Let’s get personal.
After a dozen years of blissful cohabitation (sans kids). Tim & his squeeze are getting hitched. September, maybe, depending on the you-know-what. If all goes well, 150 people. Maybe a trip to Europe. The full Monty.
The romance is good. The finances may need some salve.
We currently have independent accounts but are filing our taxes together as common-law. Ahead of our union are there any steps we should take to better align our finances? I’ve been a long-time saver / investor. She not so much but is starting to come around to the idea that retiring with money in our pockets isn’t such a bad idea. Ideally freedom 55.
So here are the numbers for these 40-year-olds. He earns $110,000, with $340k in a B&D portfolio of ETFs (good boy, Tim) plus $113k in a TFSA, $155k in a non-registered account and a hundred grand sitting in chequing. She makes $65,000 with $75k in a bank mutual fund RRSP, no TFSA and twenty thou in a savings account.
No house. Rent is cheap ($1,700). Two dogs (breeds unknown, but “super cute”), cars paid for, like to travel. “What should we do?” he asks.
Okay, Tim, here’s the reality. You and she are an economic unit. You do not have independent financial lives, since that went out the window once you moved in together. Resisting an integration of your cash flow, assets and investments is a bad idea. You’ll probably pay more tax. You will likely suffer overlap and duplication among the securities you both own. You stand a good chance of not being able to retire with as much money at age 55, nor with an overall portfolio that can provide a steady, predictable and adequate income stream.
It’s always been a wonder that people get married, buy houses, have children and age together – showing immense trust and dependence, except when it comes to their money. Bad, awful habits on each side get carried into a union. Often a woman will be a risk-averse saver with a penchant for no-growth, ‘safe’ assets. Often a guy will cluelessly confuse investing with gambling, buy speculative crap and still manage to swagger. It’s a bad combo.
So how are these two doing?
Combined liquid assets of just over $800,000 put them in a sweet spot. Of course they could blow it all buying a slanty semi somewhere, also taking on a $700,000 mortgage, but they seem too smart for that. The bottom line: if they contributed no more to their current accounts, integrated them and managed to earn 6-7% on average for fifteen years, the pot should swell to just over $2 million by age 55. That would churn out $130,000 a year in cash flow, or about 75% of current working incomes. Add in CPP and OAS down the road and they’d be living on the same cash flow as now. More, actually, if they structure things the right way.
First, $120,000 is way too much cash to sit on in dead-end bank accounts. Get it working. The first place is her TFSA, which needs to go from zero to the current max of $75,500. Keep the tax-free account topped up for every one of the years until retirement, invested in growth-oriented ETFs (this is not a savings account for vacations), and it can seriously boost retirement income without causing more OAS clawback or bumping her into a higher tax bracket.
The remainder should go into a joint non-registered account, along with Tim’s existing assets.
It will save tax. Growth in a joint non-reg account is attributed to the account-holders equally (regardless of the origin of the funds, whatever the CRA tries to tell you), which takes advantage of her lower tax rate. There’s also a strong estate planning component. If Tim croaks before his dear partner, for example (statistically almost certain), everything in the joint account automatically becomes the property of the spouse – no probate, no wills and no waiting. Do it.
Additionally, Tim should stop making contributions to his own RRSP and direct them all to a spousal plan. He still gets the full tax break for doing so, but eventually she can cash portions of that plan in to finance retirement with less tax. In fact, even is she uses some of this money for the next Italian dalliance it will come out (after three years) at her marginal rate – while he got the big tax break.
More… she should dump the bank mutual funds and their high MERs. Converting to low-cost ETFs will help the assets grow faster. They should ensure each other are beneficiaries of their RRSPs and successor holders of their TFSAs. They should get some help – with eight hundred thousand, soon to be a million, a fee-based advisor would help ensure an overall balance and diversification and move various assets around for the best tax-efficiency. Plus draft a plan for four decades of wrinklihood. A joint chequing account is also a basic need. The days of ‘his’ money and ‘her’ money are so over.
Living with someone breeds dependence. That brings responsibility. Each to the other. Failure may lead to a break. Then what happens to the dogs?