Following your request for a financial plan, I have hereby evaluated your financial position in the light of your present and future plans and came up with a concrete financial plan that will not only enhance your financial stability but also success in your other facets of life.
PART 1: NET WORTH STATEMENT
CURRENT ASSETS
larry
Amber
net worth statement as of 30th November 2010
% of total assets
education savings account
23000
2.41%
Joint chequing
5000
0.52%
Grandmother's cheque
150000
15.71%
joint saving
10000
1.05%
188000
19.69%
long term assets
House
550000
57.59%
RRSP
170000
17.80%
Car
21000
26000
47000
4.92%
total long term assets
767000
80.31%
total assets
955000
current liabilities
car payment(with interest)
21297
12208
33505
3.51%
12208
1.28%
total current liabilities
45713
4.79%
long term liabilities
house mortgage
230000
24.08%
net worth
679287
71.13%
The net worth statement provided above gives you a snapshot of your present total assets and. as a financial planner, my task is to help you efficiently grow your net worth either through increasing your assets or minimizing your debts or both. This financial plan will strengthen your financial net worth and set you on course to achieving your life goals.
To begin with, you have a particularly attractive and positive net worth, well within your tenet as a middle aged man. During initial stages of life, it is typical to have very high incomes but equally high expenses as well. These are the foundation years to help you achieve your short, medium and long term goals. You have done well in maintaining minimal debt and notably you do not have any credit card debt. Despite two car loans and the mortgage, your debt is well in line; just less than 3% of your net worth goes to service your mortgage which is well within your financial ability. Both car loans are at great rates (1.9% and 0.9%) and we have the opportunity to lower your mortgage rates even further after continued repayment since it is based on reducing balance.
looking at your assets, a few issues come to light. You two have been working for well over 17 years for Larry and I presume a little less for Amber. despite both of your relative job stability and solid income, I would encourage you to reserve at least 5% of your total income as savings. that's a minimum of $8000, per year for the years that you have worked. I encourage you maintaining this safety reserve in case of emergency. You can use high interest bearing accounts such as money market mutual funds or high interest savings account so your cash can maintain purchasing power; both options are fairly liquid, meaning you can access your money anytime, and have the potential to earn a higher rate of interest. I will expound on these investment options once we get to the investment plans.
On further scrutiny of the net worth statement, your liquidity ratio is somewhat lacking. Notably, other than for the lucky check that your grandmother bequeathed you, you are highly liquid. Your total current assets outnumber your current liabilities by four to one. This shows that you could have overinvested in current assets monies which can be invested in other fixed assets which can appreciate over relatively quickly than the current assets.
However, at a glance, you you have an adequate net worth position. There are a few areas we need to work on that will better prepare you financially. Fortunately, you both are young enough that we have a sufficient time horizon to implement strategies to help you grow your net worth figure.
Part 2: Personal cash flow and income statement
personal income statement and cashflow
Larry
Amber
income
71000
88700
rrsp contributions
taxable income
71000
88700
Tax
12752.1
16646.1
CPP
2118
2118
EI
731
731
total cash inflow
55398.9
69204.9
cash outflow
monthly
annualy
%of income
expenses
Home expenses
mortgage
1972
3.17%
property taxes
5200
0.00%
water and gas
4200
6.76%
maintainance
3700
5.95%
clothing
3600
5.79%
Childcare
6000
9.65%
miseclenious
10400
0.00%
Social Expenses
31.33%
Vacations
7000
11.26%
gym membership
2400
0.00%
entertainment
7200
11.58%
kids sports
2500
0.00%
vehicle expenses
22.85%
car payments
800
1.29%
gas/car maintainance
3500
5.63%
insurance
3680
5.92%
total exp
62152
12.84%
contribution to savings
not defined
Total take home
62452
In the chart above, I broke down your expenditures by category to give you an idea if where your money is being spent. After taxes and deductions, you are both taking home $62452 combined. As you can see your house consumes most of your take home pay. though you are not way off, some of the costs need to be scaled down. the most important way to reduce housing costs in the long-run is energy conservation and frequent mortgage payments which will be detailed later on. Your expenditure on satellite, telephone and interest is quite high. You can bundle these services, getting the best home telephone service, the best internet connection at Digital Max Bell TV for $187 saving you over $720 a year, and all of these services are top of the line of what they offer. This is absolutely something worthy of consideration.
