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portfolio makeover

Dushan Milic

Lisa has spent the past two years changing things up. The 41-year-old went back to school to finish her bachelor of arts degree, 20 years after she began. She divorced. She switched careers.

Still, she hasn't lost sight of long-term goals and wants to save for her two children's postsecondary education and for her retirement.

After studying aboriginal history, she realized she wants a career in aboriginal relations for an oil and gas company. The Albertan is on her way – doing some stakeholder relations in her new job – and hopes to work for another 15 to 20 years before switching to consulting work.

"I think that there are some oil and gas companies that have very good relationships with the First Nations people whose traditional land they're using, and I'd like to be part of building those mutually beneficial relationships."

Lisa's life has shifted dramatically since her divorce. After dropping out of university, she led training departments in a number of industries, including newspapers and oil and gas. She also worked for a while doing software implementation – travelling to Jakarta, Singapore and Texas.

Eventually, regular work fell to the wayside. "After my second child was born, and after being back at work for a year, I quit my job to basically stay home with the kids and support my then-husband's business," Lisa says. "I did work part-time with him. But essentially, I hadn't worked away from home since 2005."

That stopped being an option two years ago, when Lisa and her husband split. She went back to school, living on savings as she studied aboriginal history."I had always wanted to get my degree," she says. "Despite a successful career, I really felt it was something I should do."

Going back wasn't easy, either, as she realized last December that her savings would quickly dwindle after an impending drop in child-support payments. She found a job and started working in March, two months before she finished classes.

Today, Lisa has a junior position at a non-profit, but feels like she's on the right track."I believe that my income will increase as I get closer to my goal," she says.

Now that she's on this track, it's time for her to figure out how to make her assets work toward her goals. "I haven't done any saving for the last few years, but now that I'm employed again, I need to get started," Lisa says.

She wants to shake up the $165,000 she has in RRSPs, and feels comfortable investing the remaining $40,000 of her divorce settlement.

"I want to know what to do with the $40,000 cash I have, how much I should be saving for the kids' education, and how much I need to save each month for my retirement."

For advice on Lisa's portfolio, we turned to two financial experts: Cindy Crean, a financial planner with Canadian Imperial Bank of Commerce, and Bev Moir, senior wealth adviser with ScotiaMcLeod.

The basics

- $165,000 in RRSPs, largely in index and mutual funds with a handful of individual stocks.

- $40,000 from divorce settlement.

- $4,100 in a tax free savings account.

- $28,000 in two RESPs.

- $37,000 in a real estate investment trust.

- $750,000 home (paid off).

- No debts.

Cindy Crean's tips

1. RESP catch-up: Taking advantage of the Canada education savings grant in her RESPs should be Lisa's top priority, Ms. Crean says. "The program also allows her to catch up on past CESG that has been missed. If Lisa is eligible to, she could invest $5,000 in her eldest child's RESP and $5,000 in her youngest child's plan. This would net her $1,000 in CESG," she says. Lisa should take full advantage of the annual grant and make sure she's caught up on any contributions she's missed to get even more from the grant. The RESPs' asset allocation should lean toward conservative – no more than 50 per cent equities, Ms. Crean says – since she has fewer than 10 years for her first child to start drawing on it.

2. Personal savings: As Lisa's next step, she should use her divorce settlement to top up her TFSA. "The TFSA can be a vehicle for short-term savings or long-term savings like retirement," Ms. Crean says. "This will provide her with tax-free growth for her retirement, but also allow her to access the funds should she need money in an emergency." Because of the potential need for emergency use, Ms. Crean also recommends the TFSA asset mix be conservative: perhaps 20 to 25 per cent equities, 40 to 50 per cent in fixed-income, and the rest in cash.

3. Review that RRSP portfolio: After Lisa hits her maximum TFSA contributions, she should start regular RRSP contributions, particularly as she expects her income to grow, to make sure she can hit her goals of $60,000 to $70,000 in annual retirement income. She should also review her portfolio with an adviser to make sure she has the right asset allocation for her goals and risk tolerance. "Right now, she has many holdings and this may be difficult to manage long term," Ms. Crean says. "I would suggest she simplify her holdings so it is easier to manage and monitor." The RRSP's asset mix will depend on her personal risk tolerance, but with 20 years to retirement, "she could weigh this more heavily in equities for growth," Ms. Crean says – perhaps 65 per cent equities, 35 per cent fixed income. "The equities should also be diversified by country and industry sector for further diversification."

Bev Moir's tips

1. Simplify her RRSP: Unless she plans to regularly check in on her investments, Lisa's retirement portfolio is much too complicated, Ms. Moir says. If Lisa wants to simplify it, Ms. Moir recommends streamlining by investing into a single geographically diversified, balanced mutual fund with a low underlying fee and history of low volatility. "She should buy a no-load fund – no fees to buy, no fees to redeem," Ms. Moir says. She recommends looking for a fund with a minimum of 20 per cent fixed-income assets, unless Lisa is very risk-averse. A single fund, Ms. Moir points out, will make it easy to set up monthly contributions. She also recommends Lisa keep Bank of Nova Scotia shares that make up 7 per cent of her portfolio as a dividend-providing core with potential price and dividend growth. "She should put the shares on a dividend reinvestment program to accumulate more shares at no cost each time the quarterly dividend is paid," Ms. Moir says. "She should also keep the shares of Berkshire Hathaway and General Electric, as they are core companies, and they give her U.S. exposure."

2. Bulk up RESPs: Once Lisa makes sure her family is protected, she can focus on investing toward her goals. Step one is to get the ball rolling on Registered Education Savings Plans for her kids. She's already got $28,000 saved in two RESPs, and she should try to pay at least $2,500 for each child every year to receive the maximum continuing education savings grant from the federal government. (The grant matches 20 per cent of the total annual contribution, but caps at $500 a child a year.) Setting up monthly contributions will make this process easy. Lisa should build these portfolios for some growth, but with less than 10 years until her kids go to school, she should consider capital protection as well, Ms. Moir says. "A balanced fund with 40 per cent allocated to fixed income will help to maintain the capital and provide some growth over time."

3. Save and save: Since the government caps TFSA contributions to a total of $25,500 by the end of 2013, Lisa should immediately contribute $21,400 from her divorce settlement to the account. After TFSA and RESP contributions, the remainder of the settlement funds can go into an emergency savings account, which should equal three to six months of income. Lisa can also earmark some of the money in her TFSA for emergency sayings. The easiest way to do this is by investing that portion into laddered, cashable GICs, Ms. Moir says. "While rates are low, a cashable GIC allows her to access the funds if an emergency situation arises. And she can get out of it and reinvest into a higher-yielding GIC as interest rates move higher." By laddering the portfolio, money will be due to reinvest at the end of each year for several years. Meanwhile, the long-term savings in the TFSA should be invested in a balanced fund with long-term growth potential.

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