Brian, single with no dependents, is in his mid-50s and has been unemployed for six months. He had a long career as an inside salesperson and earned $ 90,000 a year. While hunting for new job opportunities, Brian has been collecting employment insurance and tapping $ 500 a month from his cash savings. His situation has made him wonder if he has enough assets to retire. His portfolio, made up of a LIRA and RRSP, are collectively worth $ 469,000. He also has another $ 130,000 in a cash account (from an inheritance) and $ 38,000 in a Tax Free Savings Account. Other than his $ 118,000 mortgage, he has no debts.
While Brian has accumulated significant assets, his portfolio isn’t well positioned for someone who is close to retirement. He’s an aggressive investor, solely invested in high-risk equities and cash. He also based many of his financial decisions on some recommendations from friends who work in financial services. His mortgage, for instance, was taken out with an insurance company to help a friend close a business deal. Unfortunately for Brian, his interest rate is 3.99 per cent, high by today’s standards. Brian’s advisor, a friend, placed him in deferred sales charge mutual funds, which have fees as high as five per cent.
House: $ 360,000
RRSPs: $ 425,000
Mortgage: $ 118,000
Brian is doing a lot of things well. He lives within his means ($ 2,200 a month) and is frugal with his spending. He has also increased his wealth by regularly contributing to his RRSP and TFSA. But a portfolio invested mostly in equities is too aggressive for his stage of life and investment objectives, says Robyn Thompson, a financial planner at Castlemark Wealth Management in Toronto. “With imminent retirement plans and volatile markets, he is just plain gambling,” she says.
Brian holds 12 mutual funds in his portfolio. That’s too many; six would show true diversification; and unfortunately, many of his fund picks have the same mandate. This approach to investing dilutes the possibility of achieving a decent rate of return. “The only difference (between some of the funds) is they are offered by different fund companies,” she says.
According to Retirementadvisor.ca, an aggressive portfolio similar to Brian’s has a 20-year historical rate of return of 6.26 per cent. Meanwhile, a balanced portfolio delivered a 20-year average annual return of 7.93 per cent. “Less risk and higher return should always the objective of disciplined portfolio management,” she explains.
To stay in line with a more balanced investing approach, Brian should reduce his equity allocation to 60 per cent and spread the investments to include blue-chip, dividend-paying stocks, preferred shares, and exchange-traded funds (ETFs), Thompson says.
To set up his portfolio properly, Thompson recommends that Brian find a licensed discretionary portfolio manager through the Portfolio Management Association of Canada. “They will be transparent about their fees, and should be upfront about their performance history, providing written documentation of both,” she says. “With a portfolio manager quarterbacking his consolidated assets, Brian will benefit from clearly defined objectives, a disciplined investment approach, and regular monitoring and reporting of his progress. He will also benefit from reduced management fees.”
Ideally, his portfolio manager would also be a financial planner who can help ensure that Brian’s spending stays on track, that his retirement assets are being deployed in the most tax efficient way possible, and that his risk tolerance level for investments is reviewed and updated regularly.
Finally, Brian should eliminate his mortgage as soon as it’s up for renewal in August. He has more than enough cash in a savings account to do just that, Thompson notes. “This will reduce his monthly expenses by about $ 1,000,” she says.
While Brian is in a position to retire, Thompson recommends that he find work for a few more years, even part time, to ensure he has a safety net to guard against high inflation, severe market corrections and illness. “With a retirement horizon of potentially as long as 40 years, a lot can change,” she says.