When her husband died suddenly of a heart attack two years ago, Candice didn't know what to do.
"He had managed our financial affairs," she writes in an e-mail.
"After he died, I was in shock for over a year and am now realizing that I have to take control of my finances if I am to live somewhat comfortably in retirement."
She is 65 with no company pension. Candice gets $888 a month from the Canada Pension Plan, $544 a month from Old Age Security and $55 from her registered retirement income fund.
Her non-registered portfolio, about $197,000, is invested almost entirely in one real estate investment trust that pays her a monthly distribution of about $925.
Her expenses total about $25,320 a year.
"Should I keep the REIT or change into something else, knowing that my income will be greatly reduced?" Candice asks.
She wonders whether it would make sense to rent out the basement apartment for $900 a month in her B.C. Interior home or whether this would put her at risk of having her OAS clawed back.
She wants a financial planner to review her investments and suggest improvements.
We asked Clay Gillespie, a financial planner and managing director at Rogers Group Financial in Vancouver, to look at Candice's situation.
What the expert says
Candice faces three major risks to her financial well-being, Mr. Gillespie notes.
First, she faces the risk of outliving her money; second, of having her purchasing power eroded by inflation; and third, of having to draw on her capital when the stock market has tumbled.
"If you are unlucky enough to retire when the stock market is performing poorly and you need to generate income from your portfolio, then you could deplete your capital at an alarming rate," he says.
In his calculation, Mr. Gillespie uses a "real" or inflation-adjusted return of 3 per cent a year.
"This would suggest a portfolio that is 75 per cent fixed income and 25 per cent equity" – much more conservative than the REITs and stocks she is holding now.
Over the past 62 years, five-year guaranteed investment certificates have outperformed the inflation rate by three percentage points on average, the planner notes.
If she can achieve that return, her government benefits and investments will be enough to generate a real, after-tax return (in today's dollars) of $27,000 a year to age 95 – enough to meet her spending goal.
If she decides to rent her basement apartment, she can generate even more; the extra income will not jeopardize her OAS benefits.
Her bank savings and TFSA should be set aside for emergencies.
Candice is investing too aggressively and her portfolio is too concentrated, Mr. Gillespie says. To prepare for those inevitable times when stock markets plummet, the planner suggests Candice adopt the following strategy:
-Invest $16,000 in a high-yield savings account and withdraw $1,300 a month to supplement her government benefits. Invest $16,000 each in a one, two and three-year guaranteed investment certificate or bond (not a bond fund).
-Invest the remainder of her non-registered account ($133,000) in a diversified portfolio of Canadian and foreign stocks.
The rationale behind this strategy is that the savings account will be depleted over the first year. After that, if the growth part of the portfolio (equity investments) has grown in value, then Candice can take the following year's income from that portion, using some of the capital gains, for example, to replenish the savings account. If, in contrast, the stock market has fallen, then she can use the maturing GIC to replenish the savings account.
If the maturing GIC is not needed for income, it can be reinvested for a three-year term. "If the market performs well above long-term expectations, then not only can she use the profit to generate next year's income, but she can also buy more GICs and bonds to prepare for the next market correction."
"Unless we have stock market declines that last over four years, Candice should not be forced to take income from her investments while they are declining in value," Mr. Gillespie says.
The person
Candice, 65
The problem
Determining whether she has enough money to last a lifetime – and how to invest it.
The plan
Switch from a heavily concentrated, all-equity portfolio to a much more diversified one, with 75 per cent in fixed income. Build a ladder of cash and GICs stretching out over four years and invest the rest in a balanced portfolio with a growth component.
The payoff
Barring a long stock market drop, the peace of mind that comes from knowing she will not have to draw on her stock investments during a time when the market is down. Her money will last.
Monthly net income
$2,412
Assets
Bank accounts $22,000; non-registered investments $197,000; TFSA $4,800; RRSP $17,000; home $500,000. Total: $740,800
Monthly disbursements
Housing expenses $574; transportation $208; groceries $300; clothing $50; other (things charged to credit card) $250; personal grooming, entertainment, dining out, pets, hobbies: $226; dentists, drugstore $37; telecom, cable $265; gifts $150; vacation, travel $50. Total: $2,110
Special to The Globe and Mail
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