The social category of expenses represents more of the variable expenses that you have
somewhat control over your spending. At a glance, entertainment is the largest consumption of your after tax pay. You could take almost 3 times the number of trips you currently take with the money you spend on entertainment each year. To prevent cash flow issues, this should be the first to cutback. It is worthy pointing out that 22.85% of your take home pay goes to fund these variable costs; perhaps allocating some of these funds to saving for your retirement will enable you to enjoy entertainment throughout your retirement years and to cater the short-term.
Lastly, your vehicle and their maintenance make up about 12.84% of your net income which is well within manageable limits. The last part of your cash flow statement needs some work. To add to that, you haven't specified percentage of you income that goes to savings. I suggest you open separate accounts each with a designated purpose to start saving your cash. I am glad that Amber has already started off with an education savings account. Remember, it is important to always 'pay yourself first'. Whenevr you embark on saving, always take account of yourself first and other things second. For instance, budget for you basics first and other things come later. Now you can use pre-authorized payments that are scheduled withdrawals from your account that go right into an investment vehicle of your choice. We'll discuss these in detail later
on. Nevertheless, the portion of your income being saved needs be more efficiently allocated according to a goal-based plan.
I have noted that your net income after expenses is $ 62451.8 which are free funds subject to your preferred allocations. There are a few options with what you could do with the funds. As discussed earlier, these funds can be used to build up your safety reserve accounts, start a regular savings plans, save for retirement, or use the money to pay down your mortgage. In all, I see some potential cash that can be better allocated to help you reach your goals; you both have a decent amount of after-tax and expenses income that we can put to use.
Part 3: Current/revised budget
personal income statement and cashflow
Larry
Amber
total
income
71000
88700
159700
rrsp contributions
taxable income
71000
88700
159700
Tax
12752.1
16646.1
29398.2
6145.5
6145.5
CPP
2118
2118
4236
6606.6
10500.6
EI
731
731
1462
12752.1
16646.1
total cash inflow
55398.9
69204.9
124603.8
Old
New
cash outflow
monthly
annualy
%of income
annualy
%of income
expenses
Home expenses
mortgage
1972
3.58%
1972
3.17%
property taxes
5200
0.00%
5200
0.00%
water and gas
4200
7.63%
4200
6.76%
maintainance
3700
6.72%
3700
5.95%
clothing
3600
6.54%
3600
5.79%
childcare
6000
10.90%
6000
9.65%
miseclenious
10400
0.00%
10400
0.00%
Social Expenses
35.37%
31.33%
vacations
3500
6.36%
7000
11.26%
gym membership
2400
0.00%
2400
0.00%
entertainment
3600
6.54%
7200
11.58%
kids sports
2500
0.00%
2500
0.00%
vehicle expenses
12.90%
22.85%
car payments
800
1.45%
800
1.29%
gas/car maintainance
3500
6.36%
3500
5.63%
insurance
3680
6.68%
3680
5.92%
total exp
55052
14.50%
62152
12.84%
contribution to savings
not defined
total take home
69551.8
Though your budget is tight by the average family you can still cut back on entertainment and vacation expenses. This will free up some cash for you to commit to other more urgent and demanding expenses.
