At the age of 71, Jack has no plans to quit his part-time job as a translator. Although he works mainly from his Vancouver condo, he can do the work almost anywhere, Mexico being his preferred location in the winter months.
"My TV, Internet and cable package are suspended while I'm away, my electricity bill falls dramatically and the cost of living is much lower in Mexico," Jack writes in an e-mail. His work, government benefits and $500-a-month registered retirement savings plan withdrawal bring him a total of $2,930 a month before tax.
Jack has some pressing questions about his retirement savings, how long he can maintain his lifestyle and how to "use up the bulk of my estate" without ending up on the street. "My GP has told me I'm in excellent health," he adds.
After perusing his annual brokerage statement under the new Client Relationship Model 2, Jack wonders, too, if he should shift his RRSP holdings from his bank to some lower-cost alternative.
"I'm paying a management fee of $300 a month," Jack writes. That's on his $180,000 RRSP invested in a monthly income balanced portfolio, or fund of funds. He has a smaller RRSP with a different financial institution. By year end, Jack has to convert his RRSPs to a registered retirement income fund (RRIF), so he wonders if this would be an opportune time to switch advisers. Next year, he will have to begin making mandatory minimum withdrawals.
"I am not interested in self-directing the fund," Jack adds. His adviser also suggests Jack arrange a home-equity line of credit (HELOC) on his condo while he is still working, to use in case of emergencies.
We asked Morgan Ulmer, owner of Calgary-based financial counselling firm CentsAbility, to look at Jack's situation.
What the expert says
Jack is on track to meet his retirement goals, Ms. Ulmer says. He has a target retirement income of $3,000 a month. Because he's blessed with good health, Jack should "prepare for income needs beyond age 90," she adds, so getting the best net return possible on his investments – within his risk tolerance – is important.
Ms. Ulmer based her calculations on an initial RRIF value of $191,200 with a forecast rate of return of 4 per cent a year. She assumed Jack works to the age of 78, earning $14,400 a year. He needs after-tax income of $3,000 a month, adjusted for inflation of 2.25 per cent a year. His spending needs drop by $5,200 a year when his mortgage is paid off in 2020. She allows a travel budget of $6,000 a year to age 80. His Canada Pension Plan and Old Age Security benefits are $1,230 a month, indexed to inflation.
At the age of 82, she assumes Jack will tap into is home equity through a HELOC. By that time, his condo will have risen in value to $677,000. His RRIF runs out at the age of 95, but he will still be collecting CPP and OAS.
When deciding whether to switch advisers, Jack should ask what he would be giving up, Ms. Ulmer says. No doubt he could get the same type of portfolio with lower fees, but is he getting value for his money with his current adviser? "For example, is he receiving comprehensive financial planning and investment advice?" she asks. Can his financial institution offer him a lower-fee alternative?
Jack has looked at robo-advisers. Would he be comfortable with a robo-adviser (online portfolio manager) or does he prefer face-to-face service, she asks. He might want to consider a low-fee mutual-fund manager instead.
"Moving his funds to a robo-adviser would save about $3,000 a year [assuming a 0.5-per-cent fee]," Ms. Ulmer says. The savings would decline as his capital is drawn down. But would the robo-adviser offer financial planning? Does Jack care about getting financial advice?
"If Jack wants to switch advisers, a good place to start is by asking financially savvy friends and family if they have an adviser they recommend," Ms. Ulmer says. Before moving, "he should interview at least three to determine if their fees and service offering are a match for his needs."
Regardless of what Jack decides, he should keep three years' worth of expected RRIF withdrawals in a secure, liquid investment – a money market fund, treasury bill fund or high-interest RRIF account – to weather any short-term fluctuations in financial markets, Ms. Ulmer says. "This will help offset the risk of being forced to sell market-based investments at a low point in the market cycle."
He should apply for a HELOC while he is still working, like his adviser recommends, because it would give him the flexibility of when and how much to borrow. Approval is not guaranteed, she adds. If Jack finds he has a surplus after he begins making mandatory minimum RRIF withdrawals next year, he should invest it in his tax-free savings account, Ms. Ulmer says.
The person: Jack, 71
The problem: Should he switch financial advisers to get lower investment-management fees? Should he apply for a home-equity line of credit?
The plan: Comparing fees can be tricky, so Jack needs to figure out how much advice he needs and what he is willing to pay for it. Is he getting value for his money? If not, interview prospective advisers to find a better fit. Apply for a HELOC.
The payoff: Income security for a potentially long life.
Monthly net income: $2,680
Assets: Cash $6,000; RRSP monthly income portfolio $180,000; RRSP term deposit $11,200; TFSA $5,000; residence $530,000. Total: $732,200
Monthly outlays: Mortgage principal, interest, taxes $435; condo fees $310; electricity $60; transit $20; groceries $600; clothing $100; line of credit $50; gifts, charitable $40; vacation, travel $50; dining, drinks, entertainment $200; grooming $125; clubs $20; doctors, dentists, drugstore $80; health insurance $35; telecom, TV, Internet $255; TFSA $300. Total: $2,680
Liabilities: Mortgage $15,785, credit line $1,875. Total: $17,660
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