Case study
#1
Making Retirement
Better
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Solutions that click
Case
study #1
Paul integrates a TFSA
into his retirement
savings portfolio
For advisor use only.
This document is not intended for public distribution.
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Case study #1
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Paul knows he wants a TFSA, but he isn’t
sure what investment to choose. He turns
to you for guidance.
Case study #1
At 40 years old, Paul is a diligent, motivated saver. Although
he had a pension plan with a previous job, he does not
have one now, and he knows he cannot count on one in
the future. Keeping this in mind, he’s determined to do
everything he can to make sure his retirement years will
be comfortable. Like most people, Paul has watched his
savings take a hit from volatile markets, and he wants to
do what he can to protect and grow his investments.
Paul received a tax refund this year, and is considering putting the cash towards a
Tax‑Free Savings Account. He wants to add a TFSA to his retirement portfolio, as
he’s heard great things about these new accounts. For example, he knows TFSA
withdrawals are never taxed, while his RRSP income will be fully taxed when he begins
withdrawing it.
Watching his investments fall in value has made Paul nervous. For his TFSA,
he’s determined to make a “stable” investment, but he’s not entirely sure how
to achieve that.
Objective: Save for retirement and learn
how to best incorporate a TFSA into his
retirement portfolio
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Case study #1
Snapshot of Paul’s
current investments
Registered Savings
Non-registered Savings
RRSP:
• Currently valued at $20,000
• Currently valued at $70,000
• Paul still contributes $100 a month
• Paul contributes $500 a month
• Invested in a Canadian Equity Fund
• Invested in International, U.S. and Canadian
Equity Funds
• Reasoning: Paul chose this fund because of
its tax treatment. He understands that he will
be taxed on future capital gains at the 50%
inclusion rate.
• Reasoning: Paul chose to invest his RRSP in
growth funds because he understands “they
give the opportunity for a higher rate of return
over the long-term.”
LIRA:
• Currently valued at $35,000
• Invested in Canadian Bond Funds
• Reasoning: Paul chose a Canadian Bond Fund
because he wanted a lower-risk investment to
offset potential risks in his RRSP.
How Paul’s investment dollars are allocated
Plan type
Current Fund
Amount
% of current
portfolio
RRSP
International Equity
$30,000
24%
U.S. Equity
$30,000
24%
Canadian Equity
$10,000
8%
LIRA
Canadian Bond
$35,000
28%
Non-registered
Canadian Equity
$20,000
16%
$125,000
100%
Total
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Case study #1
Before going ahead with the investment in
a TFSA, you would like to review Paul’s
complete financial situation with him.
This way you can take steps to ensure that
all his investments are working together to help him
reach his goal.
How Paul’s investment dollars are allocated
Fixed income
Canadian Equity
U.S. Equity
International Equity
28%
16% + 8% = 24%
24%
24%
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Case study #1
Things to consider
Paul has one overriding goal: to save for retirement. At present, he wants to know
how to best include a TFSA in his retirement portfolio. Before discussing how to
approach TFSA investing, you may want to review Paul’s complete financial picture.
This way, you can take steps to ensure that all his investments are working together
to help him reach his goal.
Topics to address
Consolidation
Is the same investment philosophy guiding all of his holdings? To help Paul
achieve his goal, it’s important to make sure he’s investing his assets efficiently.
Consolidating under one advisor will help him build an efficient and tailored
portfolio, one that can more easily be kept in proper balance. When it comes
time to start drawing an income, this approach will also give Paul more control
over the mix of taxable, tax-favoured and non-taxable sources of income he will
draw from, and can lead to a more tax-efficient use of his assets.
Risk Tolerance Does Paul’s portfolio reflect his approach to risk? Does its structure reflect his
investment objectives, time horizon and knowledge? Now would be a good
time to revisit Paul’s portfolio to make sure it reflects his personal risk tolerance
and situation.
