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The quest for financial security for their sunset years

For Portfolio Makeover by Dushan Milic

They're theatre-loving, art-consuming culture vultures with a knack for Priceline-inspired last-minute getaways. Married for 25 years, Dan and Audrey are an adventurous couple in their early 50s who have backpacked around the world and hiked their way through Canada's national parks.

Dan, an amateur photographer, captures these adventures in beautiful pictures, some of which are displayed on the walls of their home in Victoria, B.C. In past years, most of the pictures would have included their two daughters – but now their eldest is in university, Dan and Audrey mostly travel as a threesome with their youngest child, who is 17 years old and has autism.

When it comes to their finances, the picture isn't so clear. Last month, as a result of corporate restructuring, Dan was let go from his job as a manager with a technology company – a blow that was softened with a severance package equivalent to one year's salary. Audrey is a self-employed communications consultant, and her income amounts to about $20,000 – $30,000 a year.

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Dan and Audrey's house is fully paid off and, all told, they have about $534,000 put away. Dan, who is an only child, also stands to inherit his mother's estate, which is currently worth about $800,000.

The couple's investment portfolio has been losing value over the last five years. Dan's RRSP has gone down about $16,000, and their U.S. investment portfolio has lost about $20,000 during this period. Even their eldest daughter's RESP has taken a hit, declining to $19,500 from $20,000 six months ago.

"The only things that have gone up are the Canadian dividend funds," says Dan. "I bought low and made $8,000 on that."

Dan wonders when he and Audrey will be able to retire – he hopes it will be in the next five years – and if they'll have enough, not just for the two of them but also for their youngest daughter, whom they expect will continue to live with them after she finishes high school. They also want to make sure their youngest daughter will be financially secure in the future. Dan and Audrey have term insurance ending in about two years, with a total payout of $500,000. Their two daughters are the primary beneficiaries of their estate.

We presented Dan and Audrey's case to Michael Taglieri, a Toronto-based financial adviser with Assante Capital Management Ltd., and Heidi Pullem, a financial planner with ZLC Financial Group in Vancouver. Both advisers felt that Dan and Audrey need a proper estate plan that takes into account the future needs of their youngest daughter, and includes longer-term life insurance. While the couple has done a commendable job of saving over the years, retirement before the age of 60 is not a realistic prospect for either of them. Ideally, says Mr. Taglieri, they should put away at least $10,000 a year until they retire, which they should be able to do comfortably in about 10 to 12 years.

The basics:

  • $190,000 in Dan’s RRSP
  • $141,000 in Audrey’s RRSP
  • $180,460 in U.S. investments
  • $19,500 in oldest daughter’s RESP
  • $2,500 in Dan’s TFSA
  • $560 in a Canadian-focused fund

Michael Taglieri's tips:

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  • Boost fixed income investments – a lot. Close to $454,000 of Dan and Audrey’s money is invested in Canadian and U.S. equities, which is way too much risk for investors their age. “They should be looking at increasing their fixed income investments by 37 per cent for a total of 40 per cent,” says Mr. Taglieri. He suggests looking into a fixed income fund with a diversified mix of Canadian and international corporate bonds and guaranteed investment certificates. “They’re fortunate and diligent enough to have enough savings, so they don’t need to take on as much risk,” he says.
  • Reconsider U.S. assets. Depending on the total value of their worldwide assets, Canadians who own assets based in the United States – including shares in U.S. corporations – may be subject to U.S. estate taxes. Until 2012, the estate tax will not apply to Canadians with worldwide assets of $5-million or less, but that threshold will drop to $1.2-million in 2013. “Dan and Audrey could potentially get hit with this estate tax in the future, causing a significant erosion to their estate,” says Mr. Taglieri. “I would strongly advice that they consult a competent cross-border estate planning professional about this.”
  • Set up a registered disability savings plan (RDSP) for their youngest daughter. Depending on a family’s annual income, each $1 socked away into an RDSP can qualify for matching funds of up to $3 from the federal government’s Canada Disability Savings Grant, up to a lifetime contribution of $70,000. Another advantage of the RDSP is that it does not affect other disability income. “RDSPs in their particular case are a win-win,” says Mr. Taglieri.

Heidi Pullem's tips:

  • Dan should ask his employer to put a big chunk of his severance pay directly into an RRSP. This will allow him to defer tax on this lump sum to a future year when he is likely to be in a much lower tax bracket. “If his employer won’t do this, there will be withholding tax taken at source – in which case, he will need to make the contribution himself and wait for the tax refund,” says Ms. Pullem.
  • Top up the tax-free savings accounts. As of 2011, Dan and Audrey are each allowed to have $15,000 in a TFSA, but so far have used only $2,500. They can take money from Dan’s severance pay and put as much as $27,500 into their TFSAs. Come January, they’ll be able to put in another $5,000 each for the year.
  • Convert RESP to cash. Their oldest daughter’s RESP portfolio – which lost $500 in the last six months – should have been in cash for the last three to four years, says Ms. Pullem. To prevent further losses, Dan and Audrey should take action now. “At this stage, they cannot afford risk. It should be converted to cash or to cash in low-volatility investment income.”

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