Alberta-based Corinne* has been happily retired for the last three years, but at 69, she wants to
make sure her retirement savings will last
and potentially fund a retirement home until her death.
Over the past 10 years, Corinne has prioritized paying down debt and saving while also helping her young adult children pay for university, a down payment for a home and the purchase of a new vehicle. Today, she is a mortgage-free homeowner and avid traveller, spending about $10,000 a year on trips. While she describes herself as comfortable financially, since retiring she has had to draw down $15,000 a year from her
registered retirement savings plan
(RRSP) to help meet unexpected expenses and maximize contributions to her
tax-free savings account
(TFSA).
Corinne receives a total net income of $48,000. This includes $20,800 in
Canada Pension Plan
(CPP) and
Old Age Security
(OAS); $23,000 from a defined benefit pension plan that is indexed to inflation; and $5,000 from a
registered retirement income fund
(RRIF) that was converted from a locked-in retirement account (LIRA). Her total annual expenses are: $43,350 (this does not include TFSA contributions).
Corrine’s home is valued at $650,000. While she is open to downsizing, the cost of a condo plus condo fees in her desired area don’t represent a significant savings.
Her investment portfolio includes: $110,000 in cash and cash equivalents; $165,000 in a TFSA invested in Canadian equity mutual funds; $320,000 in an RRSP invested in Canadian fixed-income mutual funds; $2,000 in
Guaranteed Investment Certificates
(GICs); and $53,000 in a LIRA invested in fixed-income mutual funds and Canadian common shares. She also has a whole life retiree life insurance policy from her employer valued at $10,000.
While she has been working with a financial planner from her bank, she acknowledges she doesn’t have a clear understanding of investing. “Am I invested in the right investments? When should I convert my RRSP to a RRIF? What are the tax implications of drawing down funds from my RRSPs and how do I avoid any OAS clawback?”
Corinne is also concerned about current economic conditions, cost-of-living increases and the devaluation of the Canadian dollar. “Should I cut down on travel and only budget for $3,000 annually? Will I be able to afford to move into an assisted living residence if necessary?”
What the expert says
Corinne’s focus on living within her means and paying down debt has placed her in a comfortable financial position and allowed her to be generous with her children, providing an early inheritance, said Graeme Egan, a financial planner and portfolio manager who heads CastleBay Wealth Management Inc. in Vancouver.
“Her pension income and Life Income Fund NOT MENTIONED IN QUESTION … RATHER “LIRA”? payments more than cover her living expenses, and Corinne’s investments – specifically her non-registered cash account – can fund her annual $10,000 travel budget for the next two years until the end of the year she turns 71, when she is required to convert her RRSP to a RRIF.” At that point, her RRIF income should safely cover travel and she should not have to use her cash account for living expenses, Egan said.
“Her minimum annual RRIF payment will be about $17,000 per year (5.28 per cent times $320,000 current balance) so that amount added to her existing income will bring her close to the OAS clawback threshold of $93,000 without exceeding it.”
While the Canadian dollar may slip further, Egan said there isn’t much she can do except hold U.S. dollars or euros. “Having some non-Canadian equity exposure should play some defence in offsetting a weak Canadian dollar.”
When it comes to her overall asset mix, he recommended investing a portion of her RRSP in equities so that her overall mix is closer to 40 per cent equities and 60 per cent fixed income — it is more conservative than this at present. “As she ages, her equity mix should reduce to 30 per cent at age 75 and 20 per cent at age 80. Her fixed income is placed in the most suitable account: her RRSP.”
To lessen her cost of ongoing investment management, Egan said Corinne could consider exchange-traded funds (ETFs) instead of retail mutual funds, which can have high management expense ratios (MERs). ETFs generally have much lower MER fees. “This will enable her to pay less in management fees annually and help to improve long-term performance. She may have to open a self-directed TFSA and non-RRSP discount brokerage account respectively at her bank’s discount brokerage arm to invest in ETFs. This will apply to her RRSP as well if she wants to switch to low-cost fixed-income ETFs from fixed-income mutual funds. There are all-in-one asset allocation ETFs which provide an easy way for Corrine to self-manage.”
Her TFSA is mostly Canada focused. Egan said she could consider diversifying geographically by allocating one-third each to Canadian, U.S., and international equities, noting that stock markets outside Canada have performed better over the long term.
“Corinne could invest the non-registered cash balance of $110,000 in a high-interest savings account ETF while she waits to move to a longer-term investment strategy for this money. Assuming she does not need that much cash in the long term, she could consider investing about 40 per cent of this money in a dividend-producing ETF, which pays out monthly dividend income that is tax effective and provides more income for her for travel purposes and general living expenses. A dividend-income producing investment vehicle has the possibility of appreciating in value, too, when equities rise.”
As for the growing cost of living, Egan said Corinne’s pensions (defined benefit, CPP and OAS) are all indexed to a degree to inflation. “Equity investments tend to track or keep up with inflation, so only her fixed income portion is not indexed.
“Looking down the road, she will likely have to sell her current property to create the capital to generate income to be able to move into an assisted living residence.”
Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we’ll find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).
* Her name has been changed to protect privacy.
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