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By ANDREW ALLENTUCK
Special to The Globe and Mail
Report on Business
Saturday, May 24, 2008
In Ottawa, a couple we'll call Jack, 31, and Vanessa, 30, plan to marry later this year. Both are established in their careers: Jack as a manager in the telecom industry and Vanessa as a federal civil servant. Their combined incomes currently total $164,000 a year.
Adrian Mastracci, “fee-only” portfolio manager at
KCM Wealth Management in Vancouver, says, "Their goals will soon place higher demands on their finances."
Frugal and forward looking, they want to buy a house and start a family. But there is a problem. Jack invests emotionally while Vanessa has assembled a portfolio of mutual funds sold by her bank. The investments have not met their expectations.
"We would like to understand the feasibility of buying a home and how and when we can retire," Vanessa explains.
WHAT OUR EXPERT SAYS
Facelift asked Adrian Mastracci, a financial planner and portfolio manager who heads KCM Wealth Management Inc. in Vancouver, to work with the couple. "They are prepared to make the financial decisions today to improve their prospects," he explains. "Their goals will soon place higher demands on their finances."
The couple's list of financial requirements boils down to building up a $25,000 fund for their wedding, buying a house and developing their portfolio of investments so they can have a retirement income of $80,000 a year before tax in 2008 dollars. Even for accomplished professionals, it is a substantial and costly list.
Jack and Vanessa have a retirement base in Jack's group registered retirement savings plan and Vanessa's federal government defined benefit pension plan. Their RRSPs currently total $149,300. Vanessa estimates the capital value (or commuted value) of her pension at $36,000. Jack also has $88,500 of non-registered assets. They have $28,500 in cash as well as a car worth an estimated $17,000.
Their salaries and various assets will support their financial needs if they can improve the returns on their investments.
Jack's investment technique appears to be one of buying winners and holding them. This is a form of momentum investing, a risky style that demands a great deal of management. Stocks that zoom up do not necessarily hold their high valuations and many of Jack's picks were dot-com companies that have collapsed. He failed to take profits when he could. Some of his shares are down as much as 80 per cent from their purchase price.
But he does have some winners like Apple Inc. and Potash Corp. Over all, he has done a little better than break even.
Jack and Vanessa need a structure for attaining financial goals. Wedding costs come first. They already have $18,700 in a wedding account. They can add some money from their $9,800 cash account to reach their $25,000 goal, Mr. Mastracci says.
Then they should expand their cash account to provide a short-term emergency fund to cover three to six months of living costs of about $3,000 a month. They can use the Tax-Free Savings Accounts proposed in the March, 2008, federal budget. Money put into a TFSA is tax-paid, but once in, there are no further taxes. Withdrawals from the fund are also to be tax-free. The new rules will allow $5,000 per person to be sheltered each year, beginning in 2009.
Jack and Vanessa can set up a down payment fund for their house by converting $48,500 in accounts with their stockbroker to short-term deposits or treasury bills. They can also borrow up to $20,000 each from their RRSPs from the Home Buyers' Plan. A principal residence can be sold without capital gains tax. It's an investment that's hard to beat. They want a second car, but they should wait, the planner says. It is not a priority.
Retirement budgeting for a couple three decades from ending their careers is speculative. It is premature to attempt to set a value on Vanessa's federal government pension, especially if she takes several years off to have a family. But if one assumes that Jack and Vanessa contribute a total of $15,000 a year, mainly to Jack's RRSP, and that funds within the account grow at 6 per cent a year, then they would have $2,040,000 in their RRSPs when Jack is 61. If the funds continue to generate 6 per cent each year, that capital would produce $122,400 a year indefinitely.
Assuming Jack and Vanessa qualify for 80 per cent of the maximum 2008 Canada Pension Plan benefit of $10,615 a year, each would receive $8,492 a year. Old Age Security benefits, currently $6,028 a year, would be payable at age 65. Their total income would be $151,440. The OAS clawback, which begins at $64,718 in 2008, would be likely to reduce their income. All sums are in 2008 dollars.
The couple's retirement income goals would easily be met, the planner says. Indeed, he notes, with no work-related commuting costs, retirement savings, employment insurance and CPP deductions from their paycheques, they would probably have more disposable income than they have now.
The couple's forays into stocks and mutual funds have been more enthusiastic than successful, Mr. Mastracci notes. Once their mortgage is paid off and their RRSPs are topped up, they can build up their non-registered investments, he adds.
"I think that if this couple can focus their considerable talents on their financial issues, they will do well," Mr. Mastracci says. "If they study stocks and bonds, they can become strategy savvy. Then they can make their own investment decisions."
"It is reassuring to hear from an expert that we are heading down the right path," Jack says. "His opinion is unbiased because he has not been trying to sell us anything."
Client situation
THE COUPLE
Jack, 31, and Vanessa, 30, live in Ottawa.
THE PROBLEM
Couple needs to lay out a life financial strategy.
THE PLAN
Adjust cash flows to match priorities.
THE PAYOFF
A reasonable prospect for secure family life and retirement.
NET MONTHLY INCOME
$8,470.
ASSETS
RRSPs $149,300, wedding account $18,700, cash $9,800, non-registered stocks $88,500, Vanessa's pension $36,000, car $17,000. Total: $319,300.
MONTHLY EXPENSES
Rent $825, food $400, household $150, entertainment $100, clothing $200, RRSP $447, student loan $250, apartment insurance $26, Internet & phones $122, charity & gifts $50, travel $400, miscellaneous $440, savings $5,060. Total: $8,470.
LIABILITIES
Student loan $4,700.
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