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FINANCIAL FACELIFT: How can this couple save for their son’s higher education and their own retirement?

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Below you will find a real life case study of a couple who is 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 September 25, 2020

Since coming to Canada from India in 2016, Sanjay and Maya have found well-paying jobs, bought a large condo in Toronto and had a child. He is age 35, she is 32.

Both are professionals, bringing in a combined $300,000-plus a year in salary. Sanjay earns another $15,000 a year in income from his business, which he hopes to expand.

“We have assets across Canada and in India, spanning equities, bonds and real estate,” Sanjay writes in an e-mail. While they are both well educated, “financially, we believe there’s so much more we can and should do,” he writes. “The last few years were so unpredictable in the stock market that most of the time we spent on the sidelines.”

Their questions: “What should be our portfolio structure to achieve our goals?” Sanjay asks. Their long-term goals include saving for their son’s higher education and for their own retirement. Their retirement spending target is $6,500 a month or $78,000 a year. “How much should we be saving on a monthly basis?” As well, “what products are we missing that are unique to Canada and which can give us some tax benefits?”

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

What the expert says

Now that they are settled, Sanjay and Maya would like to take stock of their lives and ensure they are on the right path for their financial future, Mr. Ardrey says.

“Sanjay’s goal is to work at his own business full-time once his income from it is sufficient, which he figures will take another two years.” In preparing his forecast, Mr. Ardrey assumes that for the next two years (2021-22) Sanjay will earn $15,000 a year from his business and in 2023 will start working there full-time, earning $150,000 a year.

After communicating with the couple and analyzing their income and expenditures, the planner discovered some holes in their budget. They appear to have a larger surplus than their numbers indicated, he said. Although some of the difference can be attributed to RRSP refunds, “Sanjay and Maya need to review their budget thoroughly,” Mr. Ardrey says.

The next step is for Sanjay and Maya to open a registered education savings plan for their son, who was born in 2018, to take advantage of the Canada Education Savings Grant, the planner says. The grant adds 20 per cent to the first $2,500 in contributions made to an RESP each year up to a maximum of $7,200. “To maximize the grant, they should look at contributing $5,000 for this year and next (to catch up with missed contributions) and then $2,500 a year afterwards,” he adds.

The savings will not be enough to cover the expected future cost of postsecondary education, estimated at $20,000 a year for a student living away from home, Mr. Ardrey says. Including investment returns, they would be able to cover off about 55 per cent of the expected costs. The remainder would have to come from the child’s work income, student loans or other family savings or current income.

In addition to their above-mentioned savings, Maya will be enrolled in a defined contribution pension plan by the end of the year, the planner says. Starting in 2021, she will contribute 6 per cent of her salary, matched by her employer. In addition, Maya makes the maximum contribution to her RRSP annually. Mr. Ardrey assumes that after he leaves his job to run his own business, Sanjay will maximize his RRSP contribution room each year as well.

Next, the planner looks at the couple’s investment portfolio, which has an asset mix of 95 per cent equities and 5 per cent fixed income, with most of the stock portion in U.S. and international markets. Aside from bank accounts, all of the non-registered investments remain in investment accounts in India, with the bulk in mutual funds, he says. The historical return for a portfolio with this asset mix is 5.6 per cent a year, with an average investment cost of 1.25 per cent, Mr. Ardrey says. When they retire, his analysis assumes their rate of return is reduced by one percentage point as they add more conservative investments to their asset mix.

Both Sanjay and Maya plan to retire at the age of 65. Based on their time in Canada, they would get 85 per cent and 93 per cent of Old Age Security benefits, respectively. If they continue to work at their current income levels, then they would get 87 per cent and 95 per cent of Canada Pension Plan benefits, respectively.

“Based on the above assumptions, Maya and Sanjay can meet their retirement goals with ease,” Mr. Ardrey says. At Maya’s age 90, they would have $3-million in investment assets, largely in RRSPs or other registered accounts, and $4-million in real estate value, he says. If they decided to spend that investment value, they could increase their spending by $4,500 a month, in addition to the $6,500 a month in planned spending.

“With that kind of financial cushion in place, Sanjay and Maya may want to look at retiring earlier than 65,” Mr. Ardrey says. He did a projection with a retirement age of 60 for Sanjay and age 57 for Maya. Even if they retired sooner they can still meet their goal, though the additional spending room would fall to $1,000 a month more than the $6,500-a-month target.

