Gone are the days when pennies buried in Mason jars in the backyard could be harvested as retirement income. With plummeting interest rates, even trustworthy Canada Savings Bonds (CSBs) are not keeping up with inflation.
Manitoba's financial experts are now advising clients that judicious and diversified investments are the keys to financial security. The next piece of advice offered, if you're really serious about handling your personal finances, is to find a reputable financial planner.
Larry Lee, a chartered financial planner and senior consultant with Winnipeg-based Investors Group, gives conservative advice.
"Most investors should review their financial picture annually with a qualified financial planner who has a broad range of expertise and is not trying to sell a particular product," says Lee.
Robert W. Meaden, a financial advisor with Midland Walwyn Capital Inc., says money instruments aren't that easy to choose for the uninitiated. Says Meaden, "Investments are becoming more and more complex, and unless you have a lot of time for research, finding a good financial planner is the only way to prevent costly mistakes."
To illustrate, Manitoba Business presents examples of savings strategies on which financial planners have commented. The names of the clients have been changed to protect their privacy, but the financial data is authentic.
Donald Jason is a 50-year-old executive with a public corporation. Until recently, he has been managing his own investment portfolio and has accumulated holdings worth $496,950. Two-thirds, or $331,750 of this investment is in company-sensitive shares which he has purchased from his employer over the past 30 years.
"That's far too much investment in one company," cautions Jeffrey J. Kraemer, president of TFI Services Ltd., a financial planning firm. "If the company goes bankrupt or the share price goes down, his portfolio could be devastated. I know of one person, for example, who bought PWA shares for $14 each less than four years ago. They're now worth 77 cents per share."
Jason, who wants to retire in 1997, is married to Penelope, 50, who hasn't worked since before they were married 25 years ago. Only one of their three children still lives at home. They think they will need about two-thirds of their $90,000 annual income ($59,000) to maintain their standard of living during retirement.
In addition to the company shares, Jason has $51,200 in Hydro bonds, $75,000 in proceeds from Northwest Options, $85,900 in a savings account, $26,500 in a Standard Life RRSP, $36,750 in a Royal Trust RRSP and $2,500 in a spousal RRSP.
The first thing Kraemer encouraged him to do was to invest more in the spousal RRSP, thus sheltering more earned interest from taxation. Next, Kraemer recommended redistributing the investment portfolio to diversify Jason's holdings. Only $50,000 should be invested in the employer shares. (Kraemer predicts, that with a seven per cent after-tax growth rate, these shares will be worth $70,127 in 1997).
Industrial cash management -- something like a money market account or Government of Canada Treasury Bills -- should consume $209,000. Another $100,000 should go to a non-registered Retirement Income Fund (RIF) and $210,000 to mutual funds.
"The mutual funds," says Kraemer, "should be divided among Canadian and foreign investments: $50,000 split equally between U.S.-based Fidelity Growth American and Trimark Select Growth; $40,000 in Southeast-Asian Fidelity Far East; $40,000 in Fidelity European Growth; $20,000 in Canada-based Industrial Future and $60,000 in MacKenzie Income (Canadian stocks, bonds and mortgage-backed securities). Such longer-term investments will yield more interest and higher growth. ("By 1997," Kraemer adds, "a conservative estimate puts the value of mutual funds at $294,535.")
Issued by insurance companies only, the non-registered RIFs, "are dynamic for tax-sheltered savings as well as life insurance," stressed Kraemer.
Exempt from accrued taxation as long as they are set up properly, RIFS produce a substantially greater income than an unsheltered GIC or other alternative investment. They are also exempt from inheritance tax because of the life insurance elements attached to them, and because the RIF is considered life insurance, benefits flow directly to beneficiaries without having to pass through probate.
At the same time a projected eight per cent earning on the mutual fund and share portfolio should give the Jasons annual returns of $29,173. Their pension income from the employer pension plan is going to be $33,099, giving them a total of $62,272 -- $8,372 more than they wanted, "and that's without their RRSPs or old-age security or Canada Pension Plan," said Kraemer.
"A less conservative approach is almost mandatory when setting up an investment plan for 35-year-old Gary Braxton," says Meaden. Braxton, an unmarried lawyer with no dependents and an annual income of $60,000, is in a very high tax bracket. "We don't want interest-bearing things to complicate the situation," says Meaden. "My number one recommendation would be to maximize his RRSP."
