Fi­nan­cial facelift

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS - DIANNE MA­LEY

A well-off cou­ple are blink­ered by a lack of fi­nan­cial lit­er­acy

Mar­garet and John are well off, but ‘we’re both clue­less when it comes to in­vest­ing our money.’ The lack of in­ter­est could be costly

Mar­garet and John are in their mid-40s with two chil­dren, ages 12 and 16. They have se­nior jobs in me­dia and com­mu­ni­ca­tions, earn­ing a com­bined $244,000 a year.

“We’re fi­nan­cially com­fort­able right now,” Mar­garet writes in an e-mail. But they have lit­tle in the way of re­tire­ment sav­ings be­yond their de­fined-ben­e­fit pen­sion plans, and “we’re both clue­less when it comes to in­vest­ing our money,” she adds. “Nei­ther of us has the time or the in­ter­est to re­ally ex­plore and un­der­stand the mar­kets or our op­tions, but I am start­ing to lose some sleep over this.”

They set up ed­u­ca­tion sav­ings plans for their chil­dren when they were ba­bies, but they are prob­a­bly not ac­cru­ing enough money to foot the en­tire univer­sity or col­lege bill, Mar­garet writes. Their re­tire­ment sav­ings plan con­sists of throw­ing “a few thou­sand bucks into RRSPs be­fore tax time with­out a lot of re­search into how we in­vest it,” she adds. They have $50,000 sit­ting in a sav­ings ac­count at the bank but nei­ther has opened a tax-free sav­ings ac­count.

Their fi­nan­cial goals also in­clude house­hold im­prove­ments and travel.

“Should we bite the bul­let and hire an in­vest­ment ad­viser or plan­ner to whip us into shape on a reg­u­lar ba­sis and keep our in­vest­ments on track?” she asks. “How can we set up a plan that doesn’t re­quire mi­cro-man­age­ment on our part?”

We asked Heather Franklin, an in­de­pen­dent Toronto fi­nan­cial plan­ner, to look at Mar­garet and John’s sit­u­a­tion. Ms. Franklin holds the cer­ti­fied fi­nan­cial plan­ner des­ig­na­tion.

What the ex­pert says

Mar­garet and John are in good fi­nan­cial shape, thanks mainly to their de­fined-ben­e­fit pen­sion plans, but they are a bit be­hind in sav­ing for their chil­dren’s higher ed­u­ca­tion, Ms. Franklin says. They also need a more ef­fec­tive plan for sav­ing and in­vest­ing.

Their top pri­or­ity should be to open tax-free sav­ings ac­counts (TFSAs) at the dis­count bro­ker­age firm where they hold their RRSP trad­ing ac­counts, Ms. Franklin says. As of 2017, they have com­bined TFSA con­tri­bu­tion room of $104,000 – a sub­stan­tial sum.

While TFSAs can be use­ful for short-term goals – Mar­garet has men­tioned land­scap­ing and fix­ing the porch – they also can be ver­sa­tile op­tions for long-term re­tire­ment plan­ning, Ms. Franklin notes. In­vest­ment in­come, in­clud­ing cap­i­tal gains and div­i­dends, earned in a TFSA is not taxed, even when with­drawn. “Since TFSAs are the only true tax-free in­vest­ments, John and Mar­garet are miss­ing a huge in­vest­ment op­por­tu­nity,” the plan­ner says.

She sug­gests they shift some of the cash sit­ting in their bank sav­ings ac­count to TFSAs and in­vest in broadly based and di­ver­si­fied ex­change-traded funds (ETFs) with an em­pha­sis on div­i­dend­pay­ing blue-chip stocks. Al­ter­na­tively, they could con­sider low­cost mu­tual funds such as those of­fered by Mawer In­vest­ment Man­age­ment of Cal­gary or Steady­hand In­vest­ment Funds Inc. of Van­cou­ver, among oth­ers.

If in­stead their goals are short term, they should be matched by suit­ably short-term in­vest­ments such as sav­ings ac­counts or guar­an­teed in­vest­ment cer­tifi­cates, the plan­ner says.

Mak­ing fur­ther con­tri­bu­tions to their RRSPs is not es­sen­tial at this time.

The cou­ple’s pen­sion plans, which can be viewed as the fixed­in­come por­tion of their re­tire­ment sav­ings, she adds. John will be en­ti­tled to a pen­sion of $45,000 a year at the age of 65, while Mar­garet will get $85,000 (partly in­dexed to in­fla­tion).

The nearly $134,000 they have in their RRSPs could be bet­ter in­vested, the plan­ner says. As it is, they hold mu­tual funds with high man­age­ment ex­pense ra­tios that are “hand­i­cap­ping the per­for­mance of their in­vest­ments.” They also hold some GICs. John and Mar­garet could switch to low-cost ETFs that track blue-chip div­i­dend-pay­ing stocks or to low-fee mu­tual funds, Ms. Franklin says.

To save for their chil­dren’s higher ed­u­ca­tion, Mar­garet and John have been con­tribut­ing to a schol­ar­ship trust. These are group RESPs that in­vest only in bonds and term de­posits and have more re­stric­tive rules on with­drawals. But the GICs and bonds held in the schol­ar­ship trust will not pro­vide the growth nec­es­sary to fund their chil­dren’s post-sec­ondary ed­u­ca­tion, she says.

Ms. Franklin sug­gests Mar­garet and John open a self-di­rected RESP at their bro­ker­age firm and make fur­ther con­tri­bu­tions to it in­stead of the schol­ar­ship trust. That way, they can in­vest in stocks as well as bonds with a view to earn­ing a higher re­turn.

To sim­plify their sav­ings and in­vest­ment plan, Mar­garet and John could put their sav­ings on auto pi­lot by set­ting up au­to­matic with­drawals from their pay that could be de­posited in the dif­fer­ent ac­counts each month, the plan­ner says.

Fi­nally, John and Mar­garet need to re­al­ize that no one will take more of an in­ter­est in their fi­nan­cial well-be­ing than them­selves, Ms. Franklin says. They could start by tak­ing the time to im­prove their fi­nan­cial lit­er­acy. “This is a nec­es­sary step in the right di­rec­tion and an im­por­tant life skill.”

Want a free fi­nan­cial facelift? E-mail fin­facelift@gmail.com. Some de­tails may be changed to pro­tect the pri­vacy of the per­sons pro­filed.

JEN­NIFER ROBERTS/THE GLOBE AND MAIL

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