“Financial Checkup” is an ongoing series that discusses financial planning options. In this issue, Investment Executive speaks with Barb Garbens, certified financial planner, registered financial planner and president of
B L Garbens Associates Inc. in Toronto; and Miles Schiller, CFP and senior executive financial consultant with Investors Group Inc. in Lloydminster, Alta.



The Scenario: Derek and Susan are both 48 years old. They live in Brampton, Ont., with their three children, ages 15, 13 and 11. Derek is a manager with a small manufacturing firm earning $90,000 a year; Susan is a teacher earning $70,000 annually. Derek is worried that his company will be taken over or even shut down, as it is struggling in the U.S. — where it sells 60% of its output — because of the high Canadian dollar.

Susan will have a pension, equal to 54% of her last five years’ average salary if she works to age 65. Derek’s company doesn’t have a pension plan.

Derek has $600,000 in RRSP assets invested in Canadian balanced mutual funds and the couple have $60,000 in a family RESP. They each have $10,000 in tax-free savings accounts. Their $800,000 home has a $400,000 mortgage on it.

The mortgage payments are $25,000 a year; Derek and Susan have car-leasing payments of $300 a month each; Derek has been contributing the maximum toward his RRSP; the couple have been putting $5,000 a year into the RESP for each child; they’ve been investing $5,000 a year each into their TFSAs; and they’ve been spending the rest of their income. They think they could save an additional $20,000 between them as long as Derek keeps his job.

They want to know what income they could expect to have in retirement, in today’s dollars, if both keep their current jobs — and what they would have if Derek loses his job in three, five or 10 years and can’t find an equivalent job. They are prepared to consider selling their house.



The Recommendations: Both Advisors say the couple should be fine because of Susan’s pension. Even if Derek loses his job in three years, the couple could pay for four years of out-of-town university education for the children, costing $20,000 each in today’s dollars, and keep the house.

Schiller ran a range of scenarios — some with a 6.5% average annual return after fees, some with an 8.5% return and all with inflation at 3% — to look at what would happen if Derek lost his job and didn’t get another at various points in the future. In all cases, the couple were OK financially and wouldn’t need to sell the house.

Garbens focused on three scenarios, all of which assumed that the couple will spend $64,000 a year in today’s dollars after paying the mortgage and making maximum contributions to both their TFSAs until they turn 65, to Derek’s RRSP while he’s working and to the family RESP, as long as it’s applicable, until Susan’s retirement at age 65; at that point, the couple’s spending would decline to $48,000 and their car-leasing expenses drop to $450 a month. Garbens’ projections all used an average annual return of 5%, and inflation and appreciation in the value of the house of 2% a year each.

It’s only in the case in which Derek loses his job in three years that the couple will have to stick closely to these numbers — the couple will need to use up Derek’s RRSP assets in the period before Susan retires. Should that happen, Garbens would recommend that the couple plan to sell the house at age 65 (by which time they will have used up Derek’s RRSP assets), at which point the house should be worth about $1.15 million — assuming 2% a year appreciation and the mortgage is paid off — and buy a house that leaves them with net proceeds of $300,000 in today’s dollars for unexpected expenses.

If both spouses keep working at their current jobs or others with equivalent salaries, Garbens estimates that the couple’s estate could be $4 million in today’s dollars — $2 million in financial assets and $2 million for the house — at age 95. If Derek stops working in 10 years, in which case his Canada Pension Plan entitlement is likely to drop by 10%, the couple would still have an estate of $3.5 million.@page_break@Both advisors recommend life insurance because of Derek’s job vulnerability and the costs of paying off the mortgage and putting the kids through post-secondary school, and that the coverage’s adequacy be reviewed periodically.

Schiller recommends Derek take out a $500,000 term-20 policy costing about $1,500 a year and Susan take out a $550,000 term-20 policy for $1,000 a year. Schiller also suggests a $500,000 joint last-to-die policy to cover tax liabilities when the couple’s estate passes to their children; that policy would cost $10,500 for 20 years.

Garbens suggests term-20 policies for $1 million for each spouse, noting that the mortgage and the children’s education expenses amount to $640,000 in today’s dollars. She suggests Derek and Susan investigate whether they can get the coverage through their group plans at work, which would lower the cost.

Schiller thinks Derek should buy a $100,000 return-of-premium critical illness policy to age 65, as well as a 20-year, $1,000-a-week long-term care policy. The annual premiums would be around $3,900 for the CI policy and $1,800 for LTC policy.

Garbens thinks the couple need purchase CI only if one spouse or the other has a family history of the health issues covered by CI insurance; Garbens would recommend a 15-year $100,000 policy for whomever has that history. Garbens thinks the couple should focus on paying off their mortgage now and not buy LTC, which is expensive, unless there are hereditary medical issues that make LTC a priority. Garbens says all the insurance is affordable — except in the situation in which Derek loses his job in three years; in that case, the couple would have to cut expenses elsewhere if the premiums for the policies they choose exceed the $5,000 Garbens has assumed in her projections.

Schiller also recommends the couple put away $1,300 a year to fund future weddings, holiday costs and so on.

Both advisors agree that, as long as Derek’s and Susan’s wills — including guardians for the children — and powers of attorney are up to date, there isn’t much more estate planning needed at this point because the couple’s house and registered accounts will go to the survivor — as long as they are each other’s named beneficiary. Later on, if they have accumulated significant non-registered assets, they could consider testamentary trusts for each other and the kids.

Garbens, however, emphasizes the need for detailed lists of assets, deeds, wills, POAs, insurance policies and advi-sors, including their locations, relevant account and phone numbers, and addresses.

For the couple’s investments, Schiller recommends tax-efficient, corporate-class mutual funds for both spouses’ portfolios. The target asset mix would be 40% fixed-income, 45% Canadian equities and 15% global equities. Schiller notes that at Investors Group, portfolios are rebalanced semi-annually or annually — and also when market conditions change suddenly.

Garbens doesn’t manage money, but her general suggestions include the addition of non-correlated assets to the portfolios’ equities and bond positions, such as gold, other resources commodities and real estate. She also suggests a mix of products: some aimed at producing an income stream; some with growth potential to protect against the erosion of purchasing power from inflation; some guaranteed investments linked to equities to ensure the couple get some of the upside if stock markets do well.

Schiller’s compensation comes from commissions and mutual fund fees, and he charges a fee for developing and monitoring a financial plan — even when there’s no guarantee he will end up managing the assets.

Garbens charges $195 an hour plus HST to prepare detailed cash-flow projections — typically $1,200 to $3,000, depending on the amount of work required. IE