Braxton's law firm has no pension plan, so he should be contributing $11,700 (18 per cent of his income -- the maximum allowable in 1993) to a self-directed RRSP each year. These retirement funds should be invested in a variety of stripped coupons, government marketable bonds, or a good-based mutual fund.
Meaden said Braxton should also consider some growth-oriented investments. "It is important that he start contributing early so that compounding can do the work for him." Meaden also recommended that Braxton consider foreign content -- "up to the 16 per cent limit."
Outside of the RRSP, Meaden suggested a balanced portfolio leaning heavily to the equity side. In Canadian stocks, he suggested banks, utilities, and stocks that pay attractive dividend tax credit. The largest portion of Braxton's equity investments should be in blue chip U.S. growth stocks. "I told him to look for companies with consistent growth such as Abbott Laboratories or Phillip Morris." The object of these growth-oriented investments is to produce tax-free capital gains.
Meaden's last suggestion was that Braxton keep a cash reserve equal to three-to six-months' living expenses in reasonably liquid assets such as Manitoba Hydro Bonds or CSBs. Should Braxton eventually decide to buy a home, a sizeable down payment is readily accessible. "But Braxton's lifestyle leaves little time for the encumbrance of home ownership and real estate is not increasing in value enough to make it an attractive investment for him," concluded Meaden.
Giselle Robinson, on the other hand, needs a house for her three children, who are rapidly approaching university age. A 45-year-old hospital administrator earning $82,000 annually, Giselle is married to David, manager for a growing computer distributor. David earns $60,000 a year. The Robinsons want to retire in 15 years with the same income they receive today, adjusted for inflation. Both will receive pensions equal to 60 per cent of the average of their last five years' salary.
Giselle's income has gone into RRSPs, CSBs and extra savings. David has paid the mortgage payment ($800 monthly, which should pay off the current balance of their $160,000 home in 15 years) and any loan payments. The $75,000 mortgage expires on March 1, 1993 with the current rate at 10 per cent. Both contribute to the upkeep of the home and regular expenses. Giselle's $76,000 RRSP is in GICs with most maturing in June, 1993 and August 1994. David has $10,000 in RRSPs in GICs which mature at various times over the next three years. Giselle has $30,000 in CSBs and is contributing $600 monthly toward more through automatic payroll deduction. Giselle has a $16,000 interest-taxable mortgage fund at a bank to serve for the children's education. The couple maintain $10,000 in cash balance in their tiered savings/chequing bank account. The account pays 3.5 per cent interest.
Giselle's car was financed over five years at 10.25 per cent. The balance is $22,000 with monthly payments of $407. David drives a company car. The outstanding credit card debts total $5,500 with current rates of 15.9 per cent.
Group life insurance is worth $82,000 for Giselle and $55,000 for David. In addition, Giselle has a term insurance policy of $100,000 and a whole life policy with death benefit of $50,000. David has a whole life policy of $55,000. Both whole life policies were bought as a form of protection combined with savings.
Because David's tax margin for investment is lower, Lee advised the couple to put David's income toward savings and Giselle's towards paying bills. He told them to pay off their credit cards and car loan with CSBs and cancel one credit card to eliminate a needless fee. He also advised them to establish a secured line of credit with the equity in their home to provide a lower rate (9.5 per cent) for short-term financing.
He also warned them that mortgage rates could be high around their maturity date because March 1 follows RRSP season. Since the rate can be set 90 days prior to maturity if requested or if the mortgage is transferred, he said they should consider either locking in the low rate option or transferring. He also recommended using the remaining CSB funds to pay down the mortgage balance.
Lee told the couple to save $600 in income tax annually by opening three Registered Education Savings Plans and transferring the limit of $1,500 to each plan from the mortgage fund each year. Both current and future tax relief could be gained through maximizing RRSPs Spousal RRSPs with Giselle's limit being deposited to David's plan will split retirement income more evenly.
He also suggested the use of carefully planned, effective over-contributions of $8,000 each to reduce tax on non-TFSP investments.
"Redirecting both the monthly loan payment and the CSB payroll deduction to a growth-oriented investment is a safe way to invest in the market," he told them. This would allow them to use the $100,100 capital gains exemption as long as it is available.
Lee wanted the Robinsons not look automatically for the best rate in GICs as this could lead to an awkward maturity date which means re-invested money will then receive a much lower return. He told them to consider other types of investments like mortgage or bond funds with better long-term results.
He also told them to review their insurance needs. Replacing David's income would require about $700,000; Giselle's $1 million. "Buy insurance in the amount needed," he advised, "but don't keep it when the family matures and you no longer need it."