Jack

Jack’s current financial picture:

• RRSPs: $168,000 in money market and balanced funds; $240,000 in equity funds; $150,000 in Canadian and U.S. equities
• Company stock: $64,000
• Unvested company stock: $105,470
• Cash tagged for investment: $84,000
• Savings: $15,000
• Home: valued at $470,000, with $130,000 in equity and $270,000 remaining on the mortgage
• Pension: $6,500 per year at age 65

Certified financial planner Kelly Ho with Vancouver’s DLD Financial Group Ltd. suggests:

1. Use that cash wisely.
With the $84,000 Jack has earmarked for investment, Ms. Ho would like to see him boost his RRSPs, depending on his contribution room, and put $31,000 toward his TFSA – the maximum allowable for him at this point.

“If there are remaining funds, I would suggest he consider allocating it toward non-registered corporate class mutual funds,” she says. “He can defer tax, allowing flexibility from moving money from one fund to another as he nears retirement.”

Ms. Ho suggests Jack keep $15,000 in a savings account as an emergency fund.

“I would also suggest that Jack implement a dollar-cost averaging strategy, meaning regular contributions into the market, which reduces the impact of volatility through large purchases of equities at a time. This includes maximizing his TFSA the following year once he gets more contribution room. Depending on his RRSP contribution room, he can then divide the remainder of his cash flow between RRSPs and non-registered corporate class mutual funds.”

2. Reallocate investments over time in alignment with Jack’s risk tolerance.
Ms. Ho suggests Jack start by moving toward a well-diversified, aggressive portfolio. Assuming a 6.5-per-cent return on all assets (RRSPs, TFSA, and non-registered funds), Jack should be able to generate about $68,000 in after-tax income in today’s dollars at retirement.

“It’s important to understand that by allocating his assets toward primarily equities, this strategy involves increased risk,” Ms. Ho says. “As Jack nears retirement, his investor risk profile may prioritize a greater bias towards capital preservation, so it’s critical that his profile is revisited annually and ensures that his asset allocation is reflective of these changes.

“Over time, Jack may consider taking a more conservative approach to lessen the impact of potential market downturns,” she adds. “A more balanced approach would be suggested with an assumption of 4.9-per-cent return for all his assets. This will result in approximately $65,500 in after-tax income in today’s dollars at retirement, which is still within his desired goal range.”

3. Diversify the portfolio to reflect more international holdings.
There is little diversification around his current stock portfolio and an apparent lack of focus regarding the management of his assets, with approximately 19 per cent in managed money, 23 per cent in a stock portfolio, 32 per cent in cash and 26 per cent in company shares, Ms. Ho notes.

“With respect to Jack’s asset allocation, he’s aggressively exposed through his employer,” Ms. Ho says. “I would suggest that he reduce his exposure of company shares in order to properly diversify, keeping tax consequences in mind.

“It appears his stock portfolio of $150,000 is spread too aggressively among six Canadian companies and nine American companies,” she adds. “Jack may want to consider having a concentrated money manager that would hold an appropriate number of companies ensuring proper geographical and sector diversification, as Jack also has little international exposure.”