Part 4- Insurance
At your age, it is highly advisable for you to take up life insurance. Adequate coverage eliminates the burden left to your dependants if either one or both of you were to die. As you age and you minimize your debt obligations, your insurance coverage can also decrease, but in the meantime, I suggest obtaining enough coverage to enable your heirs to maintain their lifestyle. Though you have already subscribed to a good pension and benefit plan, it is inadequate for the purposes of seeing your children or spouse through such aftermath. For the purpose of this assessment, I will assume that amber is adequately covered by her husband's employer. Though additional coverage is obtainable, but is often expensive and you probably will not obtain the full benefits if Larry's employer covers most of your healthcare costs beyond OHIP. Larry, you didn't mention any coverage for short and long-term disability through work which should try and obtain. This is particularly important in that once you are insured, you will access benefits should you be incapacitated at work.
Next is your home mortgage insurance. To start, it is great that the company that sold you the house agreed to trade in the value of the old house to reduce the amount that you should pay. This will amount to $150,000 as down payment a 54% value of the home. It is important to that you maintain house insurance to protect your belongings and the house itself against fire, burglary etc. This also protects you against occupier's liability on your property if someone were to get injured on your property. Additionally, it is interesting to see that you have already gotten mortgage insurance to safeguard your house against repossession should one or both of you die.
Car insurance is also a requirement to protect you and your passengers in the event of a an raccident. Assuming you both have clean records, comprehensive auto insurance on your current vehicles would cost not more than $2700 for both of your vehicles. Other than covering damages and your automobile itself, this insurance includes liability protection in case you were found liable in an accident, medical and disability expense in case you and your passengers are injured in an accident and uninsured motorist protection in case you are in an accident with someone that is not insured. Since you now have dependants, life Insurance is very important with your current life cycle stage; it ensures that in the case of either of you dying, your partner and/or children will have sufficient financial resources to cover both current and future costs. My recommendation is term life insurance. This covers you for a designated amount of time, in this case 20 years which should be sufficient since the remaining amortization on your mortgage is 15 years. If you were to pass away within this time, it ensures your spouse has enough money to meet your goals. I prefer this to mortgage insurance because with that, insurance premiums stay the same while the benefit decreases whereas term insurance covers various needs with consistent premiums. I put together a breakdown of costs you could incur (as of today) if either of you were to pass away. I depict three scenarios of term insurance with additional mortgage insurance to see what would be most cost efficient. As you can see, you are better off getting term life insurance to cover the costs of your mortgage, short-term debts while preparing you to cover funeral and executor costs, pay for your children's education and provide income until retirement. Unfortunately term insurance does not include a disability clause, but Larry is covered through work. Since Larry is the main earner, if Amber were to become disabled the reduction in income should not significantly affect your ability to pay the mortgage. Note that this is where 3-6 months of after-tax income would be beneficial. All in all, the listing I prepared for you both considers most of your foreseen life expenditures; this should adequately prepare you for life events. Keep in mind that if one of you were to pass away, that will be one less vehicle needed, one less mouth to feed etc. so the insurance coverage depicted will well prepare you for all of your life events. Larry is also insured for 3x his salary through work. Although group insurance is a cost efficient way of obtaining insurance, if you leave your employer the insurance coverage is often terminated. Be sure to look further into this and find out if it is portable or not. Besides this, you have a couple different options. Term life insurance coverage would cost you a combined total of $2,742. If you were to obtain mortgage insurance to cover you for life and disability on the mortgage, and term life insurance for the additional required coverage, such as your children's education and spousal income, it would cost you about $4,430. As mentioned earlier, the only difference is that with mortgage insurance, you obtain disability insurance. However, with it, your premiums stay the same for the duration of the mortgage but the benefit decreases as you pay down the mortgage balance. You could also combine two different term life insurance policies; a decreasing term policy for your mortgage and another policy for coverage on the remaining foreseen expenditures. Decreasing term insurance policy rates are more efficient as the payout benefit decreases over time. However, it is recommended that this policy should be combined with another life insurance policy to cover the remaining costs. To keep things simple, I recommend obtaining a term life insurance policy that covers you for all of your expenses. Make sure to include a clause stating the insurance guaranteed renewable upon expiration in 20 years if need be.
