“Financial Checkup” is an ongoing series that discusses financial planning options. In this issue, Investment Executive speaks to two advisors from Assante Financial Management Ltd. : Denzil Feinberg, a certified financial planner and registered financial planner in Ottawa; and Sheila Munch, a CFP in Oshawa, Ont.

The Scenario: Rolf, a 53-year-old automobile assembly worker with General Motors Corp. in Oshawa, Ont., is worried about his job. He has already had to face four weeks without pay through a temporary layoff — and he knows he could lose his job entirely. Now, he is wondering if his 60% pension with medical benefits will be honoured.

Rolf earns $70,000 a year. His wife Kathryn, 48, works in a grocery store, earning $30,000 a year; she has no pension.

Both Rolf and Kathryn received inheritances from their deceased parents in 2006. Rolf has $200,000 in non-registered assets that are invested in conservative balanced mutual funds, while Kathryn has $100,000 in non-registered assets and $80,000 in RRSP assets, all in fixed-income.

The two have a lot of debt, however. There’s a $25,000 personal loan for Kathryn, $15,000 in credit card debt for Rolf, $50,000 on a home-equity line of credit, car loans with GM of $5,000 each on three-year old cars and a $200,000 mortgage on their home, which they bought in 2007 for $400,000.

The couple, who have three independent children, want to know what they should do to get their financial situation in order and prepare for the future. They are prepared to move, to rent rather than own a house, to work at any jobs they can get if Rolf’s job disappears and to live on a stringent budget in order to save money for retirement. They believe their retirement income requirements will be 85% of what they needed when working.



Recommendations: Munch, who works with GM employees, is reassuring. She examined three possible scenarios, under all of which the couple will have enough to meet their retirement income goals to age 95, assuming Kathryn continues to work until she turns 65:

> If GM survives and Rolf works there until 65, he will have a fully indexed pension of about $33,000 in today’s dollars and survivor benefits of 60%.

> If GM survives but Rolf, who is eligible for full retirement as he has worked for more than 30 years at GM, is laid off and decides to retire, he will receive about $16,000 a year, which is not indexed to inflation, from GM to age 65 in a special allowance. But he will also receive a fully indexed pension of about $24,000 in today’s dollars, starting when he is laid off.

> If GM goes bankrupt, Rolf could still retire. He would get an unindexed pension of $19,000. Part of this would come from Ontario’s Pension Benefits Guarantee Fund because GM’s pension plan is underfunded.

Munch has assumed 3% inflation, including 3% capital appreciation on the house, and an annual average return of 6.8% after fees based on a balanced portfolio of 40% fixed-income/60% equities. Given those assumptions, in the first scenario, her projections show an estate of about $2 million in today’s dollars, including real estate; $1.7 million in the second scenario; and $1 million in the third scenario.

Feinberg looked at what will happen if GM survives but Rolf is laid off and takes a job at another company. Given Feinberg’s assumptions — a 40% fixed-income/60% equities asset mix, an average annual return of 5% and inflation of 3% — his analysis shows that if Rolf makes $50,000 a year at the new job until age 65 and earns an unindexed pension of $14,000, the couple will have enough money to get them through until Kathryn is 95 — and probably leave a decent estate. Feinberg doesn’t put a figure on the size of the estate; he thinks it’s too far in the future to be meaningful.

Both Feinberg and Munch recommend the couple pay off Rolf’s credit card debt and Kath-ryn’s personal loan out of non-registered assets immediately. But they say the car loans, which are financed at 1.9%, should be left in place.

Feinberg suggests paying off the line of credit as well, with each spouse paying $25,000 from their non-registered assets. As for the 200,000 mortgage, Rolf could pay 10%, or about $20,000, on the anniversary of the mortgage this year. Kathryn could then pay $20,000 on the mortgage anniversary date in 2009 and make another $20,000 payment in 2010. Feinberg suggests the couple continue to make additional payments on the mortgage each year, to the extent that they can afford to do so, until the mortgage is paid off.

@page_break@Munch is less aggressive in her debt-reduction recommendations. But she does recommend using whatever they have left after living expenses each year to reduce their liabilities. She recommends starting with the line of credit rather than the mortgage, which has a lower interest rate.

Neither Feinberg nor Munch thinks the couple needs to downsize their residence at this time, although that may need to be reconsidered if they overspend or if Kathryn loses her job.

Both advisors say Kathryn should continue to make maximum RRSP contributions. They also recommend that Rolf set up an RRSP to use his unused RRSP contribution room of about $100,000.

