Gitta retired 10 years ago with a modest company pension, a portfolio almost entirely in equity-type investments and an expensive lifestyle.
So when the stock market crashed in late 2008, she lost a bundle of money - savings she was counting on to augment her pension income. Now 64, single and not in the best of health, she is drawing on her line of credit to meet her monthly expenses because she doesn't want to sell her investments at a loss.
She has an older home in a midtown Toronto neighbourhood that needs some fixing up and is expensive to maintain. She wants to be financially independent without giving up her current lifestyle, including travelling and playing golf. She figures her expenses are about $5,000 a month after tax, but that includes $950 for household repair and maintenance.
She gets $19,050 a year from a defined benefit pension plan (not indexed) and $8,425 from the Canada Pension Plan, for a monthly income of $2,290, or about $2,020 a month after tax. This will rise once she turns 65 and begins collecting Old Age Pension. In the meantime, the entire shortfall was supposed to come from her investments.
Instead, she has racked up $85,000 on her line of credit and even seems to be drawing on it to pay interest.
Should she sell her home and buy a condo apartment or even rent? Gitta asks in an e-mail. And how can she do a better job of investing?
We asked Warren Baldwin, regional vice-president of T.E. Wealth in Toronto, to look at Gitta's situation.
What the Expert Says
Gitta is in an awkward position because while her assets are considerable, her expenses are fairly high and her house is proving to be a costly investment, Mr. Baldwin says. Her annual expenses of $60,500 do not include interest payments on her line of credit, which could add another $3,000 a year to her needs.
"Clearly, it seems that selling her house in the near future would make the most sense," Mr. Baldwin concludes. Selling now would be preferable to waiting until her finances come under even more stress.
Gitta will run out of savings by the time she is 79 if she keeps the house, the planner says. Her chronic condition is expected to shorten her life expectancy, so his forecast assumes she will live to 85, earn an average annual return of 7 per cent on her investments (income and capital gains) and that inflation will average 3 per cent a year. To stretch her money to age 85, she would need another $160,000 in her portfolio today.
Using a 5-per-cent rate of return and a 2-per-cent inflation rate, she would run out of funds at age 75. She would have to add $180,000 to her portfolio today to tide her through to age 85.
Then there's the little matter of the $85,000 line of credit, plus interest, that has to be repaid. The only way Gitta can come up with the money she needs is to sell her house, which is currently worth about $750,000. After her savings have been beefed up by $180,000 and her debts paid - along with moving expenses and real estate commission - she would be left with roughly $400,000 with which to buy a condo, Mr. Baldwin says.
One big advantage of buying a condo is it will be less expensive to maintain so she should be able to get by comfortably on less than $5,000 a month.
Mr. Baldwin does have a word of caution. Not everyone likes the apartment lifestyle, he says.
"It might be prudent to rent a unit in a building before she buys in order to appreciate the change in lifestyle that will come from high-rise living." In the meantime, she could keep the $400,000 in a secure investment such as a term deposit or money market fund.
As for her under-water portfolio, Mr. Baldwin suggests shifting the asset mix when she adds the $180,000 of new funds so that she is better diversified among debt and equity investments. If the stock market turns down again, she can draw funds from the fixed-income portion of her savings.
He suggests 40 per cent in Canadian fixed-income securities (bonds and guaranteed investment certificates, for example), 20 per cent in Canadian stocks or other equity-type investments, 20 per cent in U.S. equities and 20 per cent in international equities. This balance can be achieved through exchange-traded funds or even low-cost mutual funds.
If she is still nervous about the stock market, she could consider a 50-50 mix.
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The person: Gitta, 64
The problem: How to increase her savings to a point where they will enable her to maintain her current lifestyle and remain financially independent
The plan: Sell the house, pay off the $85,000 line of credit, add $180,000 to her investment portfolio and rent or buy a condo with the remaining $400,000
The payoff: Financial security and a comfortable lifestyle with enough money to hire some help if she needs it
Monthly net income: $2,020
Assets: Bank account $1,200; stocks $15,000; locked-in retirement account $363,000; RRSP $169,000; residence $750,000. Total: $1.3-million.
Monthly disbursements: Food, eating out, tobacco and alcohol $675; clothing $100; drugstore, dental, haircuts $90; personal allowance $150; cleaning, gardening $215; property taxes $525; house insurance $75; utilities $470; repairs and maintenance $950; vacations $360; entertainment, golf club $475; books, music, night courses $130; auto expenses $300; buses $30; group insurance $55; donations $25; gifts $100. Total: $4,725.
Shortfall: $2,705.
Liabilities: Credit cards $1,300; line of credit $85,000. Total $86,300.
Special to The Globe and Mail