Tim Fraser/The Globe and Mail
In their 50s with two teenagers, Kim and Kevin have overcome most of the financial hurdles of their younger years and are looking hopefully to the future.
Their older child is in her second year of college, the younger will start this coming fall.
"We earn a decent living and are fairly aggressively saving," Kevin writes in an e-mail. "We hope to retire around the age of 60." He works as a project manager, earning about $125,000 a year before tax, while she works in health care, earning $75,000.
Kim has a defined benefit pension plan, indexed to inflation, while Kevin has none. They live in a small town within commuting distance of Toronto.
"We would like to slow down after the kids have finished their post-secondary education and perhaps travel a little, maybe purchase a cottage or a Florida condo," Kevin writes. Both he and Kim have elderly parents who will require "some measure of assistance" soon.
While they have substantial savings, they also have a $135,000 line of credit against their home for which they pay 4 per cent a year.
"Is it possible that we can relax a bit or should we stay the course and continue saving?" Kevin wonders. "Can we consider another property purchase?"
We asked Warren MacKenzie, founder of Weigh House Investor Services Inc. in Toronto, to look at Kim and Kevin's situation.
What the expert says
Kim and Kevin have done well, raising and educating their children and building a net worth of about $1.7-million, the planner notes.
Because their income is high and their lifestyle modest, they are on track for a financially secure retirement – with a generous travel budget and a recreational property as well.
They could retire sooner if they managed their sizeable investment portfolio better, Mr. MacKenzie says. As it is, they have made some costly mistakes, including being 100 per cent invested in equities when the stock market topped in 2008. After their portfolio tumbled by 42 per cent, they sold out at the bottom and shifted much of their remaining holdings into bonds.
"They have been lulled into thinking that their adviser is adding value when there is no evidence that is the case," Mr. MacKenzie says. Their quarterly statement shows the performance of their portfolio as a whole, but does not compare it to the appropriate benchmarks, so they don't know whether they are beating or underperforming the market.
They don't know what asset classes they are invested in, the appropriate benchmarks or even what fees they are paying. As well, they are not properly diversified.
"They could have a safer portfolio with a higher expected return with no additional risk if they had diversification outside of their core Canadian large-cap stock and Canadian fixed-income positions," the planner says.
By following a simple but disciplined investment process, and assuming an average annual rate of return of 4.7 per cent, "they can achieve all of their goals and also leave a sizeable estate for their two children," Mr. MacKenzie says. The process would include a written plan outlining a strategy for regularly rebalancing their holdings among the different asset classes.
In drawing up his forecast, the planner assumed basic living expenses in retirement of $80,000 a year and added $10,500 a year for travel. He assumed the couple pays off the line of credit on their home before they retire. In a year or so, they cash in $245,000 worth of non-registered investments to buy a cottage or Florida condo.
Kevin is 54, Kim 52. The plan assumes they retire at age 61 and begin collecting Canada Pension Plan benefits, drawing on their savings to make up the shortfall.
In her first full year of retirement (age 62), Kim will get $22,550 a year in pension benefits, so their withdrawals from savings will drop. At age 65, they will begin collecting Old Age Security benefits, then at age 72, they will begin making mandatory minimum withdrawals from their registered retirement savings plans, which will have been converted into registered retirement income funds.
In their 90th year, they will have an estate worth $2.5-million to leave to their children, or about $1-million in today's dollars.
Client Situation
The people
Kim, 52, Kevin, 54, and their two children, 17 and 20.
The problem
After many years of hard work and saving, can they ease up and relax a bit once their teens are finished college? If they retire a bit early rather than working to age 65, can they still afford to travel and buy a vacation property?
The plan
Take charge of their substantial investment portfolio in order to lower risk and improve performance. Go ahead and buy the vacation property.
The payoff
Confidence that their plans are on track and their goals achievable.
Monthly net income
$14,650
Assets
Cash and term deposits $33,000; joint investment portfolio $430,000; TFSAs $56,000; his RRSP $425,000; her RRSP $135,000; present value of DB pension plan $308,000; RESPs $90,000; residence $400,000. Total: $1.88-million
Monthly disbursements
Home line of credit $435; property tax $335; insurance $60; utilities $430; maintenance, garden $325; transportation $575; groceries $1,200; clothing $150; gifts, charitable $90; vacation, travel $400; other discretionary $250; dining out, entertainment $575; clubs, hobbies, golf, sports $750; pets $200; grooming, subscriptions, other $125; disability insurance $1,350; life insurance $125; dentists, drugstore $35; cellphones $200; telephone, cable, Internet $270; RRSPs $2,085; RESP $100; tax-free savings account $915; pension plan contributions $600; professional association $50. Total: $11,630 Surplus: $3,020
Liabilities
Home line of credit $135,000
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Some details may be changed to protect the privacy of the persons profiled.