FINANCIAL FACELIFT: Great savers, not so great at investing

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.

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

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

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

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

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

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

What the expert says

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

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

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

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

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

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

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

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

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

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

Client situation

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

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

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

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

Monthly net income: $12,615

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

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

Liabilities: None

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Matthew Ardrey
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Matthew Ardrey
VP, Wealth Advisor
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