<137>Tim Fraser for the Globe and Mail<137><137><252><137>Tim Fraser/The Globe and Mail
Like many couples, Ken and Gretchen differ markedly in the way they regard their finances. He thinks things are just dandy but she is worried. They are both 57 with two grown children.
Ken retired from his job of 32 years in 2010 at the relatively young age of 54. He has a work pension that pays him $5,715 a month before tax, not indexed for inflation. As well, they have substantial savings and a comfortable home in a city just outside of Toronto.
Their living expenses are modest but they also want to travel a bit for the next few years.
"I think we are doing well financially and have no real concerns about our finances," Ken says in an e-mail. "My wife, a very conservative person, is constantly worried about money." Ken hopes that a Financial Facelift will convince Gretchen they are okay.
"Will we be financially secure until we die and not a burden to our children?" Ken asks. "Do we have enough?"
He also wonders whether their investments "make sense."
We asked Warren MacKenzie, founder of Weigh House Investor Services in Toronto, to look at Ken and Gretchen's situation. Weigh House is an independent financial planning firm that does not sell investment products.
What the expert says
Ken and Gretchen should feel secure, what with a company pension and a net worth of more than $1-million not including the value of Ken's pension, Mr. MacKenzie says. As well, their income will rise over time as they begin collecting Canada Pension Plan and Old Age Security benefits.
"Their children have been successfully launched and they are now enjoying their grandchildren," the planner says. They spend less than they earn so they are able to save $6,000 a year.
Based on reasonable assumptions, including an average annual return on investments of two percentage points more than the inflation rate and no unexpected cut in Ken's pension, "they should have no worries because their net worth will continue to grow for as long as they live," Mr. MacKenzie says.
Unfortunately, it is not clear that return on investment target will be met. After working at the same job for more than three decades, Ken risks earning less than he potentially could on their hard-earned savings because of high mutual fund management fees for investments that underperform their benchmarks.
"It is less certain that they will be able to maintain their lifestyle if their investments continue to underperform by over 4 per cent per annum – as they did last year – if pension benefits are cut (Ken's plan is underfunded) or if Ken died and Gretchen was left with only 60 per cent of his pension," the planner says.
Ken and Gretchen don't know how their investments have performed compared to the appropriate benchmarks, they don't know what they are paying in fees, they don't know why their asset mix is what it is and they don't understand their investment strategy, he adds. "Based on the fact that their entire portfolio is in deferred sales charge, underperforming mutual funds with high management expense ratios (MERs), it would seem that the investment strategy is to generate the highest possible fees for their financial adviser," Mr. MacKenzie says.
Their asset mix – 46 per cent cash and fixed income and 54 per cent equities – is reasonable, but 36 per cent of their bonds are long term, which will depress the couple's returns if interest rates rise and bond prices fall. As well, they are over-diversified – they have too many funds – "so after fees, they will never be able to match the performance of the market," the planner says.
With more than $700,000 in cash and investments, Ken and Gretchen should shop around for better alternatives: Investments that underperform the market by two percentage points a year could cost them more than $1-million in potential returns over the remainder of their lifetime (an assumption of 30 years), Mr. MacKenzie says. That's $1-million less to spend or leave to their children or grandchildren.
Their average MER is 2.4 per cent a year.
Mr. MacKenzie recommends the couple seek out a professional investment counselling firm "where they would receive lower fees, professional management and better reporting." Such firms make sense for people with $500,000 or more in their portfolio.
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Client situation
The people
Ken and Gretchen, 57
The problem
How can Ken put to rest Gretchen's concerns about financial security?
The plan
Tend to the one area of their financial plan that could be handled better – their investments. Consider switching to a professional investment counselling firm.
The payoff
Better returns on their investments with less risk.
Monthly net income
$4,850
Assets
Term deposits $66,000; GICs and savings bonds $15,000; stocks $85,000; mutual funds $345,000; his TFSA $22,800; her TFSA $27,200; spousal RRSP $181,000; residence $350,000; present value of Ken's pension $1.26-million. Total: $2.35-million.
Monthly disbursements
Property tax $340; insurance $40; utilities $315; maintenance, garden $125; transportation $355; groceries $200; clothing $25; car payment $150; charitable $750; vacation, travel $625; other discretionary (credit cards $450); entertainment, dining, clubs, grooming, subscriptions $395; dentists, drugs, supplements $170; health insurance $140; life insurance $55; telecom, cable, Internet $210; TFSA savings $500. Total: $4,845.
Liabilities
$12,240 loan, zero interest rate
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