Bruce and Barbara are in their mid-40s with two children, age 12 and 15. Bruce works in finance, bringing in $215,000 a year plus bonus. Barbara recently returned to work part-time after a 12-year break and earns about $20,800 a year.
Their suburban Montreal house is mortgage-free and they have substantial savings, much of which is in cash because they are feeling nervous about financial markets.
They wonder if their retirement goals are out of reach. Both hope to hang up their hats in their early 60s. "Retirement is starting to be a concern," Bruce writes in an e-mail.
Their main worry is how to invest their savings, most of which is sitting in cash. Bruce has some company stock thanks to a stock purchase plan, and a defined contribution pension plan, where the return depends on market performance.
"What is interesting to buy right now?" Bruce asks. "Can an ETF (exchange-traded fund) help us?" They left their full-service broker because they were dissatisfied with the service, he adds. "We are considering a private wealth manager to advise us," Bruce says. "Do we have enough money and how do we go about choosing one?"
We asked Jason Pereira, a financial planner at investment dealer Woodgate Financial/IPC in Toronto, to look at Bruce and Barbara's situation. Mr. Pereira recently won top prize for the Americas in the 2015 Global Financial Planning Awards sponsored by PlanPlus Inc. of Lindsay, Ont.
What the expert says
Bruce and Barbara have more than enough money to meet their retirement goals – if they begin investing for the long term and generating decent returns, Mr. Pereira says. He recommends a balanced portfolio – 60 per cent stocks and 40 per cent bonds – with a target yield of 7.4 per cent a year on average. They could increase their bond holdings as they grow older. Even with a lower return, they would still meet their goals.
Mr. Pereira assumes Bruce retires at age 62 and Barbara at age 60; they buy a car every seven years starting in 2017 for $40,000; they landscape their yard at a cost of $10,000 (a short-term goal); and give each of their children $50,000 to pay for their weddings.
He recommends Bruce sell his company stock as soon as he gets it so that he does not tie both his income and his financial capital to the success or failure of his employer. He should invest the proceeds in a diversified portfolio of Canadian, U.S., and global stocks and bonds.
The couple might want to consider a strategy whereby their investment income is taxed in Barbara's hands at her much lower marginal income tax rate, the planner says. They can do this through a spousal loan whereby Bruce lends Barbara the money to invest, but they must be careful that the income is not attributed back to Bruce. This can be done by ensuring the loan is properly documented and that interest is paid by Barbara to Bruce every year without fail. In his plan, Mr. Pereira assumes that an amount equal to 100 per cent of Barbara's after-tax income is saved in her name and the remainder in Bruce's.
By the time Bruce retires, their nest-egg will have grown to $7.1-million, the planner estimates: $3.1-million in non-registered investments, $1.2-million in registered retirement savings plans (RRSPs), $1-million in tax-free savings accounts and $1.77-million in Bruce's pension plan. Both Bruce and Barbara begin taking Canada Pension Plan benefits at age 60.
The planner suggests they begin making minimum withdrawals from their RRSPs/RRIFs (registered retirement income funds) when they retire. This way, they could take advantage of lower tax rates as well as reduce the size of their RRSPs when it comes time to convert them to RRIFs and start making mandatory minimum withdrawals. Taxpayers must convert their RRSPs to RRIFs in the year they turn 71 and begin making mandatory minimum withdrawals the following year.
During Bruce's first four years of retirement, he will still be selling off company shares as they vest so that the tax bill will be spread over several years, Mr. Pereira says. Their first full year of regular retirement income will come in year five, or 2037. Work pension, CPP and Old Age Security will generate $146,006 a year before tax, RRIF withdrawals $60,678, and non-registered investments $82,054, for a total of $288,738.
Mr. Pereira recommends both Bruce and Barbara continue contributing to their TFSAs after they retire.
He suggests they use corporate class mutual funds for their non-registered investments to help shelter tax. These securities allow investors to switch between funds offered by the same company without triggering income tax. Because of their relatively high net worth, the couple could benefit by hiring an investment adviser who provides comprehensive financial planning for a fee based on a percentage of assets. He suggests they interview a number of financial planners and money managers to find one with a service that matches their needs.
The people: Bruce and Barbara, 45, and their two children.
The problem: How to invest for retirement in turbulent markets.
The plan: Hire a fee-only adviser or portfolio manager and draw up a plan for a balanced portfolio. Put non-registered investments in corporate class mutual funds.
The payoff: More money than they need to achieve their retirement goals.
Monthly net income after taxes (variable): $10,600.
Assets: His cash and non-registered investments $300,157; her cash and non-registered $152,127; his TFSA $31,850; her TFSA $30,773; his RRSP $144,000; her RRSP $132,165; market value of his DC pension $200,133; market value of her DC plan $14,812; children's RESP $101,482; residence $500,000. Total: $1.61-million.
Monthly disbursements: Property tax $540; home insurance $110; utilities $335; security, maintenance, garden $90; transportation $685; grocery store $1,000; clothing $1,000; gifts, charitable $650; vacation, travel $835; dining, drinks, entertainment $1,000; grooming $50; club memberships $240, other personal $1,185; dentist $50; life insurance $60; disability insurance $25; cellphones $250; home phone, TV, Internet $260; RESP $415; TFSAs $1,500; pension plan contributions $320. Total: $10,600.
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