A TFSA in need of a late-to-the-game strategy

Name: Karen H.

Age: 52

Location: Durham, Ont.

TFSA: $15,000 Cash

Karen H., 52, is ready to open a TFSA for the first time and will contribute $15,000 to it. She wants some advice on how to invest the money. “I don’t have a TFSA right now but I’d like to start one,” says Karen, a corporate travel agent from Durham, Ont. Karen would like to put her savings plans for retirement into high gear for the next few years. “I have a robust RRSP with my employer but I only have 16 years left to save for my retirement,” says Karen, who plans to retire at age 65. “I have some cash now from the sale of my home and plan to set up a TFSA plan with biweekly payments of $75 a week.” Right now, Karen still has the full $57,500 TFSA contribution room available to her and is confused. “Some banks are saying that I should go with their mutual funds, and then I do some research on my own on exchange-traded funds (ETFs) and see how much cheaper the costs associated with those are,” she says. She’s also heard her friends talk about Vanguard and BlackRock ETFs. “I like the idea that they have a pool of mixed asset classes,” says Karen, who has been educating herself on investing the last few years. “So ETFs or mutual funds—I’m not sure which to go with.”

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Just recently, she visited her local bank who suggested she put the full $15,00 into a bank-managed balanced fund with a management expense ratio (MER) of 1.9%. “I thought that was a little high but the returns over the past five years have been good and it looks like it’s well-managed.” Karen, who owns a piece of land that she hopes to build a house on in two years, enjoys doing all her banking online and she’d like to set up her TFSA so she can do direct banking from home. “So maybe I should keep the account with my financial institution so I can see all of my accounts, including my TFSA,” says Karen. “That would simplify things for me. I just want to get some clarity on how I should invest this TFSA money so it gives me good growth and how to go about opening up an online account. I don’t have much time to save for retirement so I’d like to grow my TFSA money as best I can.” What the pro says “It’s good that people do what they can to start over in life”, says John DeGoey, portfolio manager at iAs Securities in Toronto. In Karen’s case, that means taking some of the money no longer needed from the sale of a property to invest for retirement.

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To start, DeGoey advises Karen to open a TFSA direct online discount brokerage account with her own financial institution. This will give her the flexibility to own mutual funds or ETFs in her account and to view the account from her home computer, something that Karen says is important to her. “Karen should sit down with her online banking adviser at her bank and open an account. She will then be able to view her account online from home and monitor it as she invests throughout the year. She can also ask any questions of how the account works at that time.” Investing the initial $15,000 is the easy part. Deciding what to put into her TFSA is a bit trickier. DeGoey notes that to get the best investment option for her TFSA, Karen needs to decide between ETFs and mutual funds. While ETF units do have lower fees than most mutual funds (0.10% to 0.50% for ETFs versus 2.0% or more for mutual funds) ETFs often do not allow for systematic monthly reinvestment of contributions. This makes it difficult to put into place a “set-it-and-forget-it” low-cost monthly investment strategy since ETFs do not lend themselves to regular (monthly or bi-monthly) deposits and commissions are applied each time there is a buy or sell.

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Still, if she is happy with simply buying her ETF shares once a year with the cash accumulated in her TFSA from her monthly cash contributions, she should consider them. Lucky for her, Vanguard recently released a series of balanced ETFs expressly for people in her situation. There are three options to choose from 40% stocks / 60% bonds; 60% stocks / 40% bonds; and 80% stocks / 20% bonds. Karen didn’t say anything about her risk profile, but if her timeframe is as long as she says it is (retirement), then the 80/20 option Vanguard Growth ETF, Ticker VGRO) might well be the best, although the 60/40 option (Vanguard Balanced ETF – Ticker VBAL) might be better if she’s a bit unsure of herself. The management fees are a low 0.22%.

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Karen’s second option is to invest in a low-fee balanced mutual fund. The truth is there are very few balanced mutual funds that are low-cost and don’t require high minimum balances. But BlackRock does have a mutual fund that is both low cost, and offers the monthly investment option. It’s the BlackRock Balanced Portfolio – Series F mutual fund (Ticker: M:BLK410). (Yes, BlackRock offers mutual funds as well.) This particular fund allows for monthly investments of a minimum of $100 monthly. At Karen’s $150 monthly target, she meets that criteria. The management expense ratio is low, too—a very reasonable 0.64%. Karen should set up this BlackRock option so $150 monthly will be invested in these units. Someone at her bank should be able to get her going. Automated deposits to a simple, low-cost balanced fund such as this one will keep her portfolio growing.

RELATED: Use the Wealth Game calculator to compare the impact of fees. A $15,000 investment is expected to grow to almost $46,000 in 20 years at average returns. At 1.9% fees, about $15,700 would go to fees, while at 0.64% just $5,900 would go to fees.