Based on these assumptions, Shawn and Sharon will not be able to achieve their goal,” Mr. Ardrey says. They will fall short in their later years, when Shawn is about age 85. They would still have their house, which they could sell, but “I much prefer to leave the home intact as a financial cushion to cover unexpected expenses,” the planner says.

They could alter their plans, working longer, saving more and spending less in retirement. Or they could take steps to improve their investment returns after fees. Leaving their goals intact, Mr. Ardrey looks at how they might fare if they sought professional investment management for their entire portfolio, their personal savings and their combined work pension money.

As it is, their RRSPs are 75 per cent in stocks, which is high, given how close they are to retiring, he says. Instead, the planner suggests they add some alternative income investments to their portfolio, something they can do by hiring an investment counsellor (portfolio manager) with expertise in the area. Alternative income funds include such strategies as private debt, accounts receivable factoring and global real estate.

Doing so should boost their investment returns to about 6.5 per cent, or 5 per cent a year after subtracting investment costs of 1.5 percentage points. “In Shawn and Sharon’s case, the value [in alternative investments] is not only the increased return, but also the reduction in equity exposure, reducing the overall portfolio volatility.”

This compares with historical returns of 4.25 per cent before fees of 0.5 per cent on their DC pension money and 4.55 per cent before fees of 2.2 per cent on their personal savings. “After inflation of 2 per cent, there is very little real return in their personal strategy,” the planner says.

The effect of a 5-per-cent net return on their retirement plan would be dramatic, Mr. Ardrey says. “Instead of falling short of their goal and running out of money when Shawn is 85 they would have more than enough to meet their lifestyle needs.” They would even be able to increase their spending by $9,000 a year if they chose to.

Client situation

The people: Shawn, 59, and Sharon, 56

The problem: Can they afford to retire early and travel without running out of savings?

The plan: Either adjust the goals or take steps to improve their investment returns after fees by hiring a professional money manager.

The payoff: With higher returns, they could well meet their original goals.

Monthly net income: $10,800

Assets: Cash $5,000; his TFSA $10,000; his RRSP $90,000; her RRSP $25,000; his DC pension plan $420,000; estimated present value of his DB pension plan $435,755; her DC pension plan $585,000; residence $450,000. Total: $2-million

Monthly outlays: Mortgage $1,980; property tax $330; home insurance $125; utilities $305; car lease $650; insurance, fuel $350; grocery store $700; clothing $100; line of credit $500; gifts, charitable $245; vacation, travel $800; dining, drinks, entertainment $1,450; personal care $350; pets $350; other personal $60; health, life, disability insurance $185; phones $160; TV, internet $150; TFSAs $400. Total: $9,190. Surplus of $1,610 goes to student loan and travel spending.

Liabilities: Mortgage $126,000; line of credit $10,000. Total: $136,000

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 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
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