Lisa's concern is getting a handle on her income and expenses to see where she stands financially.Fred Lum/The Globe and Mail
After a few very difficult years for Lisa and Miles, Lisa is trying to look to the future again. Miles has been confined to a nursing home with an especially nasty form of dementia.
“What a nightmare,” Lisa writes in an e-mail. “He is declining very quickly.” Doctors say his life expectancy is about five years. They had already prepared wills covering the contingencies that flow from a blended family so that isn’t a concern, she writes.
Lisa is 68, Miles 72. They each have two children from previous marriages. After a successful career as a management consultant, Lisa has earned very little this past while, making about $20,000 a year from royalties on her published work.
Her concern now is getting a handle on her income and expenses to see where she stands financially. She’s upped the payments on their $90,000 mortgage so it will be paid off in three years. Now she needs a rest.
“Can I take my two kids on a three-week trip to Asia in 2025, business class?” Lisa asks. “Can I contribute something to help them with a home purchase?”
We asked Warren MacKenzie, a certified financial planner in Toronto, to look at Lisa’s situation. Mr. MacKenzie also holds the chartered professional accountant (CPA) designation.
What the Expert Says
Like many successful people, Lisa is nervous about the prospect of dipping into the capital that she has saved for her retirement, Mr. MacKenzie says.
In 2025, the couple’s projected cash flow will include Lisa’s royalties of $20,000; her Canada Pension Plan of $16,500; Miles’s CPP of $16,500; Miles’s Old Age Security of $8,700; withdrawals from Miles’s registered retirement income fund (RRIF) of $8,000; dividends and interest of $30,000 from bank accounts and Lisa’s $490,000 investment portfolio; and a cash withdrawal of $28,000 from her non-registered account, for a total of $127,700 a year.
Miles’s government benefits of $2,100 before tax a month plus withdrawals from his $52,000 RRIF are sufficient to cover his nursing-home costs, the planner says.
The couple’s outflow consists of $80,000 ($50,000 for her and $30,000 for him) in living expenses, adjusted for inflation, $29,820 in mortgage payments for the next three years and $11,000 in income tax. Lisa’s $7,000 in annual contributions to her tax-free savings account come from her non-registered portfolio. Lisa could choose to withdraw from her non-registered account to pay off the mortgage earlier, greatly reducing her monthly cash outflow.
Lisa plans to delay starting her OAS until the age of 70. By doing so, the benefits will be 36 per cent higher than if she started at the age of 65. She took CPP benefits at the age of 65 “because she felt the need for immediate cash flow,” Mr. MacKenzie says.
For her children, Lisa has decided an appropriate amount to leave them would be $200,000 each in dollars with today’s purchasing power, the planner says. His forecast shows Lisa has more than enough to achieve this goal even if she lives to the age of 100.
Based on her current spending, an average rate of return of 5 per cent and inflation at 2 per cent, Lisa’s home is projected to be worth about $1.5-million and her TFSA and other investments about $1-million at the age of 100.
Lisa wants to stay in her home for as long as her health permits, Mr. MacKenzie says. “Based on conservative assumptions, and her spending of $50,000 a year plus income tax, she has sufficient resources to maintain her home debt-free until age 100.”
Lisa also asks if she can afford to take her children on a $60,000 trip to Asia. She can, the planner says. “If she does, she can expect to enjoy a once-in-a-lifetime adventure with her children,” Mr. MacKenzie says. Because she’ll have less investment income, she’ll pay a bit less income tax and her estate will pay lower probate fees. “Her children may inherit a bit less later in their lives, but they will enjoy an adventure they will never forget.”
She’d also like to help them with a down payment on a first home. “She should immediately start giving each of them $8,000 a year to deposit to a first home savings account,” the planner says. After giving each the maximum of $40,000 that can go into the FHSA, she can give them another $60,000 each toward a down payment “and still not run out of money.”
Miles’s and Lisa’s investments are in a mix of 17 individual blue-chip stocks and money market funds, Mr. MacKenzie says. The overall asset mix is about 75 per cent Canadian stocks and 25 per cent money market funds. Over the past five years, their rate of return was slightly less than 5 per cent.
“She would have earned a higher return with better diversification by investing 25 per cent in a treasury bill fund and 75 per cent in any one of a number of broad-based Canadian exchange-traded funds,” the planner says.
With her stocks, Lisa is exposed to more market risk than necessary to achieve her 5-per-cent return goal, the planner says. Her investment adviser does not provide a performance report comparing her portfolio’s performance against the appropriate benchmarks.
Lisa’s large-capitalization, dividend-paying Canadian stocks are held in her RRSP and Miles’s RRIF. “The eventual withdrawal will be fully taxable, so this means that she is losing the benefit of the Canadian dividend tax credit and the tax-free portion of capital gains,” Mr. MacKenzie says. “A better approach to minimize tax would be to hold these securities in her non-registered account and hold her fixed-income securities in her RRIF.” Finally, Lisa should continue to contribute to her TFSA.
Client Situation
The People: Lisa, 68, Miles, 72, and Lisa’s children, 26 and 29.
The Problem: Can she afford to take her children on a big trip, help them with a down payment and still have enough to care for Miles and maintain her lifestyle even if she lives to be 100?
The Plan: Take the vacation, start giving the children money for a FHSA. Get a better grip on her investments to improve her rate of return. Hold dividend-paying Canadian stocks in her non-registered account and interest-bearing investments in her RRSP/RRIF.
The Payoff: Peace of mind.
Monthly net income: As needed.
Assets: Cash $22,000; corporate account cash $26,000; non-registered portfolio $490,000; his TFSA $16,000; her TFSA $110,000; his RRIF $52,000; her RRSP/RRIF $442,000; residence $780,000. Total: $1.93-million.
Monthly outlays: Mortgage $2,485; nursing home $1,985 plus extras $400; water, sewer, garbage $75; property tax $335; home insurance $130; electricity $160; heating $180; maintenance $200; garden $50; transportation $495; groceries $300; gifts, charity $200; education plan for grandchild $250; dining, drinks, entertainment $250; personal care $25; pets $100; sports, hobbies $500; subscriptions $35; doctors, dentists $100; life insurance $250; phones, TV, internet $455. Total: $8,960.
Liabilities: Mortgage $90,000 at 1.7 per cent.
Editor’s note: A previous version of this article included an incorrect abbreviation for the chartered professional accountant designation. It is CPA. This article has been updated.