Part 4: Education Savings and Tax Planning
cost of education
Jack
Koen
Addison
cost today
21500
21500
21500
years to save
10
12
13
inflationary adjustment(4%)
31825.25
34422.19
35799.08
program of program
4 years
4 years
4 years
total cost
127301
137688.8
143196.3
education saving plan
total funds required
127301
137688.8
143196.3
PV savings
23000
future value of savings6.5%
43174.16
0
0
Shortfall
84126.85
137688.8
143196.3
Your kids are still quite young so you have long-term horizon to save for their education. it is great that you have already started saving and I am sure they have be able to pursue post-secondary school education without major financial hiccups.
With an estimated inflation rate in education costs of about 4% and current expenditures running about $21500 per year, I estimate a 4 year program will cost $127,301 for each of the three. Right now you the money in savings earning little to no interest so you cannot rely on capital appreciation to help you achieve these savings. Instead, I recommend an alternative savings and investment strategy. these could be mutual funds and trusts. The portfolio manager of these funds allocates assets in accordance to the time horizon. For example, with 10+ years until the funds will be needed for school, the fund will have more equity exposure right now; as your children near university or college years, the asset allocation will change from equity exposure to less risky investments such as GICs, bonds, t-bills etc. What's good about these
funds is that they are actively managed by a professional, so you do not have to do it. Moreover, instead of lump sum contributions annually, you can make regular contributions, such as weekly according to your pay schedules, into the fund right from your bank account. For Jack, i recommend RBC's Target 2020 Education Fund. Since it has a relatively short track record, it is rated 2 stars by Globefund but has a low management expense ratio (MER) of 1.85% and is up 12.44% year to date. As well, the minimum weekly contribution you have to make is only $25 whereas some similar funds have minimum contributions of $50. This mutual fund is relatively stable because majority of its holdings are other RBC mutual funds so they are well diversified- it will help eliminate some of the unsystematic risk. For the Koen and Addison, I recommend RBC's Target 2025 Education Fund. With a similar set up as the first one, this mutual fund will have slightly more exposure to equities because of the longer time horizon. This particular fund has an MER of 1.95% and is up 12% year to date. For an investment vehicle to accumulate these savings, I recommend using two different accounts, however, maintain the same investment structure. First, you should set up weekly pre-authorized payments into a family RESP. This way both children are listed as beneficiaries of the account, should one choose not to attend post-secondary school. Although these are tax deferring accounts similar to RRSPs, the contributions are not tax-deductible, and income payments are taxed in the hands of the child upon attendance of a qualified post-secondary institution.
RESPs are particularly great accounts to encourage education savings with a lifetime contribution limit of $50,000 per child. While in school, education assistance payments are made from the fund to cover various costs of school. Both children have an adequate time horizon to maximize lifetime CESG grants of $7,200. Since you have excess after-tax and expenses income, front loading your contributions and the power of compounding can substantially increase the return on investment, so I suggest contributing $5000 annually to each siblings plan starting this year.
Simply follow the contribution plan above to maximize your return. Aside from maximizing RESP contributions to benefit from tax deferral, I recommend opening an in-trust account and contributing to the Target 2025 Education Fund for the last two kids. The fistrborn's RESP is sufficient to cover his costs. It is important to remember that with the in-trust account, capital gains are taxed in the hands of the beneficiary while dividend and interest income will be taxed in your hands. A benefit of in-trust accounts is that if the last two kids or any one of them decides not to go to school, you can avoid tax consequences like that of having to transfer RESP contributions to your own RRSP, while also required to pay back accumulated CESG grants. If you do not obtain RRSP contribution room to accommodate annual income payments from the RESP and withdraw the funds as income, you are taxed at your marginal tax rate + 20%. This is one reason why it is very important to re-evaluate your financial portfolio at least annually; then you can make adjustments according to your needs as you get closer to your goal.
