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Linda would like to make gifts to her family while she is living rather than have it all dispersed through her will. But she only wants to do this if she knows it will not put her in danger of running out of money.

Glenn Lowson/The Globe and Mail

"Elderly senior in need of an unbiased financial adviser," read the subject line of Linda's e-mail.

Linda is 80 with a comfortable work pension as well as a survivor pension from her late husband's workplace. She has family, investments and a nice home. But her investment portfolio has been shrinking over the years and she blames her advisers.

Also, she regrets selling the family house after her husband died because her condo fees are high and houses have appreciated more than apartments since then.

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She plans to sell her condo at some point and move to a rental apartment or assisted-living arrangement.

"My goals are to preserve as much of my investment portfolio as I can for my children and grandchildren," Linda writes, but still have enough to travel, attend the theatre and dine out with friends.

Not long ago, Linda took out a line of credit to finance some renovations and a big trip, but finds "owing $56,000 is distressing at this age."

She wonders whether she should withdraw money from her tax-free savings account to pay off the credit line.

She wonders, too, whether her investments are the best they can be and the fees reasonable.

We asked Warren MacKenzie, a principal at HighView Financial in Toronto, to look at Linda's situation.

What the expert says

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"Over the last two decades, Linda's investment portfolio has shrunk drastically, and she believes this is because she received bad investment advice and paid too much in fees," Mr. MacKenzie says. But her biggest problem now "is that she is constantly and unnecessarily worrying about running out of money."

Linda would have benefited from having had a proper financial plan, he says. For example, if she had a plan that showed that she could spend $80,000 a year and not run out of savings, "then she would have only started to worry if she was spending more than $80,000." Because she didn't know her "safe spending limit," Linda has been worrying constantly about every dollar she spends.

Linda's asset mix is about half equity and half fixed income, reasonable given that her indexed pensions and government benefits are almost enough for her to live on. Still, she does not seem to be following a disciplined investment strategy, Mr. MacKenzie says. "She should be in an asset mix designed to take as much risk – but no more – than necessary to earn the rate of return she needs to achieve her goals," he says. His plan shows she needs an average return of 4 per cent a year. As well, her portfolio should be rebalanced regularly.

Linda is paying 1.6 per cent a year in fees, which she thinks might be too much. "But the real issue is getting value for the fees she pays," Mr. MacKenzie adds. "Even a small fee is too much if no value is received." She can only measure value if she gets a performance report comparing actual results with an absolute goals-based benchmark. "She does not receive such a report."

He suggests Linda ask her investment adviser three questions: "Are you acting as a fiduciary; that is, in my best interests? Will I have an investment policy statement that explains the process and the appropriate benchmarks? Will I see a quarterly report that shows actual performance compared to these benchmarks?"

As for her credit line, "if she had received sound advice (from her bank), she would not have borrowed for personal use when she had money in a non-RRSP account that was earning taxable income," Mr. MacKenzie says. She should use some of her non-registered investments to pay off the credit line.

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Linda would like to make gifts to her family while she is living rather than have it all dispersed through her will. But she only wants to do this if she knows it will not put her in danger of running out of money.

"This is an excellent idea for the following reasons," Mr. MacKenzie says. "It will reduce the income tax she will pay on investment income, it will reduce the probate fees that would be triggered, it will allow her the enjoyment of seeing her money put to good use, and finally, it will warn her to change her will if she sees that the money is not being used wisely."

Mr. MacKenzie's plan shows that Linda could give away $100,000 now and another $400,000 after she sells her condo (assumed to be in seven years) without risking her own financial security. "Linda needs to take stock of how solid her financial position really is," he says. Her pensions and government benefits, plus investment returns of 4 per cent a year, are enough to cover her lifestyle needs, "so there is no question that she is going to leave a significant estate to her children and grandchildren."

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The person: Linda, 80

The problem: How to maintain her lifestyle without eating into the estate she hopes to leave to her children and grandchildren.

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The plan: Get a better handle on her investments and be mindful of how much she can afford to spend without drawing on her savings.

The payoff: Not having to worry any more.

Monthly net income: $9,365

Assets: RRIF $398,500; TFSA $59,795; non-registered $150,555; residence $1,250,000; estimated present value of defined benefit pension plans $75,000. Total: $1,933,850

Monthly outlays: Condo fees $1,300; property tax $650; home and car insurance $260; hydro $130; car lease $450; other transportation $285; groceries $500; clothing, dry cleaning $500; line of credit $725; gifts $200; charity $270; vacation, travel $500; personal care $300; dining, entertainment $500; subscriptions $100; other personal $250; doctors, dentists $100; final payment to life insurance $585; telephone, TV, Internet $260; TFSA $460. Total: $8,325

Liabilities: Line of credit $56,000

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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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