The Downside of Cookie-Cutter Advice
Peter Wong was a chef and his wife, Mary, a hairdresser before immigrating to Canada. A language barrier prevented them from finding employment, but they found work in a local grocery store. They didn’t know much about Canadian finances, but knew they needed to save for their future. They opened accounts and credit cards with their bank, and with some assistance from relatives, later managed a down payment on a four-bedroom home. The bank advised them to save for retirement, so the Wongs each contributed to individual Registered Retirement Savings Plans (RRSPs), and the RRSP money was put into savings accounts. Feeling their finances were limited, the Wongs didn’t open a Registered Education Savings Plan (RESP) for their young son.
The Wongs’ savings weren’t working as hard as they were, so they came to us for a second opinion.
We identified a few opportunities:
- After reviewing the risk tolerance, financial goals, and long-term savings expectations, we determined they were moderate-risk investors. Mutual fund investments could be a better strategy than their overly conservative RRSP bank accounts.
- Start an RESP account for their son to gain 20-40% free matches through government grants
- Use Tax-Free savings accounts today to ensure they pay less tax on their income in retirement and obtain maximum government benefits.
- Rent out their basement suite to help repay the mortgage and relatives
- Recommend they have Canadian Wills and Power of Attorney documents in place
- Make sure they understand their work benefits
After meeting with the Exceptional Wealth Management team, Peter and his family have realized substantial benefits:
- Their son is now 16 years old. His RESP has grown to $11,067. Over the years, the Wongs only contributed $7500 of their own money, received $1810 in free government grant matches, and earned $1757 in investment growth. The Wongs took our advice this year to increase their RESP contribution from $100/mo to $200/mo (and subsequently get more free grant matches) as their son is getting close to university.
- Their investment accounts have grown on average 6% per year under our care. This includes the old RRSPs we took control of, the new Tax-free investment accounts, and the RESP.
- The $700/mo rent from their basement suite is helping to pay their mortgage, and they have already returned half of the owed money back to their relatives.
- They purchased additional life insurance to protect against the unexpected now that they are paying off their mortgage.
- They still need to get their Canadian Wills and Power of Attorney documents completed.
- Their tax-free investment accounts are growing at a good pace due to their monthly contributions and steady investment growth. This will help ensure that they can withdraw a comfortable ‘tax free’ income from their investments without having to pay additional taxes to the government. When their ‘taxable income’ is low in retirement, it will give them access to many government retirement benefits:
- Guaranteed Income Supplement (GIS) – monthly benefit paid to Old Age Security recipients (65 and over) with a low taxable household income.
- Allowance – monthly benefit paid to a spouse (age 60 to 64) of a GIS recipient.
- BC MSP Regular Premium Assistance – Starting January 2017, a couple or individual with less than $42,000/yr in net income can qualify for discounts on their monthly MSP premium. Many retirees in BC are required to pay their own MSP premiums.
- BC Pharmacare Assistance – BC government may subsidize your Pharmacare-eligible prescription drug purchases. The lower your taxable income, the more the government pays for your prescription drugs, and the less you pay.
- BC Bus Pass Program – Reduced annual bus pass (only $45/yr) for low income seniors receiving GIS or Allowance. The bus pass allows for unlimited rides on public transit operated by BC Transit (in Victoria and Greater BC) and Translink (in Metro Vancouver)