Married couple Alex and Alina are 45 years old with a child in elementary school and their eyes cast on the future. They are focused on how to build an investment portfolio that will allow them to achieve their short-term and long-term goals.

They have adopted a similar approach to finances as their parents. “My parents had pensions so they never invested in registered retirement savings plans (

RRSPs

),” said Alex. “The focus was on buying real estate and saving in a bank account and that’s what we’ve been doing.”

The couple are ready to explore their investing options as they look to upsize from their current home in British Columbia. They have a budget of between $1.7 million and $2 million and are looking for a house with a rental unit. They plan to use the proceeds from the sale of their mortgage-free current home, valued at $1.2 million, and the $400,000 they have in cashable guaranteed investment certificates (

GICs

) to pay for a larger house. “Is this the right approach?” asked Alex. “Will using the GICs to help fund a new home hurt my

retirement plans

?”

Alex and Alina earn $195,000 a year combined before tax and Alex will be eligible for his full employer pension at age 62, which will pay about $5,500 a month. He does not plan to work after he retires. Alina will likely work to age 65 and does not have an employer pension.

The couple also own a rental property valued at $1.4 million that generates $5,500 a month in rental income. This more than covers expenses and the $3,200 monthly mortgage payments on the $538,000 mortgage at 3.93 per cent. The mortgage matures in 14 years. They plan to keep the rental property and have it serve as Alina’s pension before eventually giving it to their child as part of the inheritance.

Alex and Alina also have $73,000 invested in exchange-traded funds (

ETFs

) and stocks in a tax-free savings account (

TFSA

). They have $156,000 invested largely in mutual funds and ETFs in an RRSP. They also maximize contributions to a registered education savings plan (

RESP

), which is valued at $40,000.

To this point, Alex feels their savings haven’t been working for them and he would like to change that. Specifically, he wants to know what the couple should be invested in and where. “Should 60 per cent of our investments be in the U.S., 20 per cent in Canada and 20 per cent in

emerging markets

? Should we be focused on generating dividend income or do ETFs make the most sense for us? What type of asset allocation should we have?” he asked.

What the expert says

Graeme Egan, president of CastleBay Wealth Management Inc. in Vancouver, said Alina and Alex have saved well and are on the right track to building a substantial investment portfolio — a definite priority in today’s world of relatively low interest rates and rising inflation. “Parking money in a bank account is no longer an option today.”

Using their GICs to help purchase a larger house makes sense, Egan said. “Even if they have to take on a small mortgage, the rental suite and income they hope to have in their new house will help offset mortgage payments and their surplus income from their rental property provides a cash-flow cushion if it takes a while to find a tenant.”

When it comes to their investment portfolio, their focus at this stage of their planning should be on capital appreciation, not generating dividend income while they are still working and don’t need the income, Egan said.

“If Alina and Alex continue to self-manage their investments, ETFs are the right choice to build a globally diversified equity portfolio and they should look at replacing all of their retail mutual funds with similar ETFs, which have lower management expense ratios (MERs) and are liquid. If they have not already done so, they might have to open self-directed RRSPs and TFSAs at a discount broker of their choice; all the big banks own a discount brokerage arm. A few discount brokers even offer no commissions on ETF purchases as an incentive to open an account.”

Given their long runway to retirement — at least 17 years of investing if Alex retires at 62 — Egan believes their current overall asset mix seems a bit conservative. He recommended at least 70 per cent equities and 30 per cent fixed income, reducing to 60 per cent equities at age 55, with further reductions in equity holdings as they age.

“Their TFSAs should hold 100 per cent equity ETFs, given the tax advantage of completely sheltering long-term capital gains. Any fixed income (bond ETFs) should be invested in their RRSPs.”

In terms of geographic focus, Egan suggested 20 per cent of their equity ETFs be invested in Canada, 25 per cent in the U.S. (including large- and small-cap as well as Nasdaq exposure) and 25 per cent international (including five per cent directed to emerging markets for “higher octane exposure”).

“If they do not want to continually rebalance and monitor their portfolio, there are all-in-one asset allocation ETFs … with various asset mix allocations to suit different investors which are rebalanced occasionally according to the ETF sponsor’s pre-set rules,” said Egan.

“If Alina and Alex want to build their own ETF portfolio and they are not interested in researching bond ETFs, they can consider using an aggregate bond ETF that contains a range of short- to long-term government and corporate bonds. No bond management is required by the investor, MERs are lower compared with a bond mutual fund and they pay interest monthly into your account.”

Egan recommended Alina and Alex continue to maximize annual RESP contributions to obtain government grant money and then focus on investing in RRSPs and use their annual tax refunds to contribute to their TFSAs and invest in equities each year.

“The good news is Alex’s defined benefit pension will likely be indexed at age 62 and beyond. Equity investments tend to keep up with inflation so only their fixed income portion is not indexed,” he said.

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“Once their current real estate situation is settled, they should consider engaging the services of a fee-for-service financial planner to do some long-term projections for them to calculate what they should save annually in RRSPs and TFSAs in conjunction with Alex’s known pension so they can both be financially independent at Alina’s age 65.”

*Names have been changed to protect privacy.

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we’ll find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).