Category: Investment Funds


senior man in despair

Here is an example, a businessman within the home-building industry named Frank, has made a home for himself in Ontario. He is 52 years of age and brings home $7,000 every month in order to support his 2 teenage children. He has been placed under financial strains which included a divorce, yet he still maintains a net worth of $2.3 million after deducting loans of around $835,909 which is robust due to the real-estate market that is strong which has pushed his estimated value for his home up to $1.7 million. In his investments he has a $327,000 taxable portfolio, along with a $82,000 TFSA, RRSPs of $831,500 along with $90,000 in RESPs dedicated to his kids are all well managed.

Despite his net worth that is strong and solid assets, there are still problems.

His job and his company are not secure within a highly competitive market. He would also like to increase on his investments for his planned retirement in around 13 years. There is also no company-pension, and this means Frank will only have income from his investments from TFSAs, OAs, CPP and his other accounts.

financial balance scales

This will be the dilemma, and even though he has success in investments and his business, he has decided that he will require a cash flow that is higher by the age of 65. He would also like to use $20,000 every year in order to travel, and even though he is prepared to downsize when it comes to his home, he is still noticing a gap between the present investments, OAS, CPP and their income and the goal that he has to have $100,000 before tax. In addition, his time is running out.

He states that in around 4 years, when he is 56 years of age, his children will have probably left the home. This is when the timetable will shift from caring for the children half the time like he is doing now combined with shared responsibilities, to fully caring for himself and time left to fully focus on the fortune he has already built skillfully through a number of wise investments.

Odds are favorable that his plans will pan out as he is hoping, says Derek Moran who is the Head of Smarter Financial Planning Ltd. based in Kelowna, B.C. He also thinks that Frank is a skilled investor will be able to achieve the required capital in order to generate the 6-figure pre-tax income goal for retirement. It is just about moving from here-to-there. At this stage, Frank is bringing home a $7,000 income after tax every month. He is only spending the take-home salary while allowing dividends and interest to compound.

Asset Management

The return on the invested assets is currently in the mid-single digits, around 5 to 8%. His choices are the chartered banks, while their market performance and payouts are supportive of his returns, Moran mentions. Yet there are still issues. He currently has $498,909 in mortgages with interest’s rates including 2.88% and 2.96%. After tax, these mortgages still cost less in comparison to his after-tax return associated with his investments. He also has a $337,000 line-of-secured-credit that he uses for his investments, so interest costs are $1,000 a month, which happens to be tax-deductible.

The issues associated with asset-management is about risk control. If Frank decided to sell $27,900 of his investments from his existing $327,000 taxable portfolio to pay off one of the residential mortgages. The pure interest costs of that mortgage apart from principle repayments is $130 every month. This may sound like peanuts, but Moran states that given that these stocks were purchased with a loan they have a gain of $35,000 after-tax profits that would be able to cover this loan completely. Another alternative involves riding the markets and to keep growing gains while still paying interest. We will make the assumption that he will continue with carrying these loans accepting risks linked to increasing interest rates that erode away at the net gains.

Education Savings

Frank currently has $90,000 in the family RESP, which is fantastic base for his children who are 16 and 13 years of age. Every month he adds $310, which is under $208 per a child or a $2,500 every year maximum in order to qualify for a full Canada Education Savings Grant of a lesser of $500 or 20% of contributions. Frank at this stage could definitely afford as well as should boost these contributions to at least $516 every month. If he decided to do this, the oldest child with 2 years of more contributions along with bonuses would then have around $50,000 for post-secondary or university education expenses. The younger child who will remain eligible until the age of 17, would then have $66,000 with another 5 years in contributions. In each of these cases, this calculation will assume a 4% annual return which is consistent with the management skills that Frank has demonstrated. He should even progress onto outing these funds that are available in order to give his children $58,000 each which would be more than sufficient for 4 years of books and tuition at any college or university in Ontario.

Retirement Planning

At this stage Frank has $831,500 in a Registered Retirement Savings Plan which he contributes $1,400 every month to or $16,800 every year. On the assumption that the 4% return continues after inflation, the RRSP will have $1,663,840 in assets by the time he turns 65. This sum would definitely support a payout of $106,500 each year over a period of 25 years when all the capital and income would then be expended.

In his Tax-Free Savings Account, with its $82,000 in total assets, which is 44% gains in investment over $57,500 allowable contribution up to this date, if it is supported with $5,500 contributions over another 13 years, till he reaches the age of 65, will then become $228,000 with a growth of 4% after inflation. This sum would be supportive of payouts of $14,600 in 2018 dollars over the next 25 years.

In his $327,000 investment portfolio which is taxable with an assumed after inflation 4% growth and assuming no more contributions which is held for a period of 13 years would reach a value of $619,400 which would support payouts of $39,650 for a period of 25 years until he reaches the age of 90.

By the age of 65, Frank can obtain full Canada Pension Plan benefits, which is currently $13,610 every year along with full Old Age Security benefits amounting to $7,075 at the 2018 rates, but we assume that this will all be somehow clawed back.

When adding up his sources for a post-65 income, Frank will have a annual cash flow that is taxable of $106,500 from the RRSP, $39,650 from the taxable investments, along with $13,610 from the Canada Pension Plan. The total amount of $159,760 which is taxed at 30% after personal credits and pension income plus the $14,600 from his own TFSA would then leave a $10,536 disposable income.

Here’s Some Insights from Polly for 2018

The pre-tax target for retirement income of $100,000 is definitely achievable according to Moran.

This is a case which shows what investing diligently is able to generate. Frank was able to do this even though he has no company pension and a divorce while still supporting his 2 children. It is a positive example of what focused investment and diligent saving is able to achieve.