Diversification Is Paul’s portfolio properly diversified? No single asset class, geographic region
or industry sector will always be the top performer. Paul’s portfolio may be
exposed to undue risk if he is overweight in one area and that area goes out of
favour. An efficiently diversified portfolio will help minimize his risk.
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Tax
Implications
Rebalancing a non-registered portfolio can have tax implications. Of course,
you would start by rebalancing Paul’s registered assets, but if rebalancing his
non-registered investments is called for, you may need to remind Paul that risk
management is a priority. In this case, realizing a capital gain or capital loss may
be the route to take.
Rebalancing
What will you recommend if you find that Paul’s portfolio would benefit
from some adjustments? Selling in a down-market could lock-in the losses he
has suffered over the past year. How could he best replenish the areas of his
portfolio that are lacking?
Case study #1
Action plan
When you meet with Paul, you start with the basics and review his situation. Has
he completed an investor profile questionnaire? If so, how long ago, and have his
investment goals changed since then?
Paul recalls completing an investor profile
questionnaire, but concedes that it was more than
5 years ago. You point out that his investment
horizon—and the economy—have changed, and
you ask him to complete a new one.
Moderate portfolio asset allocation
It reveals that Paul has a moderate risk tolerance
and should invest his overall retirement portfolio
according to the following asset classes:
Fixed income
Canadian Equity
U.S. Equity
International Equity
60%
20%
10%
10%
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Case study #1
Action plan
Revisiting Paul’s portfolio
When he started contributing to his RRSP, Paul
didn’t have a non-registered account. His only
goal was to invest for the long-term. From year to
year his rate of return would fluctuate, but overall,
he was happy with his investment performance,
and did not spend a great deal of time wondering
if his investments were appropriate.
Market volatility changed Paul’s attitude. Now
that his portfolio value is down, he is nervous
especially with his equity portion. He is not
as confident in his investment choices, and is
questioning his asset allocation.
You compare Paul’s current asset mix to that
recommended by his investor profile, starting with
the most volatile asset class.
“I want to be sure
my investments
help me reach
my retirement
objectives,
even if markets
are volatile.”
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Case study #1
Action plan
Plan type
Fund
Amount
% of
portfolio
Moderate
risk profile
Target $
allocation
Adjustment/future
contribution
RRSP
International
Equity
$30,000
24%
10%
International
Equity
$12,500
14% overweight.
Future RRSP contributions
should be invested in another
asset class.
RRSP
U.S. Equity
$30,000
24%
10%
U.S. Equity
$12,500
14% overweight.
Future RRSP contributions
should be invested in another
asset class.
RRSP
Canadian Equity $10,000
8%
$25,000
Nonregistered
Canadian Equity $20,000
16%
20%
Canadian
Equity
4% overweight: close to target
asset mix.
Future non-registered and RRSP
contributions could be invested
in the same asset class.
LIRA
Canadian Bond
$35,000
28%
60%
Fixed Income
$75,000
32% underweight.
TFSA contributions could be
invested in fixed income asset
class. Some RRSP dollars could
also be invested in fixed income
if you want him to reach his
target mix sooner.
$125,000
100%
100%
$125,000
Total
Due to recent losses in the equity asset class, you
realize that if you had gone through this exercise
a few years ago, Paul’s portfolio would have been
even more overweight in equities than it is now.
This means that without being fully aware of it,
Paul was taking on more risk than he would have
necessarily chosen. Your goal is to try to avoid
letting Paul’s portfolio shift away from his target
allocation in future.
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Case study #1
Action plan
Planning Paul’s TFSA contributions
Because the stock market has seen equities
fall historically low, Paul might be tempted to
invest his TFSA dollars as a lump sum in equities
believing he will benefit from any market
rebound. However, you recommend he follow the
path suggested by his investor profile. He needs to
replenish his fixed income holdings. Adding more
weight to this asset class will help keep him in a
moderate profile.
