Be sure to fund your lifestyle, as well as retirement
Financial Post June 27, 2009
The client: Ben just hit age 50; Jen is 48. They’re a high-earning couple: both incomes are in the 46% tax bracket. They have a solid net worth, and just put three kids through university. They own their home, which holds $1-million in equity. They have $10,000 in non-registered funds and another $10,000 in credit-card debt.
The problem: Ben is leaving his corporate job to do some academic work. Now that the kids have graduated, he is starting to look toward retirement. He will still make good money, but Ben is a nervous guy. His volatile portfolio, composed of 80% equity and 20% fixed income, doesn’t help.
The fix: Jeanette Brox is a certified financial planner in Toronto and a senior financial consultant at Investors Group. “There is one thing I preach to all my clients: You need to have non-registered assets outside of your RSPs and the equity in your home. I call these “lifestyle funds.” Ben’s portfolio was mostly in his RRSP. “If in the next six to 10 years the couple comes to me and says, ‘We need $40,000 for a car, or for a wedding,’ they will have no choice but to take it out of their RSPs,” Ms. Brox says, “and the tax liability would be huge.”
First, Ms. Brox cashed in the $10,000 they had in nonregistered funds to wipe out the credit-card debt. She restructured the RRSPs to a more palatable 40% fixed, 60% equity mix. Next, she took out a line of credit against the house: “Their home is worth $1-million in equity,” she says, “so the sky is the limit when it comes to credit. But I don’t believe in maxing people out.”
She set up a line of credit that gives them the ability to borrow as much as $250,000. Ms. Brox used $100,000 to create new non-registered funds. The non-registered portfolio is a long-term plan for any life events that pop up in the next six to 10 years.
“It’s a forced savings plan,” Ms. Brox says. “I call it the rich man’s poor savings plan.” The added bonus: Because the money is being used to invest, the couple gets to write off the loan.
The portfolio: To provide peace of mind in case of short-term emergencies, Ms. Brox put 10% ($10,000) of the $100,000 fund into a premium Canadian money market account, essentially an emergency fund. She put them on a fixed monthly payment to pay down the line of credit. The composition of the rest is weighted heavily toward Canadian funds.
“There is some speculation that Canada is in recovery mode,” Ms. Brox says. “I choose the Fidelity Canadian Equity Class Fund because there is a large component of natural resources: Canada is solid in the resource sector.” The IG Dividends fund was chosen because it holds bank stocks, utilities and insurance companies. “These businesses are cash-rich. They don’t have an inventory of obsolete computers or cars to worry about — they’ve got liquidity.” Besides, she says, the banks are immensely profitable. Why wouldn’t you want in on the action?
THE NEW PORTFOLIO
Non-registered mutual fund portfolio:
-20% IG Canadian Small Cap Class
-20% IG AGF Global Equity Class
-25% IG Fidelity Canadian Equity Class
-25% IG Dividend Fund
-10%IG Premium Money Market
RRSP mutual fund portfolio:
-20%IG Income Portfolio (consists of Canadian bonds, government bonds, and mortgage and short-term income funds.
-20% iProfile Fixed Income Pool (consists of Real Property fund, Canada bonds, provincial bonds, IG Putnam U. S. High-Yield Income)
-20% IG AGF Canadian Growth fund
-20%Beutel Goodman Small Cap
-20% IG European Mid-Cap Equity