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Debt-free 38-year-old professional wants to invest. Where does she start?

Rachel's goals are to save up $250,000 for a down payment on a house – either to live in or rent out – and longer term, to save for her eventual retirement.

Mark Blinch/The Globe and Mail

Rachel is 38 and single with a professional job paying $67,500 a year. She has been working full-time for seven years.

"I was a mature student," Rachel writes in an e-mail, "and I'm concerned about having enough money for my retirement – and owning a place to live in Toronto!" Rachel has no work pension. She's living with her boyfriend and paying him a modest rent, which allows her to save anywhere from $2,000 to $2,500 each month.

"I paid off my student loan five years ago and have saved $100,000 since then," Rachel writes. The money is sitting in GICs and savings accounts earning very little, so she wonders how she can get a higher return. She's interested in investing and would like to learn more about it, but she's feeling "overwhelmed and paralyzed" by all the information available. "I would like to know how to gently get started," Rachel adds. Should she try mutual funds? Direct investing? Robo-advisers?

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Her goals are to save up $250,000 for a down payment on a house – either to live in or rent out – and longer term, to save for her eventual retirement.

"Can you recommend some resources or people to talk to?"

We asked Josh Miszk, vice-president of investments at Oakville, Ont.-based Invisor.ca, an online portfolio manager or robo-adviser, to look at Rachel's situation. Mr. Miszk holds the chartered financial analyst designation.

What the expert says

Rachel knows she needs to get a better return on her investments to hit her major goals, Mr. Miszk says. For starters, Rachel should put aside in her non-registered, high-interest savings account about $17,000, which is about three months salary, to cover any unforeseen expenses.

Rachel has indicated she's comfortable with only a moderate level of risk. Because her goal to purchase a home is five to eight years away, she can assume some risk while being mindful of major market swings. For this goal, Mr. Miszk recommends a balanced portfolio with half equity and half fixed income, which he assumes will yield 5 per cent a year on average.

Regarding her retirement savings, she has 27 years to reach her goal of retiring at the age of 65. "She can afford to take on more risk in her [retirement] portfolio as there is ample time to recover from any downturns," Mr. Miszk says. For this goal, he recommends holding 70-per-cent equity and 30-per-cent fixed income, which he assumes will give her 6 per cent a year on average. Once Rachel is in her late 50s and closer to retirement, she'll need to lower the risk in her portfolio.

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"If we allocate the existing $25,000 in Rachel's RRSP to her retirement, that leaves us with about $59,000 to put toward the home purchase," the planner says. ($17,000 goes to an emergency fund.) If she earns 5 per cent a year over five years, she would need to save $2,500 a month to reach the $250,000 down payment target. If she puts off buying for eight years, she would have to save $1,350 a month. "Ideally, holding off until eight years would give Rachel more flexibility and the ability to contribute more to her retirement plan," Mr. Miszk says.

Rachel's target retirement income is 75 per cent of her current income, or $50,625 in today's dollars. Assuming she receives the average Canada Pension Plan and Old Age Security benefits in retirement, and using an inflation rate of 2 per cent, Rachel will need about $61,835 from her investments in the year she retires. Because her investment plan will be more conservative when she retires, he uses a target rate of 5 per cent to determine how much she will need to save to generate the income she will need: $1,167,000. "To reach her goal, Rachel should put about $1,370 per month towards her retirement savings," he says.

So her savings target (house purchase and retirement) is slightly more than $2,700 a month ($1,350 plus $1,370), while her surplus cash flow ranges from $2,000 to $2,500 a month. "That being the case, I would recommend that Rachel first contribute to her retirement savings and then add any surplus to her house purchase goal," Mr. Miszk says. "This way, the tax refund from her RRSP contributions will help make up the shortfall so that she can achieve both goals."

As for investment advice, Rachel can start with these three principles regardless of whether she chooses to manage her own investments or work with an adviser. First, keep a diversified portfolio. "Diversification helps spread risk so when a downturn hits you feel less of the pain," Mr. Miszk says.

Second, keep costs low, ideally 1 per cent a year or less. By saving one percentage point a year on a portfolio that averages a 6-per-cent rate of return, "the difference on Rachel's portfolio of $100,000 with $24,000 annual contributions over 27 years is $325,000."

Third, create a plan and stick to it. "Hearsay and headlines don't change what you are saving for. By overreacting to short-term news, you'll end up following the crowd and selling off at the wrong time."

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If she decides to work with an adviser, it may be a good idea to look for one who charges a fee upfront. "That way, they're not incentivized to recommend any particular funds and you know their interests are aligned with yours," Mr. Miszk says. While robo-advisers meet this criteria, "they're not for everybody," he adds. Rachel would have to be comfortable going through the whole process online.

Many traditional advisers are starting to add lower-cost options by using new technology. "But keep in mind that a financial planner offering 'free services' will be compensated through the embedded fees in the mutual funds they sell you," he says. "Find out what those costs are and judge by the name of the funds they sell if there is any bias in their selection."

Finally, Rachel wonders whether she should take advantage of her $50,000 plus of unused RRSP contribution room. She should. "For every dollar Rachel contributes to her RRSP, she'll get 29.65 per cent of it back at tax time," Mr. Miszk says. In addition, the federal Home Buyers' Plan will allow her a one-time withdrawal of up to $25,000 from her RRSP – with no tax implications – that she can use toward the purchase of a house. The withdrawal must be paid back over 15 years starting two years after the home is bought to avoid any penalties.

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The person: Rachel, 38

The problem: How to invest her savings to generate higher returns in order to make a down payment on a house and for retirement income in the longer term.

The plan: Focus first on the RRSP, using refunds to build her down payment. Weigh the pros and cons of do-it-yourself investing versus using an adviser to manage your portfolio. Stick to the basic principles.

The payoff: Having all of her financial goals achieved.

Monthly net income: $4,280

Assets: Cash in bank $545; non-registered savings, investments $28,140; TFSA $47,335; RRSP $25,200. Total: $101,220

Monthly outlays: Rent $650; transit $80; groceries $250; clothing $150; gifts, charity $25; vacation, travel $300; dining, drinks, entertainment $550; grooming $20; other personal $50; dentist, doctor $30; health, dental insurance $100; cellphone $75. Total: $2,280. Surplus available for saving: $2,000

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com

Some details may be changed to protect the privacy of the persons profiled.

Video: Money Monitor: Tax-efficient planning tips for retirement (The Canadian Press)
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