Despite this rosy picture, there are things that Sanjay and Maya can do to improve their financial picture, Mr. Ardrey says. First is to open tax-free savings accounts and contribute the maximum allowable. “Being able to save an additional $6,000 each and every year tax-free will greatly benefit them in retirement,” he says. Unlike RRSPs, withdrawals from TFSAs are not taxable.

As well, a considerable amount of their investments remain in Indian rupees, which adds foreign-exchange risk to their investment portfolio, the planner says. They should look to move those investments to Canada where they can form part of an overall investment strategy, he says.

Because Sanjay plans to run his own business, they might want to consider a less volatile asset mix, the planner says. Given low interest rates and turbulent stock markets, they could add some private income-producing investments such as a private debt fund or a global real estate fund, Mr. Ardrey says. “These funds would be designed to supplement their returns while reducing the volatility risk of the equities.”

Client situation

The people: Sanjay, 35, Maya, 32, and their son, 2.

The problem: How best to chart a path to a solid financial future.

The plan: Open an RESP for the child to take advantage of the government grant. Open TFSAs for both of them so their earnings can grow tax-free. Consider lowering risk in their investment portfolio.

The payoff: A brighter financial future than they may be anticipating.

Monthly net income (budgeted): $19,000

Assets: Bank accounts: $32,700; stocks $72,000; mutual funds $145,000; Indian mutual fund $27,900; his RRSP $37,000; her RRSP $49,000; his DC work pension $6,300; residence $1.25-million. Total: $1.6-million

Monthly outlays (forecast): Mortgage and property tax $4,200; condo fees $750; home insurance $70; electricity, heating $150; maintenance $240; transportation $400; groceries $800; child care $1,880; clothing $540; gifts, charity $200; vacation, travel $600; other discretionary $1,000; dining, drinks, entertainment $700; personal care $100; club memberships $150; sports, hobbies $150; subscriptions $40; other personal $100; prescriptions, supplements $100; health, life insurance $105; phones, TV, internet $215; his group RRSP $830; her RRSP $2,160. Total: $15,480. Surplus of $3,520 goes to unallocated spending and saving.

Liabilities: Mortgage $850,000

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: Lucinda wonders how to organize investments after the coronavirus accelerated her decision to sell her house

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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 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 7, 2020

At the age of 60, Lucinda is going from being without contract work and collecting the Canada Emergency Response Benefit to wondering how to invest and manage about $1.5-million – the net proceeds from her house sale in downtown Toronto. The deal, for a total of $1.7-million, is set to close in September.

“The [COVID-19] pandemic accelerated my decision to sell my house in case of a significant drop in housing prices,” Lucinda writes in an e-mail, and because contract work in communications is now hard to come by.

“I fear I won’t be able to find work anymore, meaning I might need to cut into my savings, which I wanted to avoid. So now I need guidance on how to map out my retirement savings strategically,” she adds.

“My plan had been to take a few months off to attend to house repairs and then look for another contract in the spring,” Lucinda writes. “Then the pandemic hit and the contracting job market – combined with my experience level – led me to conclude it may take a very long time, if ever, for me to be employed again.”

She has no plans to buy another place and has rented an apartment for September. A key goal is to help her daughter, her only child, who has just graduated from university, to get established.

A self-directed investor who uses a mixture of mutual funds and exchange-traded funds, Lucinda wonders how best to structure her investments to last a lifetime. She also wants to leave as much as possible to her daughter. She wonders, too, when to begin collecting Canada Pension Plan benefits. Her target retirement spending goal is $45,000 a year after tax.

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

What the expert says

“Like many Canadians these days, Lucinda’s working life has been cut short by COVID-19,” Mr. Ardrey says. “So taking stock of her financial picture today and where it is going in the future is a prudent exercise.”

Lucinda estimates she will net $1,474,000 from her house sale after she pays off her mortgage and covers closing costs, the planner says. Her existing portfolio is a mixture of ETFs and mutual funds with an asset mix of 48-per-cent stocks and 52-per-cent cash and fixed income. The stocks are slightly overweight to Canada, but are otherwise well diversified geographically, he says.

“The historical returns on her portfolio asset mix are 4.39 per cent, with investment costs of 0.79 per cent, leaving her with a net return of 3.6 per cent,” Mr. Ardrey says. If inflation is assumed to be 2 per cent, this leaves her with 1.6 per cent above inflation, he adds.

If Lucinda sticks to her modest spending target of $45,000 a year to the age of 90, she would leave an estate of about $2.4-million in 2050, the planner says. She could spend another $42,000 every year before exhausting her capital. “That being said, I would not recommend this level of spending unless it is nearer to the end of her life, because there is no real estate to fall back on as a cushion.”

