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financial facelift

Chad Hipolito/The Globe and Mail

Ted and Tanya moved back to Canada from Britain in 2005 and invested their savings in the stock market "just before the collapse," Tanya writes in an e-mail.

"Unfortunately, we have lost about $350,000 in our investments since then," she adds. Tanya is 63 and a self-employed consultant. Ted is 61 and retired from his university job because of ill health.

Their income and assets are substantial, but they wonder whether they are enough to generate their after-tax retirement income goal of $100,000 a year. Roughly half of their $2.2-million in assets is in personal-use real estate, including their Vancouver condo.

When it comes to investing, Ted and Tanya consider themselves knowledgeable to a degree, but "we find the choices bewildering and the financial environment a confusing and risky hall of mirrors," Tanya writes. They have a fair amount of cash and cash equivalents, and are uncertain where to deploy the money.

"We would like to earn a steady income that would enable Tanya to retire in two or three years," Ted says. "We also would like to see our capital preserved in the process." First on their to-do list when Tanya stops working is to travel. "We are keen to bring coherence to our financial circumstances so that we can understand and manage our financial resources," they write.

We asked Ian Black, a fee-only financial adviser and portfolio manager at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Tanya and Ted's situation.

What the expert says

First, Mr. Black reviewed the couple's potential income. Ted has a pension of $22,750 a year indexed to inflation. Tanya's pension is $16,920 a year, not indexed. Living and working in Britain and the United States will have an effect on their Canada Pension Plan contribution period and their eventual Old Age Security benefits.

Tanya's CPP benefit is expected to be $6,180 a year at age 65. Ted is already receiving CPP of $2,760. By age 60, Ted will have been in Canada for 40 years after age 18, so will receive the maximum OAS benefit, currently about $6,550. Tanya spent more time outside Canada, but will have about 32 years in the country so will receive about 75 per cent, or $4,910, of the maximum OAS benefit.

Altogether, income from pensions and government benefits is estimated to be $60,070 a year, half of their desired before-tax cash flow of $120,000, the planner notes. The other half will have to come from their investments. (Tanya should determine whether her work in the United States qualifies toward her CPP contributor period or whether she may be entitled to U.S. Social Security benefits.)

Their investment portfolio is 10 per cent cash, 60 per cent fixed income and 30 per cent equities.

"Virtually all the equity investments are in Canadian companies," Mr. Black says. Ted and Tanya have accounts at three different financial institutions, and they have invested in some mutual funds with high management expense ratios and deferred sales charges.

As it stands, their portfolio will "not quite" provide the desired cash flow, the planner says.

But if they were to sell their $400,000 vacation property at some point, they could achieve their cash-flow target. Mr. Black's analysis assumed a before-tax investment return of 5 per cent a year – a return their existing portfolio is not likely to generate.

To get on a more solid footing, Ted and Tanya should sit down with a financial adviser who can help them determine their risk tolerance and then draw up an investment policy "with an asset allocation which will allow them to stay invested during all market cycles," Mr. Black says.

"This will bring some discipline to the investment decision-making process" and help them stay invested when markets are falling, rather than fleeing to cash and missing out on market recoveries.

Their investment portfolio likely does not need to hold so much cash because the couple has substantial cash balances in their bank accounts, the planner notes. The equity part of their holdings should include U.S. and international stocks for better geographic diversification.

Tanya and Ted need to keep a close eye on fees.

"The couple should consider the advantage of low-cost exchange-traded funds (ETFs) versus actively managed mutual funds with loads [commissions], deferred service charges and higher management expense ratios," Mr. Black says. Given that they already have funds with deferred sales charges, they should take advantage of the 10 per cent free switching option on their DSC mutual funds as they shift their holdings, he adds.

To make sure their investments are tax-efficient, they should hold interest-bearing securities in their registered accounts, (registered retirement savings plans and tax-free savings accounts), Mr. Black says.

"Preferred shares and Canadian equities should be held in non-registered accounts in order to take advantage of the dividend tax credit." Holding U.S. and international equities in non-registered accounts allows for withholding taxes to be used as foreign tax credits. Taxes on foreign securities are withheld when dividends are paid, but the amount withheld is treated as a credit against Canadian taxes payable.


Client situation

The people

Ted, 61, and Tanya, 63.

The problem

Will they will be able to meet their retirement income goal of $100,000 a year?

The plan

Try to improve investment returns with lower fees and a more diversified portfolio. Consider selling the vacation property at some point and investing the proceeds.

The payoff

Financial freedom.

Monthly net income



Principal residence $700,000; vacation property $400,000; his RRSP $114,000; her RRSP $103,000; his TFSA $28,000; her TFSA $27,000; cash $210,500; cash value of insurance policy $4,300; bonds, fixed income $125,000; equities $350,000; mutual funds $98,000; GICs $66,000. Total: $2.2-million

Monthly expenses

Property tax $250; condo utilities $290; condo fees $580; condo insurance $45; car insurance, gas, maintenance $165; groceries $650; health, medical, dental $950; medical insurance $120; charity $460; travel $2,200; subscriptions $65; condo maintenance and cleaning $800; entertainment, personal, clothing $400; telecom, cable $295; TFSA $915; RRSP $740; other savings $1,715; accounting $200. Total: $10,840



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