Hey there, time traveller!
This article was published 13/4/2012 (1501 days ago), so information in it may no longer be current.
Phil and Vicky feel like they're adrift on the high seas of finance without a rudder.
"My analogy is we feel like we're staying afloat pretty comfortably," says Phil, an IT specialist in his mid-30s earning about $73,600 a year, including overtime.
"But we don't have a long-term plan. We're just floating around without any retirement plans or goals."
They own a home worth $350,000 with a mortgage on which they owe $330,000.
They have $6,500 in a savings account for home renos and a family vacation this summer, and they have about $50,000 in RRSPs and work group plans. Most of their RRSPs are invested in one balance fund.
They also have a little bit of money in RESPs for their children, but they've recently stopped contributing.
Vicky recently started a job with the province earning about $36,000 a year and will soon be a member of a defined-benefit pension plan.
While most of their savings are part of work pensions, they would like to be more active in managing their own investments.
Yet they are wary of how and where to seek advice.
"When I talk to representatives of certain financial companies, I get the feeling they're trying to sell their own products," he says.
The issue has especially come to the forefront of late because Phil has almost $18,000 in a pension fund from a previous employer that he can transfer to his own account or leave locked in with the current management firm.
"As far as where the money goes, we're contributing a few hundred dollars a month to RRSPs, which is pretty minimal, so we're wondering what the strategy should be," he says.
Phil and Vicky may feel as if they're rudderless, but they do have one thing on their side, and that's time, says Stephen Watson, financial investment adviser with MGI Securities in Winnipeg.
That leaves them with several options, which can be both good and bad.
"Vicky and Phil have the same challenge as most young parents: They have multiple financial goals, including paying off their mortgage and other debts, saving for their kids' education and retirement, and building up a fund to pay for their next car and any home repairs or appliance replacements that might be necessary," he says.
Needless to say, it's a long list and they could benefit from some guidance.
"But they have become mistrustful of the reps they have spoken to, who seem only to be selling investment products."
They should consider finding a financial planner as a job interview -- only they're doing the hiring.
The Manitoba Securities Commission (MSC) website offers the basics on how to find a good adviser or planner, including a list of questions to ask.
"You're putting a lot of trust in your adviser, so think carefully about your choice, and interview at least two or three to compare and contrast their approaches."
In the meantime, however, Phil and Vicky can take some steps to improve their finances.
For one, they should restart RESP contributions because their budget can afford it. Their monthly spending is about $5,000, and their income is $5,334, excluding Phil's overtime.
Needless to say, they have some money left over for their children's education. By not investing, they're essentially leaving free money on the table.
All RESP contributions grow tax-sheltered until they're withdrawn, at which time they're taxed as the student's income.
But more importantly, RESP contributions are subject to a 20 per cent top-up from the federal government to a maximum of $2,500 in contributions per year per child. Called the Basic Canada Education Savings Grant, the federal money can boost their children's education savings by as much as $500 a child every year if they max out their RESP contributions. The lifetime maximum for the grant is $7,200 a child.
"Since their daughter may need the money starting in about six or seven years, the portion for her should be conservatively invested in, for example, a short-term bond fund," Watson says. "Their younger child is only three, so his portion could be invested in an equity dividend fund."
Phil and Vicky are about $70 shy in their budget of fully funding RESP contributions for both children, but Phil's overtime income is a wild card that could maximize annual contributions.
Watson says the RESP program is one of the best deals because nowhere else can you get a 20 per cent guaranteed one-year return on a $2,500 investment.
With regard to retirement savings options, Phil should consider contributing as much overtime earnings as possible to RRSPs. Any refunds can be contributed to tax-free savings accounts.
Their current investments in their personal RRSPs, however, leave something to be desired. Both of their RRSPs are invested in the same balanced fund, which has a five-year average annual return of -0.6 per cent. On top of that, they are paying 2.45 per cent annually in management costs. Basically, they're paying more than $220 each year (2.45 per cent of $9,000) for losses.
"They should consider building a portfolio of stocks in companies with strong franchises, healthy balance sheets and a commitment to increasing their dividend regularly."
These firms have a track record of rewarding investors.
"Consider one company as an example: Royal Bank. It has earned a return on common equity of at least 12 per cent every year over the past 18," he says. But it's also increased its dividend over that span. "The dividend has increased 676 per cent since 1993, so the dividend yield today is 33 per cent based on the 1993 purchase price."
And RBC isn't alone. Many established Canadian firms pay investors handsomely to hold them. But creating a portfolio of income-producing stocks likely isn't feasible for Phil and Vicky at this stage. Until they accumulate more savings, at least $100,000, they should stick to mutual funds, contributing regularly to one or two dividend or income funds (one Canadian and one U.S. fund).
Watson says many good funds exist, and an unbiased adviser can help them. Phil and Vicky can also do research on their own, using financial websites Morningstar.ca or GlobeInvestor.com to look up fund performance and fees.
Just to give them an idea of some of the better options available, the CI Signature High Income Fund has a five-year average annual return of 4.5 per cent and a management expense ratio (MER) of 1.6 per cent. Or RBC's Canadian Income Fund has posted an average 14.9 per cent annual return over the last five years with a 2.08 per cent MER.
"I'd be amazed if the fund could continue with that return," Watson says.
"But I still like the management style and philosophy; they invest mainly in securities that pay a regular income."
And slow and steady returns are just the prescription for Vicky's and Phil's retirement savings because they have at least two decades to save.
"They have time to reach goals without having to make heroic efforts," Watson says.