Part 5: Retirement Planning
retirement needs
Larry
Amber
annual cashflow
71000
88500
70% of todays
49700
61950
inflationary adj.
96810.65
120672.4
future value of income needed
96810.65
120672.4
cottage fund
current cottage cost
275000
adjustment for inflation
535672.6
years to save
17
yearly interest rate
8.50%
yearly contribution
59664
Despite your concerns of the recent market downturn, it is important to remember to maintain confidence in long-term investing. Although the severity of the recent economic collapse was greater than all others except the Great Depression, there is a tremendous buying opportunity for those with the risk tolerance and long-term investment horizon. Take Warren Buffet's advice, "be fearful when others are greedy and be greedy with others are fearful". By dollar cost averaging through systematic payments will help reduce the average price paid for your investment because you buy when the market is high and buy when it is low hence a lower average cost. Now let`s look at your needs. Preparation for Stage 2 of your lifecycle is important to establish as early as possible. With a goal of earning 70% of today's income is feasible through establishing a new savings plan above what you currently have. Larry, that is great that you are planning to contribute to Amber's Spousal RRSP and achieving the tax deduction, but keep in mind it is important to establish your own nest egg as well. Even with CPP
income and your employer pension of $44,500, it still falls short of your targeted 70% of current income. To make up the shortfall of future income, you need to contribute $19000 annually to an investment program to achieve your retirement goals. With $26,000 in RRSP and $41,000 contribution room available for 2009, you have for the shortfall. Amber has no pension and therefore has enormous room for contribution which grows year on year. Since you are in a high tax bracket, it is important to utilize the RRSP tax efficiencies as much as much as possible; not only are earnings tax deferred, contributions made to the plan reduce your taxable income. The underlying concept of RRSPs is that in retirement, your income will be much lower than it is today so you will pay less tax. Within the RRSP you can hold a wide array of investments including stocks, bonds, GICs or strictly savings. We will discuss this in the investment management section of your review.
Part 6 Investment Management Section.
You mentioned one of your retirement goals is to buy a cottage up north upon retirement. Cottage prices are deflated right now and it is important that you take advantage of such. However, due to your current commitments with more urgent issues, i would advise you to wait until retirement to buy it. This gives you 17 years to establish a save towards this end. Based on current housing prices of you think that if you save $275,000, you will realize enough money in future to buy it. Assuming a 6.5% return on investment over the 17 years, I estimate that you will have to save $120 on a weekly basis. The payment will be dollar cost averaged weekly to achieve the maximum $5000 annual limit in a tax free savings account and the remaining $800 will be dollar cost averaged into a non-registered account. For an investment asset I recommend investing in the RBC Select Choices mutual fund (also held in your RRSP) which will be detailed later on.
Let me explain the tax free savings account. Implemented just last year, the Canadian Government allows you to contribute $5000 annually to a registered account in which all capital gains, interest and dividend income grow tax free. The contribution limit on the TFSA is anticipated to increase at 10%annually. Within the account you can hold any type of investment similar to your RRSP and can designate a beneficiary to avoid confusion and perhaps prevent probate in the event of your death. The TFSA can be used to save for short, medium or long-term goals. To benefit from tax-free compounding, I suggest contributing mostly to the TFSA first, with supplementary contributions to a non-registered account. I recommend staying non-registered because if you were to withdraw $426,721 in a lump sum to finance the purchase from your RRSP, it would trigger significant tax consequences. According to your revised budget, you have sufficient after-tax and expenses cash flow to finance the purchase, so you should not have to downsize your home, so long as housing prices grow at relatively stable rate.