Lucinda has expressed concern about the direction of the stock market and low returns on fixed-income securities, the planner says. “She certainly has justification for her concerns.” The five-year Canadian government bond yield is a scant 0.31 per cent. “Though bond [prices] have had a great 2020 so far, in part due to interest-rate cuts, the long-term future of this asset class is definitely in question,” Mr. Ardrey says.

First off, Lucinda may want to look to an actively managed bond fund portfolio with solid yields that she can continue to hold for the coupons (interest payments), Mr. Ardrey says. Actively managed funds tend to do better in difficult markets. She is holding bond ETFs, most of which passively track market indexes.

With her increased wealth, Lucinda should consider hiring an investment counselling firm, which is required by law to act in the best interests of its clients, he says. (For a list of such firms, see the Portfolio Management Association of Canada website at https://pmac.org/.)

These firms can “create a strategy for her that will provide solid, ongoing income from both traditional and alternative asset classes,” the planner says. He recommends an asset mix of 50-per-cent equities, 20-per-cent fixed income and 30-per-cent alternative income – a class that includes funds that invest in private debt and income-producing real estate. The addition of alternative income investments, which do not trade on public markets, has the potential to boost fixed-income returns while offsetting the volatility of stock markets.

“The next couple of years will continue to be volatile in stocks,” he says. “But if she can ignore the volatility and focus on the dividend payments, she can use that income to pay for her lifestyle (with government benefits) without drawing on her capital.”

Lucinda should invest her new capital gradually, especially when it comes to buying stocks, Mr. Ardrey says. “I would not want to see Lucinda invest a substantial amount of capital, only to have the markets fall 20 per cent the following month.”

As for when to start taking Canada Pension Plan benefits, the planner suggests Lucinda wait until she is 65. “If Lucinda took her CPP at age 60, she would get $7,848 a year. So by the time she turned 74, she would have collected a cumulative total of $109,872 ($7,848 multiplied by 14 years).”

If she waited until age 65, Her CPP would be $12,144 a year. In 9 years, she would have collected $109,296.

“So, if Lucinda lives beyond age 74 and a few months, she would be better off taking CPP at age 65 than 60,” the planner says. Getting the larger amount starting at 65 would overtake the advantage of getting the smaller amount earlier starting in her 74th year, he adds.

Client situation

The people: Lucinda, 60, and her daughter, 26.

The problem: How to invest the proceeds of her house sale to last a lifetime and leave an inheritance for her daughter. When to take CPP.

The plan: Start CPP at 65. Consider hiring a professional investment counselling firm. Enter the stock market gradually. Consider actively managed bond funds and alternative fixed-income investments to potentially boost returns and lower volatility.

The payoff: The comfort of knowing she may be able to spend a little more than she plans and still leave a substantial estate.

Monthly net income (budgeted): $3,750.

Assets: Bank accounts $52,000; mutual funds $48,400; TFSA $61,500; RRSP $374,600; net proceeds of house sale $1.5-million. Total: $2-million.

Monthly outlays (forecast): Rent $1,650; home insurance $15; electricity $50; transportation $150; groceries $400; clothing $50; vacation, travel $300; personal discretionary (dining, entertainment, clubs, personal care) $500; health care $230; phone, TV, internet $90; miscellaneous future discretionary spending $315. Total: $3,750.

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 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

FINANCIAL FACELIFT: Can this couple still retire in three years after their investments took a major hit?

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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 April 10, 2020

Robert and Rachel have worked hard, raised three children and – thanks to high income and frugal living – amassed an impressive portfolio of dividend-paying stocks, which they manage themselves. When they approached Financial Facelift in February, their combined investments were worth about $2.7-million.

After the coronavirus tore through financial markets last month, their holdings tumbled to a little more than $1.8-million by late March, a drop of roughly $900,000, or 33 per cent. Markets have since bounced but are still well below their February highs.

“The recent market downturn caught us by surprise,” Robert acknowledges in an e-mail, “but we are hoping we can weather the storm.”

Robert, a self-employed consultant, is 57. Rachel, who works in management, is 52. Together they brought in about $285,000 last year, although Robert’s income prospects for this year are uncertain. They have three children, ranging in age from 9 to 19.

“We feel burned out,” Robert writes, “but we have no company pensions or other safety blankets. Can we retire now?”

Leading up to retirement, the couple want to do some renovations costing $100,000 and take up recreational flying, which they estimate will cost about $150,000. Their goal is to quit working in three years with a budget of $100,000 a year after tax. Can they still do it?

