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portfolio makeover

Dushan Milic

Anderson and Ivana enjoy life to the fullest. Married since 2003 with no children, the Vancouver professional couple don't have any firm plans to start a family. They love to dine out, socialize and travel. For a weekend road trip, they might head east to the Okanagan Valley in British Columbia or down the coast to Portland, Ore., and their longer-haul destinations include Ivana's native Russia.

The pair make a comfortable living. Anderson, 44, works as a software developer. He's been with the same company for six years, and his job is relatively secure. Ivana, 42, left the corporate world five years ago to become a freelance technical writer. Anderson is the main breadwinner: In 2012 he earned $117,000 of their combined $147,000 income.

Anderson and Ivana recently sold the apartment they were living in and moved into their current home, a downtown two-bedroom condominium that had previously been an investment property. With help from the sale of their former residence, they've amassed about $360,000 in savings and investments.

Besides some $120,500 in registered retirement savings plans and $45,000 in Anderson's company stock purchase program, that total includes $170,000 in money market funds that they plan to use for a down payment on an $850,000 house in Vancouver or nearby Burnaby. The pair have $30,000 in unsecured debt in addition to a $95,000 mortgage on their current home, which is 50 per cent owned by Ivana's parents.

Although they contribute a total of about $1,300 each month to their RRSPs and stock purchase plan, Anderson and Ivana aren't active investors. Outside of his company RRSP, which matches employee contributions two to one, they've had the same adviser since 2006. They haven't set any financial goals for retirement and don't consider themselves disciplined savers. "Because we don't have a family, we end up spending the money we earn probably more freely than we should," Anderson says.

In the short term, they wonder what to do with the condo, which has an assessed value of $408,000. Should they sell it and put their half of the proceeds against the mortgage on a new house – or keep it as an investment?

As for long-term goals, if they're still in Vancouver at 65, Anderson and Ivana would like to have a place downtown, own recreational property in the Okanagan and be able to travel. "What would we need to be able to maintain a similar lifestyle to what we have now, being mortgage-free?" Ivana asks.

For help, we turned to Tina Buckthorp, a Calgary-based certified financial planner with Raymond James, and Jeff Davis, a director, portfolio manager and investment adviser with Odlum Brown in Vancouver.

The Basics

$170,000 in money market funds

$73,500 in Anderson's personal and company RRSPs

$47,000 in Ivana's RRSP

$45,000 in Anderson's company stock purchase program

$20,000 in Ivana's tax-free savings account

$5,000 in other savings

Tina Buckthorp's Tips

Equalize RRSP holdings. "As long as the company maintains the plans it's got in place … and Anderson stays [there] for the next 20 years, it looks like the savings could potentially build to be sufficient to support their retirement without too much of a lifestyle change," Ms. Buckthorp says. If the company plan allows, she suggests that Anderson set up a spousal RRSP in Ivana's name and make group contributions to it until their holdings are equalized, then split contributions between the group plan and the spousal one.

Ensure that company RRSPs work well with personal investments. Depending on the options available in the company RRSP, Ms. Buckthorp recommends a fairly conservative mix because the ability to switch funds may be limited. Anderson could put most of his money in a good balanced fund and boost growth potential by holding 10 to 15 per cent in a Canadian equity fund and 5 to 10 per cent in a U.S. equity fund.

Regularly review company stock holdings, especially if vested stock is in a gains position. "Consider selling some stock each year and moving funds to a tax-efficient, non-registered investment," Ms. Buckthorp advises. It's easy to be overweight in such equities, she says, and savings could suffer if there's a market downturn or Anderson's employer runs into trouble.

To buy a house, refinance the condo mortgage. Anderson and Ivana could tap the $170,000 in money market funds to pay off their $30,000 unsecured debt, which costs them more in non-deductible interest than the funds earn. They could then refinance their mortgage to $200,000, pulling $105,000 in equity out of the condo to put toward a house. When they turned the condo back into a revenue property, interest on its mortgage would be deductible against rental income. "Eventual sale of the investment property could provide funds for purchase of a recreational property," Ms. Buckthorp says. But she also points out that for an $850,000 house, monthly mortgage payments as high as $4,000 would probably mean cutting back on other expenses.

Jeff Davis's Tips

Look for growth. "Particularly for the equity side, my concern right now is with the balanced funds that they own," Mr. Davis says. About 65 per cent of Anderson and Ivana's roughly $91,000 in personal RRSP holdings are in CI Investments' Portfolio Series. The 2.44-per-cent management expense ratio (MER) for these funds of funds – which are upward of 40 per cent invested in fixed-income securities – is higher than their yield. But you could buy the series' top bond fund holding directly and pay an MER of just 1.67 per cent, Mr. Davis notes. His solution: Sell the Portfolio Series and put the money into the diversified CI Harbour Fund. Over the past 15 years, CI Harbour has posted annualized returns of 7.5 per cent compared to 4.2 per cent for the Portfolio Series Balanced Fund. Let's say Anderson alone contributed $22,000 a year to the couple's RRSPs until age 65, earning 7.5 per cent. Their current $120,500 would grow to $1.7-million, versus $1.1-million with a 4.2-per-cent return.

Put Ivana's money to work. Because she earns far less than Anderson, they should invest as much of her income as they can and use his to cover living expenses, Mr. Davis says. "That way they can try to balance out the future investment income as much as possible."

Sell the condo and boost savings. After paying off their unsecured debt, Anderson and Ivana would have just $140,000 for a down payment on a house, not including stock options and the tax-free savings account. Mr. Davis says unloading the condo would push their combined equity up to about $249,000. Putting aside $170,000 for a down payment, Anderson and Ivana could earmark $31,000 for TFSAs and stash another $20,000 in an emergency fund. And the remaining $28,000? "Invest [it] in something like the CI Harbour Fund and start building up a nonregistered portfolio," Mr. Davis says.

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