Professionals with good salaries, Jean and John face a conundrum that can afflict people at all income levels who have money in the bank but don't know what to invest in.
He is 55, she is 44. She earns about $105,000 a year working in the public sector and has a defined-benefit pension plan. He earns about $135,000 in the private sector and has a defined-contribution plan. They live modestly, splurging only on vacations, have no children and are looking to retire early.
"We find ourselves in a quandary right now," Jean writes in an e-mail. They have virtually no debt, "some decent savings of about $640,000" and a mortgage-free house in a small Ontario town valued at about $600,000.
Their problem is that they don't know what to do with their money, which is largely in bank savings accounts. Because John wants to retire in about five years, he is not keen on risk. Jean, being younger and planning to work longer, would prefer a more balanced approach to investing.
"So we are at different stages and as such have different risk tolerance," Jean writes. "We don't want to make any missteps with our hard-saved money. But there's got to be something better than the 3 per cent high-interest account the bank is offering."
We asked Jason Pereira, a financial planner at Woodgate and IPC Securities Corp. of Toronto, to look at Jean and John's situation.
What the expert says
Jean and John will have enough saved up by the time they retire that even if they make nothing on their investments, their savings will last a lifetime, Mr. Pereira says. Still, they could arrange their investments better.
After talking to Jean and John, the planner found John's tolerance for risk was below average while Jean's was above average. "The conclusion from our discussion was that John's retirement savings (including his registered pension plan) should be invested in a professionally managed income portfolio of 60 per cent bonds and 40 per cent stock," Mr. Pereira says. The forecast rate of return would average 5.6 per cent.
Jean's funds would be invested in a professionally managed balanced portfolio of 40 per cent bonds and 60 per cent stock with a forecast rate of return of 6.4 per cent. Jean would shift her holdings to an income portfolio once she quits work. They could consider corporate class mutual funds for their non-registered account, the planner says.
"They can afford to take less risk if they choose."
The planner suggests they keep $40,000 in a savings account as an emergency fund.
Jean and John have been making little or no contributions to their personal RRSPs, Mr. Pereira notes. He suggests John contribute $40,500 a year to max out his RRSPs before retiring, and contribute the maximum $5,500 a year to his tax-free savings account for the rest of his life.
Jean should contribute $21,000 a year to her RRSP until all the carry-forward room has been used up (in three years), and the maximum thereafter. Like John, Jean should contribute the maximum to her TFSA for the rest of her life.
Mr. Pereira's cash flow analysis shows the couple has money to spare. When John retires in 2022, Jean's income, plus John's Canada Pension Plan benefits, will be enough to sustain them. He suggests they both start drawing CPP benefits at age 60.
By the time Jean retires at age 60, their savings will total about $2.6-million, the planner estimates: RRSPs $1,262,600; his locked-in RRSP $422,460; TFSAs $508,590; and their non-registered investments $371,280.
As time goes by, the couple will probably increase their spending from their $80,520 after-tax target, Mr. Pereira says. Even so, they will have a substantial estate left at Jean's age 95 – $12-million based on the planner's assumptions – so "they should give serious thought as to who gets what, and how much, and consider charitable strategies," the planner says.
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The people:
John, 55, Jean, 44
The problem:
How to invest their savings.
The plan:
Have two separate, professionally managed portfolios, one tilted toward income for John and the other with 60 per cent stocks for Jean. Catch up on unused RRSP and TFSA room.
The payoff:
Portfolios based on their own risk tolerance.
Monthly net income:
$16,595
Assets:
Joint cash in bank $209,000; his cash in bank $23,000; her cash $100,000; his term deposits $11,000; his stocks $17,000; his TFSA $44,000; his RRSP $101,000; market value of his DC plan $163,000; estimated present value of her DB plan $93,000; residence $600,000. Total: $1.36-million
Monthly disbursements:
Property tax $500; utilities $280; insurance $70; maintenance $200; garden $100; fuel $550; other transportation $385; groceries $600; clothing $350; gifts $150; charitable $375; vacation, travel $750; other discretionary $100; drinks, dining, entertainment $450; grooming $100; sports, hobbies $150; subscriptions $100; other personal $110; telecom, TV, Internet $200; car loan $645; pension plan contributions $795. Total: $6,960 Surplus : $9,635
Liabilities: Car loan: $7,740
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