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

What the expert says

“The rapid decline and subsequent volatility of their investments is a result of how they are investing,” Mr. Ardrey says. Their portfolio is 85 per cent common stocks and 15 per cent preferred shares, the planner notes. “Of the common stock, about 90 per cent is Canadian. This lack of diversification in their investment strategy will affect their retirement plans.”

For the first quarter, major stock markets were down more than 20 per cent, he says. “The fixed-income universe in Canada was up 1.56 per cent for the quarter.” Having some fixed-income securities “would have mitigated the couple’s losses.”

In preparing his forecast, Mr. Ardrey weighs some different situations. He assumes their investment returns from this point forward equal the long-term average for this type of portfolio of 6.25 per cent. This rate of return continues until they retire from work in three-and-a-half years.

When Robert and Rachel retire, the planner assumes they reduce their exposure to stocks and switch to a balanced portfolio of 60 per cent stocks and 40 per cent bonds. This would give them a return of 4.5 per cent. “From there we can compare how much impact this market decline had on their portfolio.”

Their original $2.7-million would have given them a net worth at Rachel’s age 90 of $10-million, adjusted for inflation, including their residence and rental property valued at $5.4-million, Mr. Ardrey says. If they chose to spend all of their investments, leaving the real estate for their children, they could have increased their spending from $100,000 a year to $136,000, adjusted for inflation, giving them a comfortable buffer.

With their current portfolio – about $2.2-million as of April 6 – they would have a net worth of $8.4-million at Rachel’s age 90, including $5.4-million in real estate. They would have the option of increasing their spending to $118,000 a year. “This is half of their former buffer, which is a significant difference,” Mr. Ardrey says.

Even if the markets returned double the couple’s historical rate of return, or 12.5 per cent, from now until they retire, “it would still not make up all of the difference of what they have lost,” the planner says. Their net worth at Rachel’s age 90 would be $9.5-million and they could increase their spending to $130,000.

This market downturn speaks to the value of a balanced, diversified portfolio and professional money management, Mr. Ardrey says. “In so many cases, people try to invest on their own without truly understanding their ability to tolerate risk, or without a financial plan in place” to help them understand the implications of market returns on their retirement.

He recommends Robert and Rachel gradually shift to a professionally managed portfolio that includes both large-capitalization stocks with strong dividends, diversified geographically, and a fixed-income component comprising corporate and government bonds. This strategy could be supplemented with some private income funds – which do not trade on financial markets – to stabilize their returns and potentially enhance their income.

By making this change, they could increase their rate of return in retirement from 4.5 per cent to 5.5 per cent, giving them an additional financial cushion of $12,000 a year. “This would be especially beneficial if markets take a long time to return to their former highs,” Mr. Ardrey says.

The plan assumes Robert will get 85 per cent of Canada Pension Plan benefits and Rachel 75 per cent, starting at age 65. They will both get full Old Age Security benefits.

Fortunately, this couple have ample resources, including real estate, that they can use to insulate themselves against unexpected expenses, Mr. Ardrey says. Many other Canadians who have been investing in the same manner do not. Worse, many investors may have other financial stresses such as a lost job or mounting debts that could force them to liquidate their portfolio at an inopportune time, the planner says.

“What the past month has shown is that there are significant risks to do-it-yourself investing and not having a proper asset mix in place – especially as you approach retirement.”

Client situation

The people: Robert, 57, Rachel, 52, and their three children.

The problem: Can they retire in about three years without jeopardizing their financial security?

The plan: Retire as planned but take steps to draw up a proper financial plan that includes a more balanced investment strategy.

The payoff: Lowering potential investment risk to better achieve goals.

Monthly net income: $16,720

Assets: Cash $32,875; stocks $589,775; capital in his small business corporation $157,080; her TFSA $82,220; his TFSA $57,035; her RRSP $446,145; his RRSP $621,755; her locked-in retirement account from previous employer $76,405; his LIRA from previous employer $184,825; registered education savings plan $81,260; residence $1,800,000; recreational property $650,000. Total: $4.78-million

Monthly outlays: (including recreational property): Property tax $1,215; home insurance $125; utilities $495; maintenance $240; transportation $650; groceries $1,105; clothing $435; gifts $215; vacation, travel $325; dining out, entertainment $385; pets $45; sports, hobbies $625; piano lessons $160; other personal $415; doctors, dentists $200; prescriptions $70; phones, TV, internet $140; RRSPs $1,830; RESP $630; TFSA $915; savings to taxable accounts $7,460. Total: $17,680.

Liabilities: None

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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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