You let Paul know that he should be directing his
TFSA contributions to fixed income funds. A good
choice for his TFSA would be a Canadian bond
fund. If such a fund was held in a non-registered
account, any interest would be fully taxable
each year.
You also recommend against a single lump
sum contribution. Making ongoing, steady
contributions to this asset class will not only
help him rebalance his portfolio, but also let him
benefit from dollar cost averaging. You suggest
that he invest $1,000 per month from his cash
on hand until he reaches the yearly TFSA limit of
$5,000.
Paul is familiar with investment funds. At this time,
he does not feel the need for guarantees and is
comfortable investing in mutual funds.
How dollar cost averaging works, and how it helps
You can help your clients reduce stress and risk
with dollar cost averaging. The term refers to
the practice of making regular, fixed amount
investments.
Because investment fund prices fluctuate, your
clients will end up buying more shares (or units)
when prices are low, and fewer shares when
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they are high. Over time, this approach helps
minimize investment risk. It also eliminates the
pressure of deciding when to buy and sell.
For Paul, who has already seen his investments
lose value and is looking for stability, this is a
relatively stress-free investment approach. It will
also help him reach his target asset mix.
Case study #1
Action plan
Taxation features at a glance: Here’s how the plan types compare
RRSP
Non-Registered
TFSA
Deductible
Yes
No
No
Limited contribution
Yes
No
Yes
Earning deferral
Yes
Unrealized capital gain
only
N/A (not taxable)
Pension Splitting
Yes, spousal
In some cases after
age 65
Indirectly, if you gift
the money to your
spouse
Dividend Tax Credit
No
Yes
No
Capital gain inclusion
rate of 50%
No
Yes
No
Flexible withdrawal
Max at 71 years old
Yes
Yes
Tax on withdrawal
Yes
Realized capital gain
No
Use fund diversification to minimize risks
Paul has already seen first-hand what can happen
if a portfolio is overweight in an area that goes
out of favour. You make sure he knows that if
he consolidates his assets under the direction
of one advisor, that advisor can monitor the
portfolio to make sure Paul stays on track with
his asset allocation.
Whether you take care of Paul’s asset allocation
yourself or find a portfolio that matches his profile,
you need to recommend funds or a portfolio
offered by a strong, stable manager with proven
management expertise and a solid track record.
Another solution for Paul is to buy a portfolio that
matches his moderate risk profile. This will also
help him achieve an appropriate allocation of asset
class, geographic and sector diversification.
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Case study #1
Did you know?
By investing in a TFSA, Paul can potentially stay in the same tax bracket
and preserve his eligibility for government benefits when he retires.
Here’s how it might work
Assume Paul needs retirement income of $60,000
per year. His income sources will be CPP/QPP, OAS,
RRIF/LIF and TFSA. If he draws on CPP/QPP, OAS
and RRIF/LIF to generate $50,000, his government
benefits won’t be impacted. But he needs $60,000
to live comfortably.
If he takes the $10,000 from his TFSA, he can still
receive $60,000 without moving into the $60,000
bracket. He gets the income he wants, and gets to
keep his government benefits.
TFSA income is not taxed on withdrawal and has
no impact on taxable income and thus no impact
on government benefits.
If Paul takes another $10,000 from his RRIF, it will
put him in the $60,000 tax bracket and he will
lose some government benefits.
Why invest in a Tax-Free Savings Account?
TFSA savings are not taxed
on withdrawal
Unlike RRSP/RRIF withdrawals, TFSA
income has no impact on government
retirement benefits, tax credits /
income claw-backs
Any TFSA withdrawals can be
recontributed back the following year
Unused contribution room is carried
forward indefinitely
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Funds can be withdrawn at any time
There is no age limit or forced
withdrawals
The value of the TFSA at death
can be transferred to a spouse on
a tax‑free basis
Contribution limit is indexed to inflation
(rounded to the nearest $500)
Case study #1
Wrap-up
Paul’s initial inquiry about a TFSA helped you guide him to a well-considered
investment for his TFSA. It also gave you an opportunity to revisit his entire portfolio
and make sure all of his investments are working together to meet his goal.
