Having her condo, and retirement, too
Patient: Carla Smith, 31
Situation: Single, recently moved home, no car.
Group RRSP administered by Standard Life ($15,100)
Canadian Dividend Fund (Standard Life) 40 per cent
Canadian Equity Fund (Bissett) 21 per cent
Small Cap Equity Fund (Bissett) 21 per cent
US Equity Index Fund (Standard Life) 18 per cent
Personal RRSP ($4,200)
Renaissance Canadian Income Trust (CIBC)
Problem: I'm really at a loss when it comes to investing. I am relatively young and want to have a nice retirement package, or enough to help me get my first condo next year. Retirement at 50 would be great but I really don't have any idea about what is realistic for me. Should I make bigger contribution to the CIBC RRSP or my plan at work?"
Doctor: JoAnne Anderson, MoneyPower Inc., Mississauga
There seems to be a tide in the financial affairs of men and women. Right now it consists of a flood of letters from young adults who have moved in with their parents in order to retrench and repair their finances. Several of our friends find themselves with refilled nests and our oldest daughter returned home several months ago for financial reasons.
Carla Smith's portfolio is in better shape than many that cross our desk, however she shares a level of confusion with others of the boomerang group, particularly in the area of goals.
"This young woman doesn't seem to be too realistic," notes our doctor this week, JoAnne Anderson, of MoneyPower Inc. who was recently named 2005 Advisor of the Year by Advisor's Edge Report. "I see that a lot. She has two competing goals, retiring at 50, which would be nice, and buying a condo."
But the numbers don't add up. Carla has just begun to save at the rate of $15,000 annually which takes into account her group RRSP contribution and the $1,000 a month she is now setting aside. After 20 years (assuming her employer continues to match her 5 per cent contribution in her work RRSP), the nest egg accumulated will generate around $19,000.
"You could retire on that," Anderson allows, "but it would be pretty skinny. There's not much left over for lattes and certainly no condo."
One of the problems with retiring at 50 is that that the period from 52 to 62 is when most people put away the bulk of their retirement money. Furthermore, the money you start drawing on at 50 has to support you for an additional 10 non-working years. Happily, the life expectancy of women is now 90, but the downside is that Carla's retirement fund might have to support her for as long as forty years.
According to Anderson, an extra ten years of working makes a huge difference. "If this patient decided to wait until she was 60 to retire, she would have $47,000 annually at the same savings rate. This is because she has 10 more years of savings and has to make it last for 10 fewer years. But still, there's no excess money to buy a condo."
If both Carla's goals of a good retirement and a condo are equally weighted, there are a number of ways she could achieve them; get a job that makes more money, extend her working life beyond 60 or share the cost of the condo with someone else.
On the other hand she could ramp up her savings. Though Carla is doing a good job by putting away a third of her income, there is room for more. Out of her $45,000 salary she's saving $15,000 and paying $7,800 in taxes, leaving $22,000 unaccounted for.
"While she's at home she should be chunking it away; $1,000 more a month wouldn't be unrealistic - that's about what she's saving by moving home," Anderson emphasizes. "She will have to spend that again when she moves out. She will need a down payment for a condo of between $20,000 and $30,000 and she could have that in 2 1/2 years. "
Carla can have her retirement and her condo too, but she will have to be very disciplined and frugal. One bonus of buying a condo is that if she pays it off before she retires, she will cut her housing costs upon retirement and, of course, she then has a tangible asset.
If Carla decides that she wants to save for a condo as a primary and short term goal, Anderson suggests that she start building up her personal RRSP and when the time comes withdraw up to the allowable $20,000 down payment from it as part of the Home Buyer's Plan. (www.cra-arc.gc.ca Go to the search function at the top of page and type in Home Buyer's Plan.)
Should Carla decide against the condo, Anderson suggests she maximize contributions to her group plan at work.
"The group plan is really like forced savings because it comes directly off her paycheck. There are some good building blocks here. The funds are relatively low cost and everything is in one place, which is good for someone who's not that knowledgeable."
However, Anderson sees a couple of problems with the portfolio. First of all, it is 100 per cent in equities with nothing, like bonds, to offset the volatility inherent in an all-equity portfolio. Anderson suggests a different asset allocation, which is available in Carla's group plan.
15 per cent Bond fund
15 per cent Mortgage fund
30 per cent Canadian equity dividend fund ("As markets go down, this has a better chance of holding its value.")
15 per cent US equity fund
15 per cent International fund
10 per cent Real estate fund
"As an asset class real estate is not correlated to the stock market so it acts as a dampener of volatility," Anderson explains. In other words, when the market retreats, real estate usually remains steady or rises. In 2000 and 2001, for example, the stock market crash did not drag down real estate investments. Planners often talk of the importance of having non-correlated assets and this is a case in point.
Another concern is the two Canadian equity funds which have five of their top 10 holdings in common; this decreases diversification increasing the risk. She should choose funds which are distinct.
The Renaissance Canadian Income Trust (CIBC) which holds Carla Smith's $4,200 personal RRSP investment is a trust of trusts. Income trusts are an asset class similar to small cap equities. But she is already overloaded with equities so it is adding risk to an already high risk portfolio.
If Carla Davis does decide to save for a condo and wants to take the down payment out of her RRSP through the Home Buyer's Plan she can't afford to invest that money in equities. Her personal RRSP should be in investments such as cash equivalents (GIC, Canada Savings Bonds or a money market fund) and in bonds.
The Portfolio Doctors can be contacted at email@example.com. David Cruise and Alison Griffiths can be reached at firstname.lastname@example.org on the web www.portfoliodoctor.ca