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financial facelift

John Ulan/The Globe and Mail

Samantha and Darrin have well-paying jobs, plenty of savings and no debt. She is 53, he is 49. They own their $650,000 Alberta home outright.

She earns about $125,000 a year before tax, while he earns $90,000. She has a group RRSP at work to which both she and her employer contribute. The couple's combined savings total $1.6-million.

Their goal is to retire in seven years with after-tax income of $75,000 and still leave a substantial estate to their only son, who is in first-year university.

When they quit, they plan to traverse the globe, hoping that "with the vigour we will still have, and the savings we've been carefully accumulating, we can spend the first five years or so moving around the world, spending six months at a time in flats or cottages in various parts of the world, living frugally and participating in volunteer vacations, being useful, having adventures," Darrin writes in an e-mail.

They would sell their house, invest the money and store their belongings.

"After this period of vagabonding, we would settle down again in Canada, in a house either in or just outside a smaller city," Darrin writes. He's an avid gardener, so they'd grow their own fruits and vegetables.

They wonder if their plans are realistic and whether their investments are suitable, particularly their $170,000 universal life insurance policy.

We asked Warren MacKenzie, founder of Weigh House Investor Services of Toronto, to look at Darrin and Samantha's situation. Weigh House is a fee-only firm that does not sell investments.

What the expert says

"Darrin and Samantha have worked so hard and have been so focused on saving their money they are now having a hard time realizing that they are completely on track and there is no reason why they cannot soon start to enjoy the fruits of their labour," the Mr. MacKenzie says.

While many Canadians do not save enough for their retirement, "there is another group of people who need to learn how to spend and enjoy what they've saved and worked for," he adds.

"They want to know if they are on track to retire when Darrin is 56 and Samantha is 60 and the answer is yes."

Based on reasonable assumptions, including an average after-fee return of 4.75 per cent a year, they will be able to retire and achieve all of their objectives – including leaving about $5-million to their son (in 50 years' time this will have the purchasing power of about $2-million in today's dollars).

They ask about the wisdom of keeping their universal life insurance policy. In the early years, they made the same mistake as most people do when they buy such a policy, Mr. MacKenzie says.

"The mistake is to exercise their option to choose the asset allocation for the surplus funds in the policy, a decision that is usually based on fear and greed," he says. "In their case, they invested 100 per cent of the surplus in the U.S. market when the market was near its peak. Then when the U.S. market collapsed, they moved it all into a guaranteed investment account earning 3 per cent.

"This illustrates the most common selling feature and also the problem with universal life insurance: The selling feature is that the owner of the policy gets to make the investment decisions; this is also the problem."

Because they took out the policy to create an estate for their son, they would have been better off to use whole life insurance and let the insurance company make the asset allocation decisions, he adds. Even so, given that they are now 14 years into the policy and no more payments are required, they should keep it, he says.

Darrin is knowledgeable about investments and for a time managed his own portfolio, but he became uncomfortable during the 2008 financial panic and switched to a professional money manager. Such managers charge a percentage of the portfolio to make and execute investment decisions on behalf of clients.

Even so, they seem to be unclear about their investment strategy and whether their portfolio is being rebalanced in a disciplined manner, Mr. MacKenzie says.

"If investors today are not rebalancing to lock in profits, it probably means that they are not following a disciplined investment process, they are not in a well-diversified portfolio, their equities have underperformed the market or their portfolios too complicated to properly manage."

Darrin and Samantha do not have enough capital to be able to afford long-term underperformance or to make big mistakes, the planner says.

"They need to demand proper performance reports that show how they are doing compared to the proper benchmarks." Because the investment process is more important than the investment products, they should ask for clarification about the investment strategy they are following, he adds.

Client situation

The people

Darrin, 49, and Samantha, 53.

The problem

Are their plans and dreams realistic?

The plan

They are on track to achieving all their goals, but need to keep an eye on their investments to see how they measure up to the relevant benchmarks.

The payoff

Financial security and a sizeable estate for their son.

Monthly net income (including investment income)



Home $650,000; her RRSP $635,000; her non-registered savings $15,000; her TFSA $30,000; his RRSP $425,000; his non-registered savings $375,000; his TFSA $30,000; his company shares $40,000; RESP $35,000; family trust in son's name $66,000; cash $40,000. Total: $2.3-million.

Monthly disbursements

Property tax $400; utilities $270; property insurance $100; repairs, maintenance, garden $250; transportation $365; groceries $650; clothing $265; gifts, charitable $200; vacation, travel $1,500; club memberships $1,000; dining, drinks, entertainment $850; pets $250; subscriptions $40; grooming $75; dentists, drugstore $45; telecom, TV, Internet $350; RRSP contributions $1,850; TFSAs $915; group benefits $250. Total: $9,625.



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