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By ANDREW ALLENTUCK
Special to The Globe and Mail
Report on Business
Saturday, November 01, 2008
In Quebec, a couple we'll call Marc, 32, and Marjolaine, 34, are living somewhere between the modest circumstances that accompany student life and the prosperity they hope to achieve when Marc gets his master of arts next year. They have no children.
Adrian Mastracci, “fee-only” portfolio manager at
KCM Wealth Management in Vancouver, says, “At this stage, the exercise is more about targeting goals and identifying what it will take to attain them.”
Their combined gross annual incomes total $61,000, virtually all of it earned by Marjolaine, who supports Marc. She has built up $56,800 in various mutual funds and retirement accounts. Marc has $6,700 in his REER (régimes enregistrés pour la retraite, which have much the same rules as for RRSPs) and they have a substantial amount of cash. Their condo has an estimated market value of $130,000. Their problem is how to pay off debts of $81,000 and make some financial plans for their future.
WHAT OUR EXPERT SAYS
Facelift asked Adrian Mastracci, a portfolio manager and fee-only financial planner who heads KCM Wealth Management Inc. in Vancouver, to work with Marc and Marjolaine. He notes that they are frugal. "They started a family budget two years ago and they try not to live beyond their means," he explains.
Marjolaine puts $300 monthly into her retirement savings. She and Marc hope that in five years they will be able to afford an annual trip and increase contributions to their retirement accounts. For now, however, they are focused on debt management and saving $75,000 for a house down payment to add to the $71,000 equity in their condo. When they retire, they would like to have a pretax income of $100,000.
Financial planning for a young couple is uncertain, the planner notes. The job and income that Marc will develop are not known. At this stage, the exercise is more about targeting goals and identifying what it will take to attain them than in developing a road map to achieve those goals, he adds.
If Marc and Marjolaine each work to age 65, they would qualify for Quebec Pension Plan benefits that are currently $10,615 a year. They would also qualify for Old Age Security, currently $6,204 a year.
They would then need $66,360 from their own capital to add to their total public pension income - $33,638 a year - to bring the sum to $100,000. It would take $3.4-million of savings to generate that annual income. Most of this money will be needed just to overcome inflation running at an expected rate of 3 per cent a year. At that rate, in a quarter century when Marc is 57 and Marjolaine is 59, it will take $210,000 to equal $100,000 in 2008 dollars, Mr. Mastracci notes.
Saving $3.4-million will require putting away $70,000 a year if the couple can achieve 6-per-cent nominal growth, $54,000 if they can achieve growth of 8 per cent a year. Either savings goal is unattainable on their present income, but would be possible if Marc and Marjolaine were to thrive in their careers and be rewarded with pretax total incomes of perhaps $200,000 a year, Mr. Mastracci says.
These future capital and income numbers are abstractions at this point in the couple's life. For now, they need a strategy to cope with their debts and day-to-day financial needs.
The first need is to pay down the mortgage on their condo, which bears a 5.95-per-cent interest rate. They pay $485 a month to service it. The mortgage amortization has 15 years remaining. If Marc and Marjolaine increase their payments to $985 a month, which they can easily do out of their $820 in monthly savings, they will pay the mortgage off in five years and 11 months and save $19,033 in future interest charges. They could also cash out some of their non-registered investments to pay down debts, though that would require them to predict market trends - tough at any time and nearly impossible in a period of extreme volatility.
His student loan principal can be repaid when Marc gets a job. Marc is not paying interest at this time. The loan has a 5.5-per-cent interest rate and payments will begin in May, 2009, by agreement with the lender.
Making investment plans for decades to come is difficult to do. Most of the advice boils down to common sense: diversify and keep fixed-income asset levels in line with age - 30 per cent bonds in their 30s, 40 per cent bonds in their 40s, etc. They should also avoid high-fee mutual funds, which may have excellent short-term performances but tend to underperform low-fee exchange-traded funds, the planner notes. ETFs also tend to be more efficient, for they are fully invested in their defined asset groups and can be traded at any time, just like stocks or bonds, he adds.
The best and final advice for a sound financial future is to study capital markets.
Even if Marc and Marjolaine leave stock and bond picking to others, they need to know how to judge the performance of the people they pay to manage their money. "What works in any one year may not work in another. But an investment philosophy built on an understanding of markets and money can endure and help to generate a secure financial life," Mr. Mastracci says.
Client situation
THE PEOPLE
Quebec couple, 34 and 32.
THE PROBLEM
Modest income makes it difficult to plan retirement and pay off loans.
THE PLAN
Use high savings rate to accelerate mortgage payments and reduce interest cost.
THE PAYOFF
More disposable income.
NET MONTHLY INCOME
$4,368
ASSETS
Condo, $130,000; Marjolaine's REER & investments, $56,800; Marc's REER, $6,700; cash, $15,000. Total: $208,500.
MONTHLY DISBURSEMENTS
Mortgage, $485; condo fees, $203; utilities, $175; food, $400; restaurants, $100; pet, $100; REER contribution, $300; car, gas and miscellaneous, $250; bus, $75; dental, $280; home insurance, $30; travel, $500; renovations, $250; miscellaneous, $400; savings, $820. Total: $4,368.
LIABILITIES
Condo mortgage, $59,000; student loans, $20,000; miscellaneous, $2,000. Total: $81,000.
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