“Financial Checkup” is an ongoing series that discusses financial planning options. In this issue, Investment Executive speaks with Anne Hammond, a Canadian investment manager and certified financial planner with Rogers Group Financial Ltd. in Vancouver; and Treena Nault, an advisor with Investors Group Inc. in Winnipeg.



The Scenario: John, 45, and his wife, Tanya, 38, of Vancouver had a son a year ago and now need to make sure they have sufficient funds to pay for both his education and their retirement. The couple don’t plan to have another child.

Daycare costs them $1,300 a month, but will drop to about $1,000 in today’s dollars when their son is between three and five years old. It will drop further to $500 when he is in elementary school full time. The couple want to send their son to private school from Grade 7 onward, which will cost about $20,000 a year in today’s dollars. They also want to fund his university education.

John and Tanya, both non-smokers in good health, each make $85,000 a year as managers at companies that don’t provide pensions or other benefits. The couple have a house worth $800,000 with a $225,000 mortgage, amortized over 20 years, that costs them $1,500 a month. Both spouses have made maximum contributions to their RRSPs since they bought the house eight years ago; John has $200,000 in RRSP assets and Tanya has $150,000. They also have put $5,000 each into their tax-free savings accounts for the past three years.

The couple currently spend $6,000 a month on living expenses — not including taxes, daycare, mortgage payments and contributions to their RRSPs ($6,500 each a year) and TFSAs ($5,000 each a year). However, the couple think they could manage on $4,000, assuming they can cover any major house repair/maintenance expenses out of their TFSAs.

John and Tanya want to know if they can pay for their son’s private-school and university education and still have an income of around $50,000 a year in today’s dollars during retirement.



The Recommendations: Hammond and Nault both say John and Tanya can meet their goals — without reducing their expenditures to $4,000 a month. Both advisors’ projections show that if the couple cut back their spending to $5,000, they can pay for their son’s education, buy both critical illness and life insurance, and still retire on $50,000 annually in today’s dollars until they are 95.

Indeed, Nault says, the couple can retire at age 60 if they maximize their TFSA contributions every year. She believes that TFSAs are the best way to save for retirement because there are no taxes on withdrawals. This keeps taxable income low in retirement, so there aren’t concerns about how much to withdraw in a particular year to avoid triggering clawbacks of government benefits. Says Nault: “[TFSAs] provide them with the most flexibility in retirement, especially if they need lump sums for things such as emergencies and general maintenance.”

Nault isn’t opposed to RRSPs and recommends that John and Tanya continue to contribute $6,500 a year to those accounts — or more, if they have it. That said, Nault thinks TFSAs should be maximized because they provide so much flexibility.

Hammond, on the other hand, thinks contributions to the couple’s RRSPs should be the top priority. Hammond suggests building the couple’s TFSAs to a combined $30,000 in today’s dollars, which would be invested in a high-interest savings account, and maintaining it as an emergency fund.

After that, Hammond recommends putting all other excess money into the couple’s RRSPs, noting that the tax deductions on RRSP contributions give John and Tanya additional cash that they can direct to their son’s RESP as well as to other savings. It’s only when the couple have maximized their RRSP contributions and paid off their mortgage that Hammond would suggest the couple shift their focus to building longer-term investments in their TFSAs.

Nault’s projections assume an average annual return, after fees, of around 6% — with 6.5% for the couple’s RRSPs and 5% for the TFSAs — because some of that money is likely to be withdrawn for emergencies and unexpected expenditures; Hammond’s projections call for 7% for both. Nault argues that her lower figures are because of maximizing TFSAs. Both advisors use an annual inflation rate of 3%, but Nault has assumed that the couple’s salaries will increase by only 1% a year, while Hammond has them rising by 3% annually.

Both Hammond and Nault recommend starting an RESP right away and contributing $2,500 a year to it in order to qualify for the maximum annual $500 grant.