Here’s a summary of the action plan
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Used Paul’s initial inquiry about opening a TFSA to revisit his entire portfolio, beginning
with asking him to complete an investor profile questionnaire.
Compared Paul’s current portfolio to his investor profile, revealing imbalances.
Advised Paul to consolidate all investments with one advisor. This will make it easier to
ensure that all of his investments work together to help him achieve his goal.
Recommended that Paul use his extra cash to go ahead with a TFSA, and directed
his contributions to fixed income. The money he invests here will address imbalances
in his portfolio.
Instead of a lump sum contribution, recommended regular monthly contributions. This
will let Paul benefit from dollar cost averaging.
Recommended Paul invest according to his risk profile. Whether you recommended
specific investment funds or a pre-determined portfolio, you know that following your
advice will help Paul move towards an overall portfolio that matches his risk profile.
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Case study #1
Standard Life’s solutions
Real-life events require distinct planning concepts using creative product solutions.
Standard Life offers a full range of investment and protection solutions to meet these
needs. Here are the products specific to this particular case:
Standard Life Mutual Funds
Portrait Portfolio Funds – Moderate Profile
• Choice of 23 funds covering Fixed Income,
Monthly Income, Dividend and Equity
Fund Families
• Pre-determined portfolio suitable for investors
with a moderate risk tolerance
• Opportunity to build a well-balanced,
diversified portfolio that allows clients to
benefit from investment opportunities around
the world
• Provides protection against market volatility
while offering long-term growth potential
• Funds are known for their consistent long‑term
performance potential and controlled
exposure to risk
• Large portion of fixed income 60/40
• Includes a strategic target mix of fixed
income, U.S. equities, Canadian equities and
international equities
• Continuously monitored Portfolio is periodically
rebalanced according to Standard Life
Investments’ current market outlook
If you recommend the Standard Life Mutual Funds Portrait Moderate Portfolio,
Paul’s assets will be invested as shown in his Investment Policy Statement:
Standard Life Canadian Bond Fund
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49.0% Assets
Standard Life International Bond Fund
6.0%
Standard Life U.S. Dividend Growth Fund
6.0%
Standard Life Dividend Income Fund
5.5%
Standard Life Canadian Equity Fund
5.5%
Standard Life Canadian Equity Focus Fund
5.0%
Standard Life Global Equity Focus Fund
5.0%
Standard Life Global Dividend Growth Fund
5.0%
Standard Life Diversified Income Fund
5.0%
Standard Life Global Monthly Income Fund
4.0%
Standard Life International Equity Fund
4.0%
Case study #1
Standard Life Mutual Funds are managed
by Standard Life Investments Inc. (SLI)
By investing in Standard Life’s Mutual Funds,
stand-alone funds or Portrait Portfolio Funds,
your clients will gain access to proven investment
expertise – the same expertise that was once
primarily available to major pension funds and
institutional investors.
In Canada, a team of 40 investment professionals
manages assets of CDN $23.3 billion1, while SLI’s
global team of over 200 manages
CDN $219.7 billion1 of assets for clients worldwide.
SLI is a first-class investment company with offices
throughout the world that views investing from
a truly global approach.
Take the CE course.
1
Assets under management as at end of December, 2008.
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Case study #1
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This document is for general information only. It should not be construed as legal, accounting, tax or specific
investment advice. Clients should consult a professional advisor concerning their situations and any specific
investment matters. Our analysis is based on the tax legislation in effect on April 28, 2009. While reasonable
steps have been taken to ensure that this information is accurate, The Standard Life Assurance Company of
Canada and Standard Life Mutual Funds Ltd. make no representation or warranty as to the accuracy of this
information and assume no responsibility for reliance upon it.
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Standard Life Mutual Funds Ltd.
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