B8 G THE GLOBE AND MAIL • THURSDAY, FEBRUARY 16, 2017 SELF-DIRECTED INVESTING • REPORT ON BUSINESS D ave Nugent has had an idea rolling around his head for a while. Tax-free savings accounts, he thinks, might better be brand- ed with a new name: tax-free investment accounts. “Too many people leave it sit- ting in cash,” says Mr. Nugent, the chief investment officer of Wealthsimple, the Toronto-based, passive, online only robo-adviser with a large millennial client base. He speaks to a lot of young- er investors, especially those looking to save for big life events such as a wedding or a first home. And unless those folks are just a couple of years away from the purchase, “you need to get invest- ed, and grow your money above inflation.” For millennials within their first decade in the work force, as soon as you start making enough mon- ey to save, it can seem like you al- ready have occasion to spend it. But, depending on how far away your goals are, there are strategic ways to allocate assets in different accounts for different purposes. “The greatest advantage a mil- lennial has is they typically have time on their side,” says Mr. Nugent, who knows the demo- graphic well. He’s 31. He often hears from younger clients wary of stock market tumult, especially for mid-term goals of five or 10 years. “That’s actually a reason- able amount of time to invest.” Hence his criticism of the TFSA’s name. Even if your biggest financial goals are planned for the next couple of years, saving for multiple goals is prudent – as far away as it is, there’s always re- tirement – and it means investing wisely. In terms of asset mix, he recom- mends the traditional march to safety. With a five- or 10-year hori- zon before a financial goal, Mr. Nugent suggests going aggressive on equities – up to three-quarters of the portfolio – and then gradu- ally raising the fixed-income or cash-equivalent component until the three-year mark, when every- thing should be in cash or cash equivalents. Shannon Lee Simmons, a certi- fied financial planner with the fee-only New School of Finance advisory in Toronto, also recom- mends diminishing risk in the race to the finish line. “Cash-like products ... are super boring, but having exposure to volatility might not be a good idea,” says Ms. Simmons, whose roster of cli- ents is mostly between 25 and 45. Meanwhile, the accounts your assets should sit in – TFSAs and registered retirement savings plans – depend on your individu- al financial situation. If home ownership is on your mind, RRSPs have the built-in advantage of the First-Time Home Buyers’ Tax Credit – an up- to-$25,000 saving grace for many – but it’s effectively a loan, and those who use it need to repay it over 15 years. For some, that can add an undue amount of pressure on mortgage payments. “You shouldn’t stretch to buy a house,” Mr. Nugent says. Building savings through a TFSA can be a wise alternative, then, since “you don’t have the burden of having to recontribute each year.” TFSAs are “choose-your-own- adventure” accounts, Ms. Sim- mons says, since they offer a tax- sheltered chance for younger mil- lennials to save for both immediate goals – with a conser- vative asset mix – and can be a more aggressive retirement account once life’s big expendi- tures are out of the way. “For me, it’s basically matching a TFSA asset mix to your goals,” she says. For some goals, such as a wed- ding, a TFSA’s liquidity makes it a no-brainer, Ms. Simmons says. For home ownership, things can get trickier. “If you put money into your RRSP, yes, you can get a refund today, but you’re basically defer- ring tax to the future,” Mr. Nugent says. If you need to withdraw it, though – particularly if you haven’t retired but find yourself in a higher tax bracket than when you made contributions to the RRSP – the benefits disappear. If that’s the case, Mr. Nugent says, “you’re better off contribut- ing to a TFSA.” Within an RRSP, Ms. Simmons points out, there’s no reason why you can’t save for multiple goals, with your money allocated differ- ently for each. The first $25,000, in cash equivalents and ready to withdraw soon for a home pur- chase, “might be a totally sepa- rate beast than the rest of the RRSP.” “If you drop $40,000 in there,” she continues, “even if you’re going to buy a house, that $15,000 on top of the 25 can be invested in a growth-oriented asset mix. Go long – you’re not going to touch it for 30 years.” There are serious drawbacks, though, to playing chicken with the stock market with anything in your RRSP or TFSA earmarked for a home downpayment. Gaining an extra 10 per cent on your downpayment might mean slightly decreased mortgage pay- ments, but it likely won’t affect the house you buy, Mr. Nugent says. But the opposite? “If you were to lose 10 per cent of your downpayment,” Mr. Nugent says, “that affects the type of house you buy, that could defer your purchase to later years, or now you have a high-ratio mort- gage to pay [Canadian Mortgage and Housing Corporation] insur- ance on.” TD Wealth financial planner Shelley Smith warns that the threat of losing 10 per cent of a downpayment might seem small, and suggests to consider what it would actually cost. “If you put it in dollar terms for someone who has saved up $20,000 or $30,000, what if it’s worth $3,000 or $4,000 less? How do you feel about that?” Even after jumping big hurdles for things such as a home down- payment, Ms. Smith advises hav- ing a wide-ranging portfolio to weather different market condi- tions and to have some liquid assets in case of emergency. “The diversified portfolio will allow you access to investments that perform differently at different times,” she says. ..................................................................................................................................................................................................................................................................................................................................................... PORTFOLIOS TFSAs – choose adventure or investment Millennials have options when saving for multiple goals – even retirement, as far away as it might seem ..................................................................................................................................................................................................................................................................................................................................................... JOSH O’KANE ................................................................ TFSAs can be ‘choose-your-own-adventure’ accounts because they offer a tax-sheltered chance for younger people to save for both immediate goals and can later be a more aggressive retirement account. ISTOCKPHOTO E mily Larimer understands, perhaps better than most, the importance of taking meticulous steps to build up her retirement savings. The 55-year-old Toronto-based chartered professional account- ant, who is single and suffers from multiple sclerosis that requires expensive drug treat- ment, established her registered retirement savings plan (RRSP) at age 30, and has also contribut- ed to a tax-free savings account (TFSA) in recent years. “You just don’t know what’s going to happen, so you need to set things up to care for yourself when you’re older. That’s why I set up an RRSP at an early age. I don’t think Old Age Security is going to provide nearly enough to take care of me as I get older,” says Ms. Larimer. To provide an extra cushion for retirement, Ms. Larimer owns her own home, has paid off her mort- gage, made improvements to in- crease its value, and has taken in a boarder to provide rental in- come. “Paying off my mortgage was incredibly important to me. It’s another way that I’m taking care of myself, because nobody else is around to do that for me,” she says. Experts stress that while retire- ment planning is an important priority for everyone, regardless of their marital status, single baby boomers – the youngest of which are now 52 and roughly a decade from retirement, need to be especially diligent. They must pay for their mortgage, food, tax- es and all other current living expenses with one income, plus save enough money to support themselves when they decide to retire, without the possible safety net that a spouse might provide. The task may be even more daunting for women. A gender wage gap still exists in many industries. Women tend to take more time away from the work force as caregivers for family members. And statistically, they live significantly longer than men. According to the World Health Organization, in 2015 a Canadian male at 60 could expect to live for an average of 23.5 more years, while a Canadian female at 60 had another 26.4 years. Graeme Egan, a financial advis- er with CastleBay Wealth Man- agement Inc., fee-only financial planners in Vancouver, suggests that women project a 95-year lifespan when they plan for re- tirement. What to invest in is more sub- jective. Sabrina Castellano Smith, director of the retiree planning network for Investors Group Financial Services Inc. in Winni- peg, says a common question from her clients, including those who are single, is whether to invest in an RRSP or TFSA. Those instruments are struc- tured differently. For the RRSP, in the 2016 taxa- tion year, taxpayers can make an annual contribution of up to 18 per cent of their previous year’s earned income, to a maximum of $25,370. They receive an up-front tax deduction, and deferred tax liability until the money is with- drawn. The RRSP is set up to ben- efit taxpayers who expect to be in a lower marginal tax bracket when they retire. Investments inside the RRSP grow on a tax deferred basis. Up to $5,500 of after-tax money can be contributed annually to a TFSA, and because that is after- tax money, there are no tax con- sequences upon withdrawal. Investments inside the TFSA grow on a tax-free basis. “If you are single, consider maximizing your TFSA first. These are great because the investments in them aren’t taxed. This is going to allow you more flexibility. When it comes time to withdraw the income, it’s a little more favourable,” says Ms. Smith. But it is also important for sin- gles to have a good mix of RRSPs, TFSAs and other non-registered account investments, along with any pension income they are en- titled to, in order to provide tax efficient income stream options at retirement, she adds. For a baby boomer in a lower tax bracket, whose income is trending downward, a TFSA might be the better first priority, says Mr. Egan. But usually people who are roughly 10 years from re- tirement are in their highest in- come earning years, he notes. “On that basis, I would general- ly say that an RRSP would be the first priority because you’re get- ting a tax deduction at the high- est marginal tax rate, or pretty close, which is creating a tax refund. And presumably you’re going to be in a lower tax bracket when you take the money out of the RRSP,” says Mr. Egan. The RRSP tax refund also pro- vides some attractive financial planning options. Mr. Egan sug- gests that it could be used to ei- ther pay down non-tax deductible debt, or make a con- tribution to the TFSA. Retirement portfolios should always be under review, but this is especially so in the 10 years pri- or to retirement, when many will want to reduce volatility and risk as the window narrows, stress ex- perts. “I would look at the overall pic- ture. If someone has, say, an overall asset mix of 60-40, or 70- 30 being equity versus fixed in- come, as they approach that time I would lessen the equity comp- onent of the overall portfolio,” says Mr. Egan. For somebody who is suddenly divorced or widowed, resulting in an unexpected change in life cir- cumstances, a visit with a finan- cial adviser can help sort out any necessary financial changes. Single individuals who are approaching retirement, but well behind on planning for it, might also have to adapt to changing circumstances quickly. But, say the experts, it is never too late. “Start by taking a look at what your current cash flow looks like, [and] also reviewing your cur- rent income sources,” says Shell- ey Forsythe, a strategist with CIBC Wealth Strategies Group in Vancouver. “You then want to take a look [at] retirement income sources and expenses, breaking it down into fixed versus discretionary. What kind of expenses will remain the same? What will reduce, or won’t be there? And are there any health-care related costs that you need to be think- ing about?” Ms. Forsythe elabo- rates. Ms. Smith recommends that employees approach their employer to inquire about corpo- rate retirement savings plans that set aside a portion of pretax in- come for retirement. Another strategy to consider is borrowing money to make a lump-sum catch-up contribution, suggests Mr. Egan. ................................................................ Special to The Globe and Mail ..................................................................................................................................................................................................................................................................................................................................................... PLANNING Single baby boomers need cushion to pad portfolios Women, especially, face a tough task as they look to build wealth on one income ..................................................................................................................................................................................................................................................................................................................................................... JEFF BUCKSTEIN ................................................................ Single baby boomers – the youngest of which are now 52 and are roughly a decade from retirement – need to be especially diligent in building up savings. ISTOCKPHOTO