Both advisors strongly recommend CI insurance. Nault suggests that John and Tanya each take out policies that cover all critical illnesses for $75,000 — which is equal to somewhat more than one year’s net salary today. The terms would be to age 75, and would cost $2,400 a year for John and $1,500 for Tanya. Nault also suggests return-of-premium policies so that the couple will get all their premiums back at age 75 if they haven’t made use of the policies, which would provide additional funds for retirement.@page_break@Hammond recommends a permanent CI policy with return of premiums on death for both spouses, saying that the risk of a critical illness sometime in one’s life is high for everyone and the return of premium on death would help provide funds for final expenses. Hammond suggests policies for $85,000, or one year’s gross salary. She found a quote that was only $2,900 a year for a policy that covers both spouses for all critical illnesses.

Hammond also recommends $1 million in 20-year term life insurance for both spouses at a cost of $2,900 a year for a policy that covers both of them. This would take care of the mortgage and their son’s education, as well as the expenses of being a single parent and having only one adult saving for retirement, in the event that one of them dies before retirement.

Nault doesn’t think this much life insurance is needed because the survivor will probably continue to work if the other spouse passes away. Nault suggests, instead, that each spouse buy a $50,000 universal life policy with a $200,000 term-20 rider; the cost would be $1,500 a year for John and $800 for Tanya. These amounts would cover the mortgage and the costs of the funeral and other death-related expenses. “Without the major expense of the mortgage,” Nault says, “the survivor will be able to afford daycare, private school and RESP contributions.”

In addition, Nault recommends that the life policy include a child rider of $10,000. This not only insures the son’s life, but will also allow him to buy a $250,000 universal life policy at age 25 without any medical evidence — a major benefit if he experiences some childhood medical issues.

Neither Nault nor Hammond suggests that the mortgage be paid off more quickly than scheduled, given current low mortgage rates. If rates shoot up, the topic should be revisited when the mortgage comes up for renewal.

There are a number of ways that couples with small children can save taxes. John and Tanya should make sure they claim the federal child tax benefit, which is worth up to $315 per child under age 19, as well as the universal child-care benefit of $100 a month for children under age six. The couple also can deduct their daycare expenses, up to the maximum of $7,000 a year. When the son is older, the couple may also be able to use the children’s fitness tax credit.

John and Tanya should make sure they have wills that name both guardians to take care of their son and trustees to manage his money, with backups in both cases. Hammond notes that the same person can be both guardian and trustee, but the skill sets for the two jobs are not the same. It’s also a lot for one person to take on. Nault adds the couple should confirm with their designated guardians and trustees that they are willing to take on this responsibility.

Powers of attorney for property and personal health care are also needed. These, along with the couple’s wills, need to be regularly reviewed and updated.

In addition, Hammond says, the couple should name each other as beneficiaries on their RRSPs, TFSAs and any life insurance policies. Their house and any other major non-registered assets should be held jointly with the right of survivorship.

Given the couple’s ages, goals and circumstances, and assuming an average risk tolerance, Hammond recommends investments of 30% cash and fixed-income, with the remaining 70% in equities in an RRSP. Canadian equities should comprise 30% of the total portfolio; foreign industrialized world equities, 30%; and emerging-markets equities, 10%. She would suggest using mutual funds, one or two exchange-traded funds and a couple of guaranteed income certificates. She also would suggest investing the RESP assets in a similar fashion until their son is approaching university age.

Assuming a moderately aggressive risk tolerance in the RRSPs, Nault recommends an asset mix of 25%-30% fixed-income and 70%-75% in equities. A little more than half of the equities should be in Canadian investments, with the rest spread among international and emerging markets. The fixed-income portion would include a fund that invests in real estate (about 10% of the total portfolio).

Hammond charges $250 plus taxes for a simple initial financial plan such as this one. If the clients invest with her, future compensation for monitoring and updating the plan is covered by her commissions or fees on the products.

Meanwhile, Nault doesn’t charge anything for developing or maintaining a financial plan because her compensation is tied to the fees on the products used. IE