Geoffrey and Jeannette have been retired for a couple of years, and they're easily living within their means.
Jeannette, 58, is a retired teacher who earns a monthly pension. Geoffrey had been self-employed for most of his career and has been saving for retirement since he was old enough to vote. Now 60, he's amassed more than $800,000 in savings -- mostly in mutual funds -- held at two different advisory firms. Combined with Jeanette's savings, they have about $920,000.
"They (our advisers) just know that the other one has some of our money," he says. But the advisers don't know how much money each other is managing or how it has been invested.
About two-thirds of Geoffrey's and Jeanette's money is invested outside an RRSP. And while their taxable income on paper is about $65,000 a year combined, they roughly spend $26,000 a year on living expenses.
They spend so little, in fact, they don't even need to draw on their savings. Still, they would like to start using their nest egg soon. The problem is they're not sure where to start.
"Originally, when I started investing as an 18-year-old, once the wealth was accumulated, I thought I'd be able to live off the earnings."
Receiving an income generated from their portfolio would obviously be ideal because they would like to leave a large estate to their children if possible. But they're uncertain whether their portfolio is set up correctly to provide an income.
"We just want to know what to do in the future."
Senior wealth consultant Uri Kraut at Assiniboine Credit Union says at first glance, Geoffrey and Jeannette have little to worry about. They have plenty of savings, and they live easily within their means.
Beneath the surface, however, the structure of their finances does present a number of problems that put their wealth at risk.
First off, they need a real financial plan. They have far too many assets not to have a certified financial planner develop a strategy for them to draw on their wealth and preserve it in a tax-efficient way.
"It is very difficult to do a thorough assessment of their financial planning related to needs given the absence of significant cash-flow-related material and marginal retirement goals," he says.
Geoffrey and Jeannette must take time to flesh out their future as well as they can. Do they want to travel or renovate the house, and how much do they want help out their children and grandchildren? Would they like to leave a charitable legacy?
The answers to these questions will help shape the structure of their investments and how much income they will need for monthly expenses as well as big ticket items such as new cars, grandchildren's tuition and winter vacations.
Even without these essential components to developing a sound financial plan, Kraut says he can address some obvious problems with their investment portfolio.
"What is evident is their portfolio is not set up for long-term goals or even shorter-term tax consequences," he says.
Part of the problem is their two-adviser strategy.
"Although the choice of having two advisers may have been necessary to diversify and avoid being sold bad products, or ultimately being given bad advice, this has come at a cost," he says. "It has prevented them from getting good advice."
The most obvious problematic result is asset allocation. They have 16 per cent of their investments in fixed income and another eight per cent in cash. The bulk of their money is in mutual funds that invest in the stock market.
"This is generally considered a growth-oriented portfolio," says Kraut, a chartered strategic wealth professional and certified financial planner.
For a couple in retirement, this is likely far too risky -- especially if they want the investments to yield a steady return. Furthermore, the portfolio is expensive. They're paying an average management expense ratio of 2.41 per cent on all their funds.
"This is expensive for an account one-quarter the size; it is simply not acceptable."
Equally troubling is the advice they've been receiving is inconsistent and makes little sense from a tax or long-term planning perspective.
Although they're heavily invested in funds that contain dividend-producing stock, which appears to be a good tactic at first glance, the strategy is costly because they are paying more taxes than they should be on dividends generated from their sizeable non-registered investments.
"In and of itself, receiving Canadian dividend tax credits makes dividends a very useful form of income, but it does not appear they are receiving this money, so the portfolio is generating these tax events due to inefficient design, not out of an income need."
A better alternative is to invest in corporate class structured funds, available for most funds.
"Corporate class structured investments would convert present dividend payments into future capital gains, which in almost all instances is a cheaper form of taxation," Kraut says. Just as important, interest and dividends earned under the corporate structure can be reinvested and often do not result in immediate taxes payable. Only when fund units are sold are taxes payable, generally as a capital gain.
By using corporate class structure, they are eliminating about $15,000 taxable income annually. As a result, this gives them room to withdraw money from their RRSPs in a more tax-efficient manner.
"Right now, both Geoffrey and Jeannette can withdraw RSP assets at the 25.4 per cent or the 27.75 per cent marginal tax brackets -- both lower tax brackets than they likely contributed at," Kraut says.
Winding down their RRSPs also offers them more flexibility in keeping taxable income low because when they turn 72, RRSPs must be converted to RRIFs and annual mandatory, fully taxable withdrawals would likely push them into a higher tax bracket.
Another portfolio sore spot is overlap in the 60-plus mutual funds they own. Kraut says 68 funds are far too many -- again likely the result of having two advisers.
They really need no more than eight good funds -- six equity and two fixed income. Furthermore, their investments are highly concentrated in the Canadian market, so as the Canadian stock market goes, so does their wealth. While a stock market downturn is definitely a concern, so is duplication.
"There are examples in this portfolio where they have 10 funds owning the same stock," Kraut says.
"Even more concerning, the duplication cannot be solely blamed on having two advisers as the portfolios at the respective financial institutions are also filled with overlapping stock positions."
Their portfolio needs to be simplified. And they definitely do not need a guaranteed investment product from an insurance firm. Geoffrey is correct. The fees are too high, Kraut says.
But their first step is to find a planner to develop a plan, and trust is crucial, he says.
"There is that saying 'guns don't kill people; people do.' I am firmly on the fence about that comment, but I do believe mutual funds do not rip people off; people do."
Geoffrey's and Jeannette's finances:
Jeannette: $33,507 ($2,031 monthly net)
Geoffrey: $31,019 ($2,583 monthly net)
MONTHLY EXPENSES: $2,185
Geoffrey's RRSP: $195,320
Geoffrey's TFSA: $16,061
Geoffrey's non-registered portfolio: $656,402
Jeannette's RRSP: $13,628
Jeannette's TFSA: $16,062
Jeannette's non-registered portfolio: $22,672
Jeannette's teachers' pension: $1,950 a month
TOTAL ASSETS: $1,020,146