To acquire the necessary funds to help you achieve your retirement goals, we are going to set up
weekly pre-authorized payments into your RRSP, non-registered accounts and your TFSA. Combined, your weekly contribution to the funds will be $600. As discussed, this will establish efficient contributions through dollar cost averaging and payments will come directly out of your account. This is the most convenient and economically efficient method of investing. The government provides supplementary income through Canada Pension Plan and Old Age
Security. You are eligible to take CPP payments at the age of 60, but you are penalized 0.5% per month before your 65th birthday. Moreover if you delay receiving payments, you are rewarded with 0.5% for every month after your 62thbirthday. The chart below shows the monthly payment and gain/loss. It is important to note that these are lifetime losses, meaning if you collect prior to 62, say at 60, you lose 30% of your CPP benefit annually. Since your retirement income should be sufficient for the first 3 years of retirement, Larry, I recommend waiting until 62 to start collecting CPP to ensure you get as much out of it as possible. You too, Amber should wait until 62 before collecting CPP. Below is the penalty breakdown of receiving early payments.
Larry, your anticipated retirement income is too far above the threshold that you will experience claw backs in your OAS payments. Amber, however, you are fully eligible to receive the full payments. Perhaps come this time, income splitting will be something of benefit to your financial situation. During your retirement years you are eligible for income splitting to spread the tax liability between yourselves. Registered pension plans, such as RIFs, DPSP annuity and LIRA can be split once you are over 62 years old, while periodic RPP payments can be split any time before age 62. Although you do not utilize either right now, below is an example of how income splitting could benefit you. Using today's tax rates, by splitting your systematic payments from your RRSP and your DBPP, you can save about $4000 in taxes. Of course tax rates will
change by the time you utilize this option, but this gives you a rough idea on how it works. We will look at this closer to your retirement date. Larry, your anticipated retirement income is too far above the threshold that you will experience claw backs in your OAS payments. Amber, however, you are fully eligible to receive the full payments. Perhaps come this time, income splitting will be something of benefit to your financial situation. During your retirement
years you are eligible for income splitting to spread the tax liability between yourselves. Registered pension plans, such as RIFs, DPSP annuity and LIRA can be split once you are over 65 years old, while periodic RPP payments can be split any time before age 65. Although you do not utilize either right now, below is an example of how income splitting could benefit you. Using today's tax rates, by splitting your systematic payments from your RRSP and your DBPP, you can save about $4000 in taxes. Of course tax rates will change by the time you utilize this option, but this gives you a rough idea on how it works. We will look at this closer to your retirement date.
Part 7: Estate Planning
Although it may seem far off, and you may not want to think about it right now, it is important to be prepared in the unfortunate event of either one or both of you passing away. Establishment of a Last Will and Testament will ensure the division of your assets (and liabilities) get executed according to your wishes. Adequate insurance and estate planning help mitigate the consequences arising upon either or both of your deaths. I am sure you want to leave your family as best off as possible in terms of financial needs, having required expenditures already paid for as well as savings established. Moreover, you want to eliminate the burden of settling your estate which can be a lengthy and difficult process if not properly prepared.
Although having joint names on all banking accounts is a sufficient way to transfer assets upon
death through the right of survivorship, there are flaws to it. For example, if both of you were to pass away, there will be no right of survivorship, and without a will, you will die intestate which can tie up assets for lengthy periods of time as the courts must decide who should get the funds. Nevertheless, your RRSP and TFSA should have each other designated as a beneficiary and you can have your non-registered account made joint between you both. Besides this, you should establish in your will what you wish to happen to your funds if both of you pass away.
Within your will you designate an executor to carry out your intentions. Whether it is dividing up
your assets by selling property or liquidating investments, or take responsibility of your children, the executor(s) of your will is (are) the single most important decision. You mentioned that you have thought about making your sister from Louisiana executor of your estate. There are a couple things to keep in mind. The dispersion of assets upon death is often a lengthy process and may require several meeting with banks, lawyers, real estate agents and other professionals helping to settle your assets. Living so far away will only make the process longer and more confusing unless she is willing to move here until your estate is settled. I recommend reconsidering perhaps another family member located closer to this region.
