Cut­ting in­vest­ment fees could be key to free­ing up miss­ing $10K per year

National Post (Latest Edition) - - FINANCIAL POST - an­drew al­len­tuck Email an­drew.al­len­tuck@gmail.com for a free Fam­ily Fi­nance anal­y­sis Fi­nan­cial Post

In Al­berta, a woman we’ll call He­len, 62, makes a good liv­ing as a health-care pro­fes­sional. She brings home $6,400 per month and has a fully paid for town­house with an es­ti­mated value of $280,000 and other as­sets of $456,000 plus a de­ferred profit shar­ing plan worth about $117,000. It’s a tidy fi­nan­cial pic­ture, but He­len, mind­ful of the fu­ture, wor­ries that her as­sets and her Old Age Se­cu­rity and Canada Pen­sion Plan ben­e­fits will not sup­port her goal of hav­ing $50,000 per year af­ter tax in re­tire­ment. She is keenly aware that she has only three years to go to the end of her ca­reer. That’s the time left to get her fi­nan­cial fu­ture in or­der.

“I want to work to age 65,” He­len ex­plains. “What will my re­tire­ment fi­nances look like in three years? Will I have the money for a new or newer car? For other things like travel?”

Fam­ily Fi­nance asked Eliott Ei­nar­son, a fi­nan­cial plan­ner with Ex­po­nent In­vest­ment Man­age­ment Inc. in Win­nipeg, to work with He­len. “If she works an­other three years, her re­tire­ment sav­ings will be suf­fi­cient for a long and fi­nan­cially se­cure re­tire­ment,” he says. “She will be much bet­ter off if she can also raise her in­vest­ment re­turns.”

PRESENT IN­COME

The base for He­len’s re­tire­ment is her present an­nual in­come of $109,435 be­fore tax plus quar­terly bonuses of $2,667. Her spend­ing is mod­est, about $3,300 a month with the bal­ance of her take home in­come, $3,100, go­ing to sav­ings — $700 per month to her Reg­is­tered Re­tire­ment Sav­ings Plan and $2,500 per month to fill up Tax-Free Sav­ings Ac­count space. In ad­di­tion, she adds six per cent of her in­come at source, $600 monthly, to a De­ferred Profit Shar­ing Plan. It is matched by her em­ployer. She has no debts.

He­len’s is­sues are twofold: First, she has ques­tions about the tim­ing of her re­tire­ment. She won­ders if she will be able to gen­er­ate her tar­get of about $4,200 per month as early as age 63. She has no de­fined ben­e­fit work pen­sion. There­fore, her RRSP and TFSA ac­counts will be crit­i­cal to achiev­ing her tar­get in­come.

Sec­ond, she is con­cerned that she is pay­ing too much in in­vest­ment man­age­ment fees, and won­der if she can free up more money to spend by re­duc­ing them. Her fees are high be­cause she has been rel­a­tively pas­sive in buy­ing mu­tual funds that are of­fered to her.

RE­TIRE­MENT IN­COME

If He­len con­tin­ues to add $700 per month or $8,400 per year to her $434,000 RRSP and if the ac­count grows at three per cent per year af­ter in­fla­tion, she would have $500,986 in 2018 dol­lars in her RRSP in three years at age 65. In ad­di­tion, if she con­tin­ues to have six per cent of her in­come go to her DPSP plan, which is matched by her em­ployer, for three more years at three per cent a year af­ter in­fla­tion, it will grow from $116,764 to­day to $172,100, also in 2018 dol­lars, Ei­nar­son ex­plains.

Adding up her in­vest­ment in­come, at re­tire­ment at age 65, she would have $673,086 of tax­able as­sets. That cap­i­tal, if spent over a 30-year pe­riod to He­len’s age 95 with a three per cent an­nual re­turn af­ter in­fla­tion, would gen­er­ate $33,340 per year. Add in CPP at $13,610 and OAS at $7,210 per year and she would have an­nual to­tal tax­able in­come of $54,160. Af­ter aver­age tax of 17 per cent, she would have $44,050 per year to spend.

Fi­nally if He­len adds $2,500 per month to her $22,000 TFSA ac­count, then in about 15 months, the ac­count will have grown to its 2019 max­i­mum cu­mu­la­tive con­tri­bu­tion limit of $63,000. In an­other 15 months, when He­len is 65, with $5,500 an­nual con­tri­bu­tions for two years for her 64th and 65th years, the TFSA would have a bal­ance of $85,437. That sum, if an­nu­itized to pay out all in­come and prin­ci­pal for the next 30 years, would gen­er­ate $4,360 a year. That would give her a to­tal of about $48,400 to spend, close to her $50,000 an­nual tar­get in­come.

CLOS­ING THE GAP

To gen­er­ate cash, He­len could trim a few ex­penses, though her bud­get is al­ready rather lean, or cut in­vest­ment man­age­ment fees. With about $573,000 of fi­nan­cial as­sets to be man­aged, He­len could ob­tain in­de­pen­dent as­set man­age­ment ser­vices for one to one and a half per cent per year. Her present mu­tual fund in­vest­ments have fees av­er­ag­ing 2.6 per cent on eq­uity as­sets. As­sum­ing that she will pay th­ese fees with­out dis­counts, she would be charged $14,890 per year. If she were to pay one per cent of as­sets un­der man­age­ment, her fees would be about $5,730 a year. The dif­fer­ence, $9,160 per year, would not just close the gap, but would push her dis­pos­able in­come to nearly $58,000 per year. Higher ad­vi­sory fees would re­duce her net re­turn. If she were to pay as much as 1.5 per cent, her man­age­ment cost would be $8,595, still a re­duc­tion from es­ti­mated present fees for a po­ten­tial an­nual sav­ing of $6,295. If He­len chooses to take con­trol of her in­vest­ments, she could re­duce the amount her man­ager han­dles and cut fees in that fash­ion, Ei­nar­son says.

There would also be clar­ity, for un­like some mu­tual fund dis­tri­bu­tions, which may in­clude re­turns of cap­i­tal, He­len would have trans­par­ent ac­counts with more tax vis­i­bil­ity, would have trades for her needs rather than the needs or pref­er­ences of other unit hold­ers who may want cash in a down­turn or have a de­sire for risky stocks when mar­kets are ris­ing. Her man­ager would trig­ger sales to re­al­ize cash or make in­vest­ments based on her own life ex­pectancy, for ex­am­ple. The al­ter­na­tive to study cap­i­tal mar­kets and grow into the task of man­ag­ing her fi­nan­cial as­sets is hers. She has the ap­ti­tude to do it, Ei­nar­son says.

Three years more work and im­proved in­vest­ment re­turns will give her a se­cure foun­da­tion in her RRSP, her De­ferred Profit Shar­ing Plan, and in what is now go­ing to be an ag­gres­sively funded TFSA, Ei­nar­son notes. That’s the key to the dis­cre­tionary spend­ing she wants.

“He­len is bright, fo­cused, and fully in charge of her fu­ture,” Ei­nar­son says. “If she makes the ad­just­ments we have sug­gested, her fu­ture can be ful­fill­ing in that she has the base for a com­fort­able life af­ter work.”

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