After finding almost nothing for five years in the Valley of the Kings, on Nov. 4, 1922, Howard Carter made one of history’s most important discoveries. He had stumbled upon a hidden step that he thought was just another ordinary royal tomb pilfered to its walls.
It was not ordinary. Carter had discovered an ancient Egyptian tomb undisturbed for over 3,000 years — the tomb of King Tutankhamen, filled with gold, silver and other riches.
In financial planning as in archeology, often you’re looking for one thing and find something quite different.
Gary had phoned as he had lost his job and needed to deal with severance and pension money. He had procrastinated, and his deadline was just a few days away. “I’m clueless about this,” he admitted. “Can you help me?”
I asked Gary and Bev, his wife, to bring in their investment statements, life insurance policies, a list of debts and assets and a mortgage statement. I asked them to think about where they wanted to be in 10 or 15 years and to write out their top financial goals and fears.
“Why all that?” Gary asked. “I just need help with my severance and pension plan.” They humoured me and dutifully showed up two days later with the material in hand.
I knew that reviewing their finances would uncover other financial issues. This summarizes Gary’s and Bev’s financial picture.
- At age 52, they had investments of $78,000 roughly evenly split between their personal RRSPs, with no other savings. They’d made no new investments for years.
- Gary’s pension was $50,000 and his severance package was $30,000.
- They had a $279,000 mortgage.
- They were making only monthly payments on two lines of credit and credit cards totalling $149,000.
- They had four life insurance policies, a whole-life policy on Gary and three creditor insurance policies (on their mortgage and the two lines of credit).
- Incomes were $215,000 (Gary: $170,000, Bev $45,000). They hadn’t been doing any retirement savings for years.
With high debt, small savings and expensive insurance, they were struggling, and were worse off than they had been five years earlier.
Their top goal was the same — a comfortable, worry-free retirement within 10 years.
Although their situation was “pathetic” (Bev’s word, not mine), their high income gave them great capacity to salvage their retirement — if they got serious.
After our first meeting I arranged their bigger financial issues in order of importance:
Most immediate was the pension transfer and severance payment. We set up an RRSP account and transferred in the $80,000. This saved Gary $10,200 in taxes instead of taking the money in cash.
Next we transferred their existing bank RRSPs ($80,000 evenly split) into new RRSPs. They liked the “bank bloke,” as Gary called him, but were getting no advice. “He would ask us what we wanted to do. We didn’t know, and neither did he.”
We cashed in their insurance side investment account ($45,000) to pay off a car loan, saving $635 a month.
We met again two weeks later to do these things:
They were paying $850 a month for three creditor insurance policies (mortgage, lines of credit and a car loan). (Google “CBC Marketplace In Denial” for an expose on bank mortgage insurance.) Rewriting their insurance saved them $1,200 per month to throw at debts and RRSPs.
I arranged an introduction to a mortgage broker and attended their first meeting. She rewrote the mortgage to save $300 a month.
Gary and Bev had been splitting their RRSP contributions. However, with Gary’s high income he should first have contributed to his limit before Bev contributes to her RRSP. Over eight years they had been contributing they had missed thousands of dollars of tax savings.
I had them track three months’ spending. We’d already saved $1,200 per month with no reduction in their discretionary spending. Bev says they can cut a few hundred dollars from their spending, money they can use to pay off those credit cards faster, attack the other debts and resume RRSP contributions.
Your take-home piece
I asked Gary and Bev how they felt about the plan we had implemented. “You pointed out,” Bev said, “the areas where we were going wrong. We knew we were off track but had never done anything about it. We now have a plan.”
Gary and Bev thought they had one issue to deal with, when in fact they had several that threatened their financial security. Like Howard Carter, they were looking for one thing and found something quite different.
Wayne Rothe, Certified Financial Planner/Branch Manager, Wayne Rothe & Associates Wealth Management, Manulife Securities Investment Services Inc., email@example.com, 780-962-1146, Spruce Grove, Alberta. Comments are the author’s and not necessarily those of Manulife Securities Investment Services Inc.