YOUR STASH
Three retirement plans and why they work. Plus, 15-year mutual fund review.
RRSPs, TFSAs, stocks, etc. are not for everyone.... With clients in their 30s, I try to keep them from falling into heavy unnecessary debt and to focus on long-term investing. — Fabio Campanella, chartered accountant and certified financial planner
long-term FOCUS
Colby is a 35-year-old IT consultant at a major bank and Kate is a 32-year-old payroll clerk at a mid-sized company. They’re expecting their first child in six months. Having little interest in putting money in stocks, GICs or other traditional investments, they don’t have registered retirement savings plans or tax-free savings accounts.
They are, however, fully participating in their employer-sponsored pension plans (their employers match half of contributions up to 5% of annual earnings), with the savings invested in an indexed bond portfolio. They save about $1,500 a month after all expenses — that includes discretionary expenditures such as vacations — and are hoping to put down 20% on a $300,000 rental property. They’re also using cash in the bank to make one-time annual lump sum payments on the mortgage of their home (they’re allowed to double up on payments and make one-time payments of up to 10% of the balance).
To cover the family’s needs, they each have 20-year term life insurance policies worth $750,000; and Colby, an only child, is expecting to inherit his parent’s Toronto home and a triplex that his family rents out.
Their goal is to retire with no debts and enough rental income to sustain a comfortable lifestyle.
Annual gross salary $120,000 (Colby) and $45,000 (Kate) Cash in the bank $60,000 Liquidation value of personal belongings $15,000 Value of home $600,000 Mortgage $420,000 Net worth $255,000
Why does their plan kick butt? “RRSPs, TFSAs, stocks, etc. are not for everyone. There are plenty of people who have amassed substantial wealth without them,” says Fabio Campanella, a chartered accountant and certified financial planner. “Between CPP, OAS and rental income, they should be fine if they stay the course…. With clients in their 30s, I try to keep them from falling into heavy unnecessary debt and to focus on long-term investing.”
The couple could pay off the mortgage on their home in about 15 years; Mr. Campanella suggests that they buy the rental property with a home equity line of credit.
“The rental property is a good idea especially since [Colby] has experience managing his parent’s rental property; however, with their first child on the way it may be better to wait,” he says. “Also, the HELOC would be an ‘investment loan’ and they can deduct the interest on that. The idea would be to use after-tax dollars to pay off their mortgage (which is tax inefficient) and borrow against the home to put the down payment on the rental property.”
diversified plan of action
Howard, a 57-year-old business owner, wants to ensure that his nest egg will see him through retirement, starting in five years. He is using a planning horizon of age 90 and he’d like a before-tax income of $80,000 in retirement.
He will be entitled to CPP, OAS and a $2,400 employer pension starting at age 65 from a previous job. He also owns his $1.85 million Vancouver home outright, but because he has no plans on downsizing, its value is not included in his funding calculations. We assume inflation to be 2.5% and that he will receive an average return on investment of 5% a year.
Annual gross salary $135,000 Current value of RRSP $288,000 TFSA $37,000 Savings $45,000 Taxable account $255,000 Business $260,000 Investment property $425,000 Net worth $1.31 million
Why does his plan kick butt? “Howard has a broadly diversified plan of action. His investments include ETFs, fixed income and incomeproducing real estate. The finances are also well diversified and allocated between registered and non-registered accounts. This allows him the flexibility of choosing where the retirement cash flows come from year to year,” says Adrian Mastracci, a portfolio manager and financial adviser with KCM Wealth Management Inc.
“He is still in his the best earning years.... He can still put away some $20,000 to $25,000 of annual savings for the foreseeable future.”
Given that Howard will require almost $850,000 of investment assets to fund his retirement (above his pensions), he has achieved his retirement goals, Mr. Mastracci says.
“The picture could change if his business cannot be sold. Howard also needs to continue investing diligently and be mindful of inflation, health issues and market risks,” he says.
“We’ve implemented an investment plan seeking income and some growth. It provides comfort within his risk tolerances and investor profile.... Allocating 45% to equities is appropriate and comfortable.”
focused on the right things
Anna is a 42-year-old marketing assistant. Her goal is to retire in 2037 at the age of 65 with an annual after-tax income of $40,000. She is on track to achieve this goal by putting $900 a month into her RRSP with a rate of return of 6% before retirement and then 5% after retirement. We assume that inflation is 2%.
She doesn’t have an employer pension, but she sticks to a household budget and saves 10% of her pre-tax income each and every year toward RRSPs. She uses dollar-cost averaging to add to her investments during both good and bad times. Annual gross salary $55,000 Current value of RRSP $150,000 Value of RESP $18,000 Value of home $435,000 Mortgage $200,000 Net worth $403,000
Why does her plan kick butt? “She’s really focused on doing all of the right things,” says Lise Andreana, a certified financial planner with Continuum II Inc.
Her mortgage is on a 15-year amortization and she makes bi-weekly as well as lump sum payments; she’ll have it paid off well before retirement. “That will give her several years to save more money for her retirement.”
She also gets points for putting money aside for her child’s education. “Parents do too much when they can’t. But this woman is well-prepared,” she says. “She won’t be dipping into her own retirement savings.”