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financial facelift

Michael Bell/The Globe and Mail

Evan and Estelle are in their early 40s. Both have professional jobs with good income and defined contribution pension plans. Together they bring in nearly $250,000 a year.

They live in a part of the country where house prices are still relatively reasonable, so Estelle and Evan have managed to pay off their mortgage in full. They contribute to a registered education savings plan (RESP) for their two children, ages 11 and 13. They have maxed out their RRSP contributions and have been catching up with their tax-free savings account room.

"Once we invest the maximum amount of money in our TFSAs, where else should we be investing?" Estelle asks in an e-mail. They tend to spend $15,000 a year on a summer vacation to visit family overseas. They will need a new car soon (expected to cost about $40,000) and they wonder if they should tap their TFSAs to buy it. They want to diversify their investments and are thinking of buying a rental property with family members.

Can they do all this and still retire – Evan at age 65 and Estelle at age 60 – with a spending target of $120,000 a year after tax?

We asked Josh Miszk, vice-president of investments at Invisor of Oakville, Ont., an online investment adviser (robo-adviser), to look at Evan and Estelle's situation. Mr. Miszk holds the chartered financial analyst (CFA) designation.

What the expert says

Estelle and Evan need to change their way of thinking slightly, Mr. Miszk says. "Instead of thinking in terms of accounts (RRSPs, TFSAs), it's best to think in terms of goals," he adds. By identifying their short- and long-term goals, Evan and Estelle can set up a broad, goal-based asset allocation and use their different account types to invest in a way that is tax-advantageous.

First, they should make sure each of their goals has suitable asset allocations, Mr. Miszk says. The $15,000 a year pegged for travel can be in a savings account. The $40,000 car purchase can be financed, or the money can be set aside in low-risk investments. The RESP allocation should take into account the remaining years before each child begins their higher education. "They should reduce the equity portion as they get within five years of needing the money."

For their retirement funds, which are longer term, they can take on some risk, Mr. Miszk says. "Their risk-tolerance (questionnaire) suggests they have a moderate-to-growth-oriented approach to risk." He suggests targeting a balanced growth mix of roughly 60-per-cent equities and 40-per-cent fixed income. "Their entire retirement savings – pensions, RRSPs and TFSAs – should have this asset mix."

If Evan and Estelle decide to invest in a rental property, and consider it part of their retirement nest egg, they should include it as fixed income when factoring it into their overall asset mix, Mr. Miszk says. For example, if their retirement portfolio is $1-million and $300,000 of that is in an investment property, they should invest another $100,000 in fixed income, with the remainder invested in equities to ensure a 60/40 mix.

For the new car, he suggests the couple take advantage of current low interest rates and finance the purchase. They can do better investing the money provided they have the discipline to pay off the loan and are comfortable with the debt. The monthly payment would be about $575, which falls within the couple's budget. Going the financing route will leave that $40,000 in their TFSAs to put toward retirement savings or a down payment on an investment property.

Are their goals too ambitious?

Evan and Estelle's goal of $120,000 a year in after-tax income is about $30,000 more than they are spending today excluding savings and investment, but well within reach, Mr. Miszk says. Because the main source of their income will be from their pension funds and RRSPs, and will be taxable upon withdrawal, they will need about $170,000 a year before tax.

To save enough money to maintain their lifestyle to Estelle's age 90, the couple should have about $3.7-million by 2039, when Evan retires at age 65. By putting away $50,000 a year, they should have $2.9-million by 2032, when Estelle retires at age 60. Because Estelle will only be drawing a moderate income until Evan retires, Mr. Miszk projects the balance should grow to their target of $3.7-million over the seven years to 2039.

They will likely get full Canada Pension Plan benefits but have some of their Old Age Security benefits clawed back.

In his calculation, Mr. Miszk assumes the current TFSA, RRSP and pension balances go toward funding their retirement. He has used a 6-per-cent growth rate while they are working and 5 per cent after they have retired and shifted their portfolio more to fixed income, on which returns likely will be lower. Once Estelle retires at age 60, the only further retirement savings will be Evan's pension plan contributions. Based on these assumptions, the couple will need to save $49,712 a year in their pension plans, RRSPs and TFSAs from now to when they retire to reach their goal of $170,000 a year pre-tax.

Currently, they contribute about $45,000 a year, or 18 per cent of their income, to their RRSPs and pension plans after employer matching, Mr. Miszk says, so they are roughly $5,000 a year short ($49,712 minus $45,000). Another $6,000 goes to education savings and $41,000 to their TFSAs. Once they have caught up on their TFSA room, he suggests they set aside $5,000 a year in their TFSAs for retirement. Any surplus savings could go toward other goals such as the investment property.


Client situation

The people: Evan, 42, Estelle, 44, and their two children.

The problem: How to better invest their money now that they are free of debt and have taken full advantage of their savings vehicles.

The plan: Draw up a goal-based investing strategy rather than thinking in terms of plans such as RRSPs and TFSAs. Make sure the investments match the goals.

The payoff: A path to achieve their financial goals.

Monthly net income: $14,540

Assets: Cash and short term deposits $16,100; his TFSA $38,860; her TFSA $35,500; his RRSP $114,830; her RRSP $138,600; his DC pension plan $293,330; her DC pension plan $114,000; RESP $51,100; residence $330,000. Total: $1.13-million

Monthly disbursements: Property tax $285; utilities $310; home insurance $85; maintenance $300; furniture, appliance replacement $115; garden $50; transportation $605; groceries $1,200; child care $35; clothing $320; gifts $100; charity $250; vacation, travel $1,250; dining, drinks, entertainment $975; grooming $250; club memberships $80; pets $365; sports, hobbies $500; subscriptions, other $75; dentists, doctors $75; drugstore $15; health, dental insurance $115; life insurance $40; telecom, TV, Internet $245; RRSPs $1,215; RESP $500; TFSAs $3,400; pension plan contributions $1,120. Total: $13,875.

Liabilities: None

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