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portfolio makeover

Dushan Milic

This is part of a series of portfolio makeovers that focus on the issues of investors who are in the 50-plus age range.

Getting divorced after more than two decades of marriage is something that Jack, a Toronto native, doesn't like to discuss. But now that the split is official, he's feeling positive about the road ahead.

"I'm feeling relieved and optimistic about the future," says Jack, 53, a business-development manager at a global recruitment firm. "I'm healthy, active, have a good support network, and I'm engaged at work."

If there's one area where the father of one grown child is feeling less grounded, however, it's finances. He pays about $50,000 in spousal support annually. He and his ex-wife share equally tuition and living expenses for their daughter, costs that will last another year. Despite an attractive income – Jack earns a yearly bonus of approximately $50,000 on top of his $150,000 base salary – it's the uncertainty surrounding any future financial fallout from the divorce that makes him apprehensive.

"Financially, I need to feel more in control of my life coming out of this," he says. "Because it was a long-term marriage, there's no automatic end to spousal support. My concern is about what spousal support will be if circumstances change, if either of us experiences job loss, remarriage or illness. That's something I have no control over, but I worry about the financial impact and the legal process."

Jack hopes to retire by 65 with an income of between $60,000 and $70,000 per year. He wants to combine consulting with volunteer work and travel, and he'd like to have more time for hobbies that have taken a back seat in the past, such as cycling and playing tennis. He's assuming he'll be on his own for retirement, but whether solo or not, he wants to ensure he's in the best possible position financially to enjoy it.

To help Jack find his financial footing, we consulted certified financial planners Kelly Ho with Vancouver's DLD Financial Group Ltd. and Jill Chambers, an adviser at WealthCo Financial Advisory Services Inc. in Calgary.

The basics

– RRSPs: $168,000 in money market and balanced funds; $240,000 in equity funds; $150,000 in Canadian and U.S. equities

– Company stock: $64,000

– Unvested company stock: $105,470

– Cash tagged for investment: $84,000

– Savings: $15,000

– Home valued at $470,000, with $130,000 in equity and $270,000 remaining on the mortgage

– Pension: $6,500 per year at age 65.

Ms. Ho's tips

1. Use that cash wisely.

With the $84,000 Jack has earmarked for investment, Ms. Ho would like to see him boost his RRSPs, depending on his contribution room, and put $31,000 toward his TFSA – the maximum allowable for him at this point.

"If there are remaining funds, I would suggest he consider allocating it toward non-registered corporate class mutual funds," she says. "He can defer tax, allowing flexibility from moving money from one fund to another as he nears retirement."

Ms. Ho suggests Jack keep $15,000 in a savings account as an emergency fund.

"I would also suggest that Jack implement a dollar-cost averaging strategy, meaning regular contributions into the market, which reduces the impact of volatility through large purchases of equities at a time. This includes maximizing his TFSA the following year once he gets more contribution room. Depending on his RRSP contribution room, he can then divide the remainder of his cash flow between RRSPs and non-registered corporate class mutual funds."

2. Reallocate investments over time in alignment with Jack's risk tolerance.

Ms. Ho suggests Jack start by moving toward a well-diversified, aggressive portfolio. Assuming a 6.5-per-cent return on all assets (RRSPs, TFSA, and non-registered funds), Jack should be able to generate about $68,000 in after-tax income in today's dollars at retirement.

"It's important to understand that by allocating his assets toward primarily equities, this strategy involves increased risk," Ms. Ho says. "As Jack nears retirement, his investor risk profile may prioritize a greater bias towards capital preservation, so it's critical that his profile is revisited annually and ensures that his asset allocation is reflective of these changes.

"Over time, Jack may consider taking a more conservative approach to lessen the impact of potential market downturns," she adds. "A more balanced approach would be suggested with an assumption of 4.9-per-cent return for all his assets. This will result in approximately $65,500 in after-tax income in today's dollars at retirement, which is still within his desired goal range."

3. Diversify the portfolio to reflect more international holdings.

There is little diversification around his current stock portfolio and an apparent lack of focus regarding the management of his assets, with approximately 19 per cent in managed money, 23 per cent in a stock portfolio, 32 per cent in cash and 26 per cent in company shares, Ms. Ho notes.

"With respect to Jack's asset allocation, he's aggressively exposed through his employer," Ms. Ho says. "I would suggest that he reduce his exposure of company shares in order to properly diversify, keeping tax consequences in mind.

"It appears his stock portfolio of $150,000 is spread too aggressively among six Canadian companies and nine American companies," she adds. "Jack may want to consider having a concentrated money manager that would hold an appropriate number of companies ensuring proper geographical and sector diversification, as Jack also has little international exposure."

Ms. Chambers's tips

1. Pay down the mortgage as quickly as possible.

Doing so will improve Jack's cash flow at retirement.

"Jack intends to retire in 12 years and is carrying a mortgage, while the goal at retirement should be to be mortgage-free," Ms. Chambers says. "To achieve this, Jack would need to refinance his mortgage with a 10-year amortization. With prevailing rates, that would mean a monthly payment of about $2,600, not including property taxes."

Jack should also open a TFSA and maximize his RRSP contributions.

"I would suggest he immediately invest $26,000 of his cash in a tax-free savings plan," Ms. Chambers says. "At a six per cent rate of return, that $26,000 will grow to about $53,000 by retirement. If Jack contributes the current maximum of $5,500 each year, that will generate an additional $87,000 by retirement."

2. Get Jack's portfolio working harder.

As people approach retirement, they tend to become more conservative in their investments, since they can't afford to lose what they've worked so hard to earn, Ms. Chambers says.

"At 53, Jack should consider a more balanced portfolio with an equal income and equity split," she says. "However, a portfolio weighted more heavily in traditional income products will not generate the return Jack needs to grow his portfolio in his remaining working years.

"The income portion currently consists of cash in the bank and money market funds," she notes. "While this is very safe, the minimal growth will not keep pace with inflation and taxes. Jack needs to get his income portion working for him by considering an alternative income strategy, such as mortgages."

Applying the "Rule of 72" – 72 divided by rate of return equals the number of years it will take to double investments – if Jack achieves a rate of return after fees of 6 per cent on his investments, it will take him 12 years to double his current portfolio, Ms. Chambers says.

"If he makes no additional deposits, he can anticipate $1.25-million at age 65," she explains. "Assuming a burn rate of three per cent at that time, he will have $37,500 of safe income, not taking CPP, OAS or any other sources of income into account. His projected income requirements suggest closer to a 4- to 5-per-cent burn rate, which may result in a faster-than-desired portfolio erosion."

Other options for Jack to consider to ensure sufficient cash flow during retirement include saving more each month now, spending less, and/or working past age 65.

3. Speak to a lawyer regarding the separation agreement.

Given that Jack is anxious about what may or may not happen financially as a result of his divorce, he needs to get legal advice about any changes to the amount of spousal support he pays.

"He should direct his concerns to his lawyer so that he can sleep at night without wondering how his cash flow may be impacted in the future," Ms. Chambers says. "That way he'll be comfortable and informed about what may or may not transpire."