Feinberg thinks Rolf should contribute the full $100,000 this year to shelter the income earned from taxes immediately. Feinberg notes that the tax deduction for RRSP contributions can be used any time in the future at the discretion of the taxpayer. Thus, Rolf should consult a tax specialist and look at his tax situation each year to determine the amount of the deduction to be used.

Munch suggests Rolf decide each year how much he puts into the RRSP that year, depending on his tax situation. She suggests “in kind” contributions to avoid the need to sell securities.

Both advisors also recommend that Rolf apply $2,000 of any pension income he receives to Kathryn so that they can both get the $2,000 pension tax credit.

Feinberg strongly recommends Kathryn apply the pension tax credit to withdrawals from a RRIF once she turns 65. This would free $14,000 of future RRIF withdrawals from taxation, or reduce taxes in the estate of the partner who dies last.

Munch thinks the couple should defer withdrawing money from their RRSPs as long as possible and use non-registered assets if additional money is needed.

To get a better job, Rolf could also use RRSP money for training not provided by the Employment Insurance program. Withdrawals from an RRSP up to $10,000 a year under the Lifetime Learning Plan are not taxed. But withdrawals — the maximum allowed is $20,000 — must be repaid to the RRSP.

Feinberg recommends that Kath-ryn take out disability insurance that would pay $1,500 a month in tax-free benefits up to five years. The cost would be about $90 a month, possibly cheaper. Various Canadian chambers of commerce, he notes, offer insurance at very reasonable rates.

Rolf should take out a 10-year term life insurance policy for $1 million, Feinberg adds, to provide additional assets for Kathryn if Rolf should die before greater financial stability is achieved. The cost would be about $3,000 a year and, if it were to come into effect, Feinberg recommends Kathryn use part of the money pay off the mortgage and invest the rest.

Munch agrees that Rolf taking out life insurance would be a good move, particularly in the event that GM goes bankrupt. She suggests a $200,000 policy. The cost would be about $700 a year for a 10-year term policy.

Feinberg says critical illness insurance of $70,000 for Rolf and $35,000 for Kathryn would cost about $110 and $65 a month, respectively, given that they are non-smokers in good health. If they prefer, they could convert to a higher-benefit policy later when their income is more certain. Feinberg would not suggest a long-term care policy before age 65, but if the couple wanted to take out a policy earlier, he would discuss it with them.

Munch doesn’t think that either CI or LTC are major priorities at this point, given Rolf’s and Kathryn’s immediate needs. But Munch agrees that such policies should be discussed and taken out if the clients want the comfort of that insurance.

Munch suggests that Rolf and Kathryn consider putting all their non-registered assets into a joint account with survivor rights. She notes, however, that if this is done, the assets will become community property and be treated as such should they separate or divorce.

Feinberg, on the other hand, suggests the assets be kept separate, but that the couple keep records of when the inheritances were used to pay down debts, in case they do have marital problems in the future.

Both advisors suggest that the couple begin shifting their target asset mix toward 40% fixed-income/60% equities from their current 66% fixed-income/34% equities. Both advisors also agree that the fixed-income assets should be mostly in the RRSPs and that the equities should be in the non-registered accounts because of the tax treatment of dividends and capital gains.

Munch suggests the equities component be 24% Canadian, 19% U.S. and 17% international. She favours “managed solution” mutual funds or pools because she believes professional money management produces better long-term returns than indexed or exchange-traded funds. She would leave the sector mix up to the money managers.

In the fixed-income component, Munch recommends a liquid emergency fund equal to three to six months of expenses and suggests that $60,000 be put into very secure, low-volatility securities in case Kathryn loses her job.

Feinberg suggests an equities asset mix of about 30% Canadian, 20% U.S. and 10% international. He suggests balanced mutual funds but adds that pools, wrap programs and ETFs are all good. In the case of mutual funds and pools, he recommends leaving the sector mix to the money managers. He also believes guaranteed withdrawal benefit plans are worth considering “for the clients’ peace of mind.” But, he adds, their higher costs are not currently warranted with equities prices so low.

Munch charges about $1,500 to do a comprehensive financial plan. If she is managing the assets, she reduces the fee by the approximate revenue she receives for doing so.

Feinberg’s consultancy fee is $150 an hour for preparing and monitoring a plan; developing the plan usually takes six to eight hours. If he were to become Rolf and Kathryn’s financial planner, there would usually be no further fees for either managing the assets, debts and insurance, or for monitoring the plan. IE