You may also want to establish each other as a designated power of attorney in the event that you
are unable to make decisions for yourselves. For example, in the event that either one of you have an accident and are unable to make a decision with adequate knowledge and understanding, the designated power of attorney will obtain the power to do so. It may be wise to consider having a different power of attorney for medical reasons and financial reasons. I would recommend setting up an appointment with a lawyer to help you carry out this process.
Part 8: Investment Management
The past year and a half is attributed as the second worst market collapse in world history. Some
industry experts were projecting it to grow in severity similar to the Great Depression in the 1930s but through quantitative easing and other monetary and fiscal policies, governments around the world were able to prevent complete dissipation of world economies. Although you may worried about your investments being down 45%, it is important to maintain your long-term outlook and investment horizon. The economy has always been cyclical and rebounded from market downturns such as the one we just experienced. The best thing to do in times such as these is to stick to your fundamental investing strategy, maintain your asset allocation in unison with your risk tolerances, and if optimistic and confident, exploit the opportunity; some see this as a buying opportunity to lower their average buying cost. Again, dollar cost averaging into your investments will enable you to buy when the market is high and buy when it is low,
lowering your average cost base.
You are both fearful of the market downturn and have lost complete confidence in your investing
strategy. Now you are questioning your investments you have made. Larry, although you thought you were seeking a portfolio that would offer aggressive growth, the downturn has made you realize you are a balanced investor. Often, this is what it takes for a person to really understand their risk tolerance. Nevertheless, the collapse has already occurred and your investments are down significantly. Going forward, we will make adjustments to your portfolio to better suit your circumstances and revisit the situation annually to re-balance your portfolio. This ensures you maintain an adequate asset allocation and changes can be made according to variations in the economic environment. Starting with your emergency fund, I recommend having 3-6 months of after-tax income diversified amongst two different investments. First, I recommend having one-third of the funds in a high interest savings account so that if you require funds immediately, you have an accessible balance. As mentioned previously, I also recommend obtaining a home equity line of credit in combination with these funds for emergency access. The other two-thirds of the balance should be put in a money market mutual fund such as the BMO Premium Money Market mutual fund. It is a five-star rated fund by Globefund with a very low MER of 0.42%. Mutual fund withdrawals require 24 hours before you have access to the funds; this is why I recommend the breakdown between the two different accounts. Your portfolio asset allocation needs to consider several aspects such as your time horizon, risk tolerance, age, accessibility of funds, size of your portfolio and several others. Amber, the current breakdown of your RRSPs and spousal RRSPs represents the asset allocation of a growth investor. I would not recommend selling your holdings and buying only GICs for a couple of reasons. I would not advise pulling your money out of the market now because you will be selling your investments at deflated prices, possibly even at a loss. Warren Buffet's advice of buying low and selling high could come in handy here. In addition, holding only GICs, although they are guaranteed, fail to maintain purchasing power as effective as mutual funds do. For non-registered savings, interest income is fully taxable so almost half of the interest rate you would earn goes to taxes. Once you compensate for inflation you will see that your actual growth will be minimal, if not negative. Nevertheless, some investors prefer to hold them because they have guaranteed interest rates and the principle is guaranteed through CDIC. If you are truly worried about the markets and do not have the confidence of investing further, an investment vehicle you could explore are index linked GICs. Your principle is covered under CDIC insurance and the rate of interest you earn is tied to the return on a specific index, such as Dow Jones Industrial Average or the TSX. These provide you with the safekeeping of your initial investment with the opportunity to participate in a gain in the index.
Part 9 - Overall Reco's, Write-Up & Summary
You are both in adequate financial positions to achieve your lifetime goals. Since you are young and have stable icome streams as well as the willingness to make these necessary changes, I believe all your financial goals are well within your reach. If you implement each recommendation made above, you are surely going to achieve these goals. It is important that we meet at least on an annual basis to review your financial circumstances and make changes accordingly
