Insurance, Investing Savvy Key to Couple's Goal


A couple we'll call Tom 52, and Carol, 47, left the rat race of the corporate world in Calgary to find a slower-paced and, they hope, more satisfying life in Victoria.

Their 2006 gross income of $80,000, based on contract work, is modest for a family in a costly city, but they still yearn for time off in a few years to do volunteer work in a developing country, perhaps in South America. As well, they want to help their university-age children finance their educations.

"Contract work affords us freedom, but we also have times when we're between contracts and therefore have no income," Carol explains. "We live comfortably, but we're wondering if we can make our equity work better for us."

Facelift asked Derek Moran, a registered financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Tom and Carol in order to determine the feasibility of their plans.

"This couple are in what I would call a 'preretirement' state. Tom does consulting work and Carol is a writer who does part-time work. They have chosen to work to live rather than the other way around. They are not rich, but they are wealthy in terms of their day-to-day happiness. Finally, they are incredibly responsible with money."

And they do have money. Their house is valued at $400,000, they have registered retirement savings plans worth $220,000 and $50,000 of non-registered investments. The total is $670,000 and they have no debts.

Capital has become the cornerstone of the couple's finances and future. A total of 61 per cent of their capital is tied up in their house with the remainder in an RRSP that has eight stocks including an airline, a building products company, a U.S. auto maker, a drugstore chain, and some commodity producers. Their non-registered portfolio consists of shares in major chartered banks.

"This is a collection of ideas, not a portfolio," Mr. Moran says. He explains that the array of stocks lack measured sector diversification, predictable response to changes in market cycles and in the economy, cash generation, and measurable volatility. When those variables are calculated, the outcome merely confirms the problem -- the handful of stocks is not a value portfolio of companies with low valuation, not a growth portfolio with businesses that have a high rate of increase of cash flow or earnings, and, most importantly, is little more than a random selection of assets.

How over a quarter of a million dollars came to be invested in a dartboard of picks is the issue. Tom explains that he followed an investment dealer's recommendations. His choice now is to go back to the dealer and develop a portfolio or seek other advice. He could also study investing and perhaps learn ways to boost his returns, Mr. Moran says.

Not only have Tom and Carol not made the most of their financial assets, they have also not covered the downside of early death. They have dependent children and want to help them with the costs of their educations. However, they have neither life insurance nor disability coverage. For a couple with no employer endowing them with insurance or other fringe benefits, this is a risky way to live, Mr. Moran notes.

Tom should get $250,000 of life coverage and should investigate the costs and complexities of disability plans, he adds. He could get $250,000 of renewable term insurance to age 75 with an option to convert to whole life for $702 a year through a professional association. A disability policy with a one-year waiting period for benefits would cost $607 a year for $2,000 a month of benefits.

For retirement, working with the existing asset base, and assuming that investments grow at 6 per cent a year and that inflation runs at 3 per cent a year, Tom and Carol's financial assets should be worth $396,504 in 2007 dollars. Taxes will reduce returns in the non-registered account, but some of this erosion is covered in the conservative estimates of growth, the planner notes.

There will be a 27-year period from Tom's age 65 to Carol's estimated death at 87 (that's her life expectancy plus five years). During that period, each will receive pensions from Old Age Security and the Canada Pension Plan.

The total from OAS will be the current annual payment of $5,903 times two or $11,806. Tom has earned 56.5 per cent of the maximum CPP credits. Carol has 7.1 per cent. Their incomes are rising, so it is safe to estimate that they will have 85 and 30 per cent respectively when Tom is 65 and Carol is 60. On this assumption, Tom will have CPP of $8,810 if he begins his pension at age 65 and Carol will have CPP payments of $2,177 if she begins hers at age 60, suffering a reduction of 0.5 per cent per month for each month prior to age 65 that she begins to receive CPP.

Thus their pensions alone will equal $22,793 per year. Spread over the 27 years they are estimated to be eligible for the pensions and given the same assumption of an annual real return of 3 per cent, the flow will average $21,005 a year in 2007 dollars, Mr. Moran explains.

Putting their own investment income together with their pension income, they will have a total family retirement income of $43,798 or $3,650 a month. This sum is about their current spending when savings and education costs for their children are removed, the planner notes.

Taxes on the couple's income would be about $2,643 a year, assuming that it is split evenly between them. Low-income seniors are eligible for substantial tax credits. Adding up all their statutory credits, Tom and Carol will each have $15,905 of initial writeoffs. In sum, even without improving the structure of their investments, they can look forward to a comfortable though not lavish retirement income.

They can also afford to take a year off to do volunteer work in a developing country, Mr. Moran says. If they can rent their house out for $1,200 a month, they could actually save more money than they now are able to put away each month.

They can also help defer some costs of education for their children. They can make some payments to the children to help reduce loans the children will have to take out to pay for post-secondary education. The payments will reduce the couple's assets, but they can be made over time out of investment income that can be generated by tailoring their not insignificant financial capital, Mr. Moran says.

"The life Tom and Carol have laid out is workable in financial terms because their main assets are in place," Mr. Moran says. "However, they have a lot to do to make their plans secure. They have to do serious work on their investments and they need to buy life and disability insurance to give their family financial security. If they do these things, then they can be more confident that their lives will play out as they want."

"The advice is right, but I do not know if I can persuade Tom to get life insurance," Carol says. "We used to have life insurance, but we discontinued it when money was tight in the past. But I see that it is a priority for us, even though Tom has taken the view that the children and I could live off our investments were he to die prematurely."

 Client situation

Tom, 52, and Carol, 47, live in Victoria with their three children ages 17, 19 and 21.

Estimated 2007 Net Monthly Income



House $400,000 RRSPs $220,000 non-registered $50,000.



Monthly Expenses

Property taxes $170, food $900, utilities, phone $350, entertainment $350, clothing $300, car fuel, repairs $550, vacations $200, medical costs $250, car & home insurance $150, charity $35, children education costs $300, savings $778.

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