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Amber Bracken/The Globe and Mail

A few years ago, Ruth was teaching at a university, earning good money.

“I worked very hard for 15 years … but was denied tenure in the wake of a cut to postsecondary education in the provincial budget,” Ruth writes in an e-mail. “My income went from $120,000 to zero overnight.” She’s a single woman with two teenage boys and no child support.

Since then, she’s been doing some part-time teaching, earning about $17,000 a year, plus some freelance editing that brings in about $11,000 a year. She’s been renting out rooms in her house to students eight months of the year to make ends meet.

“I’m proud that I managed to keep my house, which required severe belt-tightening and penny-by-penny financial management,” Ruth writes. “It worked.”

It’s unlikely she’ll get another full time job, Ruth adds, because universities are relying more and more on part-time, sessional instructors, and also because of her age. She is 58.

Naturally, Ruth finds it galling to have to keep working for the same university for a fraction of the pay, no benefits and no pension because she is no longer a member of the pension plan. “I would like to know if it will be possible for me to retire from exploitative work when I turn 60.” Her retirement spending target is $42,000 a year.

We asked Robyn Thompson, president of Castlemark Wealth Management Inc., to look at Ruth’s situation. Ms. Thompson holds the certified financial planner (CFP) designation.

What the expert says

Ruth “is mentally operating out of scarcity and insecurity, when in fact she has the freedom of choice,” Ms. Thompson says. “She needs help weighing her options and looking to the future.”

In addition to her mortgage-free house, Ruth has investment assets of about $460,565, too much of which is cash and cash-equivalents. Her tax-free savings account is 100-per-cent cash and equivalents earning 0.5 per cent to 1.5 per cent a year. She has no RRSP.

Ruth did not take advantage of the registered retirement savings plan during her high-income years because she was concerned she would be taxed at a higher rate when she retired. When she needed advice, she went to the local bank branch, where her “adviser” sold her mutual funds.

“The lack of planning to maximize tax-free growth, and the absence of a financial plan to provide clarity and direction, are the two biggest weaknesses in her situation,” Ms. Thompson says. Ruth has no idea what she is paying in fees or how her investments are performing. She doesn’t know whether she will have enough to live on when she retires two years from now. “This lack of planning is costing her significantly in tax-free growth, tax minimization, high mutual-fund fees and peace of mind.”

The mutual funds in her non-registered account have a blended management-expense ratio of 1.74 per cent, high for the value she is receiving, the planner says. Her blended rate of return is 5.3 per cent, in line with the historical rate of return on a conservative portfolio. Ms. Thompson is assuming a 4-per-cent rate of return to be on the cautious side.

Because Ruth is not comfortable managing her own investments, she should look for a discretionary portfolio manager to oversee them, the planner says. That designation is important. Portfolio managers are held to a higher standard than salespeople, in that they have a fiduciary duty to act in their clients’ best interests.

With her level of assets, Ruth would pay in the range of 1.25 per cent to 1.5 per cent annually. That fee should include portfolio management, full financial planning and tax planning, Ms. Thompson says. The portfolio-management fees are usually tax-deductible for non-registered accounts, which comprise the bulk of Ruth’s investments.

Ruth needs to stop using her TFSA as a piggy bank, shifting instead to growth assets to take advantage of the tax-free growth within the account, Ms. Thompson says. Money for living expenses should come from a chequing or savings account instead. Any surplus cash flow should go to the TFSA. Ruth should withdraw money from her non-registered account to make the maximum contribution to her TFSA annually.

The planner suggests Ruth cut her cash holdings to 5 per cent, raise her fixed-income to 65 per cent, and increase her stock allocation to 30 per cent. Her new portfolio should be spread across laddered guaranteed investment certificates; corporate and government bonds or bond exchange-traded funds; solid, income-producing real estate investment trusts; and blue-chip, dividend-paying preferred and common stocks or stock ETFs. “Targeting a conservative return of 4 per cent net of fees, at age 60, her projected non-registered investments will total about $416,190 and her TFSA $67,720, for a total of $483,910."

To minimize sequence of return risk – the risk that withdrawals from her investment accounts will cut the overall rate of return on her portfolio – Ruth should use the distributions from her investments (interest and dividends) for living expenses as much as possible instead of selling assets, Ms. Thompson says.

Next, the planner looks at Ruth’s future income sources. At 60, Ruth will get an indexed defined benefit pension of about $19,300 a year, with a bridge benefit of $3,350 a year to 65. In addition, she will get Canada Pension Plan benefits of $6,180 a year. About $22,500 a year would come from her non-registered savings and investments, for total income of $51,330 a year.

She’ll pay about $9,000 in income tax, leaving her with $42,330 a year, in line with her target. She would stop renting to students and working at that point. Ruth will begin collecting Old Age Security benefits at 65.

As it turns out, Ruth has nothing to worry about. “Ruth is in a position to meet all of her retirement objectives and then some,” Ms. Thompson says. “Her disciplined approach to remain debt-free, take on part-time employment and rent out rooms in her home worked in her favour.”

Finally, Ruth is worried about her children and is considering giving them the family home, where they could rent to students to help pay the bills. The planner weighs Ruth’s plan to borrow against the house to buy a fourplex, costing in the range of $750,000, and live in one of the units. The benefits of an owner-occupied fourplex include the potential for rental income to cover expenses for the entire building and provide positive cash flow, Ms. Thompson says. “But the disadvantages include becoming a landlord, responsible for tax, insurance, maintenance and repairs, advertising, screening applicants, collecting rents and paying legal and accounting fees.” She would likely have to hire a property-management firm, which would add to the expenses.

“Ruth doesn’t need to buy a fourplex to meet her lifestyle needs,” Ms. Thompson says. “She’s looking for a stress-free retirement plan. Getting into commercial real estate as a landlord doesn’t meet that criterion.”

At age 90, Ruth’s projected net worth is estimated at $1.9-million, of which her house will comprise $1.4-million and her TFSA the balance of about $475,000.

Client situation

The people: Ruth, 58, and her two children, 18 and 19.

The problem: Can she afford to quit sessional teaching at 60 and still meet her retirement spending goal? Should she buy a fourplex?

The plan: Weigh the investment property idea carefully so that she understands all the risks. Switch her investments from bank mutual funds to a discretionary portfolio manager who includes financial and tax planning in their annual fee. Quit the part-time university job as planned.

The payoff: Professional investment management, a comprehensive financial plan and no more worrying.

Monthly net income (variable): $3,635

Assets: Cash $23,780; mutual funds $362,430; GICs $74,420; residence $745,500. Total: $1.2-million

Monthly outlays: Property tax $610; home insurance $80; utilities $400; maintenance $250; garden $150; transportation $140; groceries $900; clothing $150; gifts $250; grooming $115; entertainment $120; phones, internet $170; savings $300. Total: $3,635Any surplus goes to spending or saving.

Liabilities: None

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Some details may be changed to protect the privacy of the persons profiled.

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