For a single mom who has raised four children, Rebecca has done well. She owns a home in Halifax outright and is a partner with her ex-husband in a couple of income properties.
Rebecca's idea of financial freedom is not a million dollars worth of investments, "but enough to continue my current subsistence lifestyle with ease," she writes in an e-mail. "I quite like it and don't envisage needing to change it."
She earns a modest salary in the publishing industry and takes in the occasional boarder to help make ends meet. She has a small pension from a previous job and some savings. Recently, she inherited $30,000 and wonders what to do with it. Longer term, she wonders how best to chart her financial course.
We asked Warren MacKenzie, president and chief executive officer of Weigh House Investor Services, to look at Rebecca's situation.
What the Expert Says Rebecca is a model for common sense and wise, "big-picture" financial management, Mr. MacKenzie says.
"She has made her lifestyle fit the income she has available and, because of this, she has greater financial security than most people with 10 times the income and assets."
Her most significant financial accomplishment was to acquire a 50-per-cent interest in two rental properties. The mortgages (of which $83,500 is her share) will be repaid before she retires and the cash flow will then be used to fund her lifestyle needs.
Using conservative assumptions, Rebecca, who is 50, will be financially secure for the rest of her life and will be able to leave her children a reasonable inheritance, he concludes.
Still, she has some important issues to address.
She has an RRSP worth $49,600 that she is ignoring because she feels she does not know enough about investing and doesn't understand what her adviser is saying when he talks to her.
Along with her RRSP, she has the $30,000 inheritance and $10,000 in her tax-free savings account (TFSA) that she wants to invest wisely, for a total of nearly $90,000. Over the next 40 years, the difference between managing it wisely and just ignoring it could easily amount to more than $250,000, Mr. MacKenzie says.
And Rebecca, he notes, is too heavily invested in one asset class - real estate. With her home and the half interest in two investment properties, real estate amounts to about 77 per cent of her total assets.
The planner is critical of Rebecca's investment adviser, "who is not providing sound advice." Rebecca's mutual fund investments have underperformed against the broader stock index and their peers.
"This is not surprising given that the hidden fees are 3 per cent per annum," he says.
The Invest for Life series:
Rebecca has invested in socially responsible and environment friendly mutual funds, but given their high cost and the fact that she is getting little in the way of service from her investment adviser, she should consider exchange-traded funds (ETFs) instead, he says.
Her investment adviser has sold her both the front-end load and deferred sales charge (DSC) versions of the same mutual fund, which raises a red flag in Mr. MacKenzie's mind.
"When we see this, we are always suspicious that the financial adviser first sold [to his client]the DSC version of the fund to earn the 5-per-cent commission, and later (when the DSC fee expired) sold the DSC version to buy a front-end version of the same fund in order to earn the higher trailer fee."
The problem with this is that the front-end version of the fund has a higher management fee, which is required to pay the higher trailer fee, and this higher fee eats into returns, he says.
Rebecca has $10,000 in guaranteed investment certificates (GICs) in her TFSA and $16,000 of contribution room available in her RRSP.
Mr. MacKenzie says he would normally recommend she first use her cash to pay down debt and then add to her RRSP or TFSA. But in this case, he recommends that she put as much as possible into her RRSP first.
Her debt, mainly the mortgages, is income-tax deductible and is being carried by the rents from the investment property, he notes. Inflation could return within the next few years, and "during periods of inflation it is beneficial to have debt because the debt eventually gets paid off with less valuable dollars."
In addition to about $13,000 in mutual funds, Rebecca has $37,000 in GICs in her RRSP that mature within the next three months. With the additional $16,000 of available RRSP room, she will need to make a decision on how to invest about $53,000 - $66,000 if she decides to sell her current mutual funds and re-invest that money.
Rebecca is capable and intelligent but she is getting no useful advice from her investment adviser. Mr. MacKenzie recommends she open an online account with a discount broker and invest in simple and broadly diversified exchange-traded funds. To learn about ETFs, she can study the newspaper and online investment sites as well as the model ETF portfolios provided by the discount broker.
Rebecca, age 50, with two of four children still at home
What to do with $30,000 inheritance, how to make sure her financial affairs are on course.
Contribute as much as possible to RRSP, take charge of investing her savings.
The financial security she is seeking.
Monthly net income:
Net salary $2,120; child support $200; Total $2,320.
House $300,000; interest in rental properties $200,000; RRSP $49,600; RESP $9,500; tax-free savings account $10,000; inheritance $30,000; defined contribution pension plan from previous employer $61,000; Total $660,100.
Property tax $200; house insurance $80; utilities $340; repair and maintenance $100; food and eating out $760; clothing $80; tobacco and alcohol $70; haircuts, cosmetics $40; medical/dental $80; kids' allowance $40; vacations $150; entertainment and reading $85; auto $200; bus $40; credit card payments $20; memberships/sponsorships $85; gifts $100. Total $2,470; Shortfall $150.
Her share of mortgage on rental properties $83,500; her share of line of credit for rental property $15,000; credit card debt $500; Total $99,000.
Special to The Globe and Mail. Want a free financial facelift? E-mail firstname.lastname@example.org