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A sound plan for the road to 100 for this retiree

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Rafal Gerszak/The Globe and Mail

At 82, Dora is thinking of selling her B.C. condo and moving into a retirement home where she could get some help with day-to-day tasks.

"I am in reasonable health considering my age," Dora writes in an e-mail. She also is in pretty good financial shape.

Dora figures she will net about $500,000 from the sale of her condo. In addition, she has savings of $275,000, including her RRSP and TFSA, which she has invested in a mixture of bonds and equities.

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"My question is this: What would be the best way to invest my money so that I can generate enough income to last the rest of my life or to age 100?" Dora asks.

Her rent at the home would be $4,055 a month, which would include everything but the telephone. "I would need a little spending money, though," she adds.

As well, Dora has a permanent life insurance policy that will pay $1-million when she dies or turns 100. For this she pays $7,200 a year. Although she has four grown children, she is not concerned about leaving an estate.

We asked Alexandra Macqueen, a financial planner and co-author with Moshe Milevsky of the personal finance book, Pensionize Your Nest Egg, to look at Dora's situation.

What the expert says

Dora is in a fortunate situation because her spending needs are modest relative to her assets, Ms. Macqueen says. Dora gets $1,540 a month in Canada Pension Plan and Old Age Security benefits and $148 a month from a small annuity that was part of her late husband's estate. To cover her monthly expenses, plus her $600-a-month insurance premium, she draws $2,150 from her savings, for total income of $3,838 a month.

"She now has many choices and few constraints as she designs an investment and spending plan for her future," Ms. Macqueen says. When she moves to the retirement home, Dora will need $4,055 a month for rent and all living expenses, $500 a month in pocket money and the same $600 a month for life insurance premiums, for a total of $5,155. That is roughly $3,468 a month more than her monthly CPP, OAS and annuity income. She will have to finance this shortfall from her savings and investments.

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Dora likely is concerned about investment risk and income fluctuations, protecting against rising costs and the need to make ongoing investment decisions. She needn't worry.

Even with no return on her investments, Dora's portfolio of $775,000 (once the condo is sold) would support withdrawals of $41,250 a year ($3,438 a month) for 18.8 years, "almost exactly to her age 100, when her life insurance policy will pay out if she is alive," the planner says.

"If Dora took her whole portfolio and put it in guaranteed investment certificates paying 2 per cent, she would generate a small, risk-free return which could theoretically cover costs as they rise with inflation without exposing her portfolio to investment risk," Ms. Macqueen says.

Alternatively, Dora could use some or all of the proceeds from her condo to buy a life annuity that would give her stable, guaranteed income for life. A single-premium income annuity with no guarantees or inflation indexing for a woman aged 82 will provide about $665 in monthly income for each $100,000, the planner says.

"Note that this is a guaranteed yield of 6.65 per cent with no investment risk," Ms. Macqueen says.

If Dora used all of the proceeds from the sale of her condo ($500,000) to purchase a single-premium income annuity, she would have $3,325 in monthly annuity income, or $39,900 a year. This would nearly cover the monthly shortfall she will have.

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Because she would be using non-registered funds, Dora could consider a prescribed annuity, which would give her a more tax-efficient source of income, Ms. Macqueen says. Prescribed annuities level out the amount of each payment that is subject to tax and provide some tax deferral.

"If Dora adopts this plan and 'pensionizes' the proceeds from the sale of her condo, she could stop taking regular income from her portfolio to meet her day-to-day spending needs and cover the cost of her insurance premiums," Ms. Macqueen says.

"Instead, over time, as her costs rise, her portfolio could provide any additional income required," she says. It could also cover any extraordinary spending needs, such as long-term care requirements. "The portion of her portfolio invested in equities will serve as a hedge against inflation over the longer term."

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Client situation:

The person: Dora, 82.

The problem: How to ensure she has an income for life to cover her needs after she moves to an assisted-living home.

The plan: Consider using some or all of the proceeds from her condo sale to buy annuities, which will pay her a predictable and guaranteed income for life.

The payoff: Financial security.

Monthly net income: $3,765

Assets: Cash in bank $3,000; investment portfolio (including RRSP and TFSA) $275,000; condo $500,000. Total: $778,000

Monthly disbursements: Condo fees $225; other housing $215; transportation $50; food, clothing $255; dining, drinks, clubs, grooming $175; doctors, dentists $265; health and dental insurance $130; life insurance $600; telephone, TV $140; gifts, charitable $195; vacation, travel $100. Total: $2,350

Liabilities: None

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Special to The Globe and Mail

Read more from Financial Facelift.

Want a free financial facelift? E-mail finfacelift@gmail.com Some details may be changed to protect the privacy of the persons profiled.

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