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Money makeover: 6 per cent solutions

Nicky should dump her adviser, not RRSPs

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Nicky has been investing in RRSPs since her mid-20s, and more than 15 years into the game, she has little to show for her efforts.

"I don't trust the mutual-fund thing," says the 40-something consultant.

"A couple of years ago, I stopped the automatic withdrawals to my RRSP and I've been putting savings aside and I'm thinking of investing in property as a plan for the long term."

Nicky has about $30,000 invested in RRSPs. She hasn't touched her portfolio in years aside from making contributions, which she estimates have easily exceeded $15,000. Her money is invested with a local firm with an adviser specializing in high-net-worth clients. She says the adviser took her on as a client as a favour to a friend.

But Nicky is now considering taking $15,000 in non-registered savings -- money she would have otherwise sunk into RRSPs -- to buy a rental property or invest in another kind of real estate venture.

She has no shortage of money to invest. On average, Nicky earns about $65,000 a year before taxes and deductions, but she has earned more than $100,000 in one year before. The problem is earning six figures is bad for her health.

"I want to work less, and I can't anticipate that energy and health will get better rather than the other way around," she says. "But I don't think I'll ever retire."

Still, she's looking for advice because she'll inevitably have to cut back on work as she ages.

"How does a self-employed person realistically save for retirement?"

Ryan Lussier is a financial planner and investment adviser with RBC in Winnipeg. After examining Nicky's investment portfolio, he can see why she's turned off stock-market investing.

"Most of her funds have underperformed the market, so I can see why she's frustrated and lost faith in the whole mutual fund and RSPs game," he says.

On average, she's paying about 2.5 per cent a year in management costs on the funds she owns, a high price for underperformance, he says. And more than 50 per cent of her money is invested in international funds that have a lot of exposure to Europe, which has been in crisis mode since 2008.

It could be when she was originally advised to purchase those funds about nine years ago, they were good investments. In fact, according to Morningstar Canada, which follows Canada's mutual-fund industry, a few of the funds she owns had five-star ratings almost a decade ago, but they're two-star funds today.

Part of the problem is she's investing with an adviser who works with high-net-worth clients, and she's not one of them. So he might have little motivation to ensure her money is properly invested.

Lussier says Nicky would likely be better served investing through her bank or credit union. For one thing, they could offer her no-load funds. Currently, most of her funds have deferred sales charges (DSCs). This fee structure helps compensate the adviser who sells the funds. The fees do not cost investors anything as long as they remain invested over a long period.

In Nicky's case, she has been invested for more than seven years, so she should be able to move her money to different mutual funds and another adviser at another firm without much cost.

If she chooses this route, she doesn't need to swing for the fences as she was trying to do almost a decade ago by investing in high-risk assets.

All she needs to achieve is a six per cent annual average return on her investments to meet her basic retirement needs at age 65, and that's not as hard as it may seem.

"For a conservative investor, for example, there's the RBC Select Conservative fund, which has been around since the '80s, and it's made, on average, six per cent a year," Lussier says.

Though Nicky says she's not risk-averse, Lussier suspects she's more conservative than she realizes.

"If she wasn't complaining and hadn't lost faith in the market, then maybe she would be an all-equity investor -- or risk-taking investor."

What she needs is a little more fixed income, such as bonds, in her retirement portfolio. Furthermore, she shouldn't give up on RRSP investing, because it's the ideal savings vehicle for her.

"She's a classic example of where an RRSP totally works, because she'll be going from a high income while working to a low income in retirement," Lussier says.

By contributing to an RRSP, she will likely get between 10 and 18 per cent tax savings, because she is likely paying a lot more in taxes today than she'll pay when she cuts back on work and starts supplementing her income with savings about two decades from now. Nicky could even fully retire at 65, carving out a meagre retirement income of $24,000 in today's dollars after taxes. (That's more like a net income of about $36,000 when she retires, based on two per cent annual inflation. This estimate also includes CPP at 65 and OAS at 67.)

To achieve this retirement goal, she needs that six per cent average yield, and she needs to continue contributing about $3,000 to $5,000 a year to her RRSP.

"I tried to solve for her needs for retirement savings at the bare minimum," Lussier says. "Over and above that, it's up to her."

Additional savings could be invested for the same return, only in a TFSA that would provide her with tax-free income in retirement.

Regarding real estate ventures, Lussier says he wouldn't tell a client not to invest in a rental property or similar venture, but he would discuss the many risks, costs and potential additional headaches.

"She says she wants to work less because she gets burnt out," Lussier says. "I've never met one person who doesn't work harder when they own a rental unit."

Another issue is the cost involved to earn a return on investment. Many real estate investors have done very well in Winnipeg in the last decade, but that's no guarantee for the future.

"You're buying into a market that has had the 10 best years in a long time, and everything reverts back to its mean," he says, adding bigger Canadian cities are already seeing a slowdown.

"And that will eventually trickle down to us."

Investing in real estate is never a bad idea, but real estate shouldn't make up all or most of a portfolio, he says. Her home, worth about $329,000, on which she owes about $87,000, already makes up the great majority of her wealth, so diversifying into other sectors is likely a better option.

Given the size of her portfolio, mutual funds still make the most sense. But she needs better guidance when picking funds, and she certainly needs to get back in the swing of contributing to RRSPs.

"For some people, RSPs may not be the right option, but for Nicky, who has a high self-employment income today with little retirement income tomorrow, I believe it's the best option," Lussier says.

Republished from the Winnipeg Free Press print edition August 18, 2012 B11

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