Penny and Morris have a home in Southern Ontario valued at $1.5-million.Aaron Lynett/The Globe and Mail
Morris and Penny started their company in the depths of the 1972 recession, “with no cash, six years into our marriage and with two small children,” Penny writes in an e-mail. “With a lot of hours invested, we earned a decent living,” Penny adds, but they’ve been frugal. “We did not spend what we didn’t have and have been out of debt since we were 40 years old.”
Penny is 80 now and Morris is 81. Their two children, in their mid-50s, have taken over the business. Morris and Penny are planning to help their four grandchildren and three great-grandchildren with their higher education and other expenses.
“We are interested in receiving some advice mainly in regard to our budget,” Penny writes. “We would really like to know how much we can spend [and gift] each year without eventually having to rely on family.” They also ask about ways to keep taxes to a minimum.
They have a home in Southern Ontario valued at $1.5-million.
Penny has some health problems and has been managing by having someone come in one or two days a week. “Seniors’ homes are expensive for a decent one,” Penny writes.
We asked Warren MacKenzie, an independent Toronto-based financial planner, to look at Morris and Penny’s situation. Mr. MacKenzie holds the chartered professional accountant (CPA) designation.
What the expert says
Morris and Penny worked hard to achieve a financially secure retirement, Mr. MacKenzie says.
“Although they are well off, like many retirees, they are still concerned about the possibility of running out of money in their old age.” As do-it-yourself investors, they have been able to accumulate a substantial net worth even after passing on their business to their children.
“Penny and Morris lack a financial plan that clearly shows how things can be expected to work out over the rest of their lives under different economic assumptions,” Mr. MacKenzie says.
Their cash outflow last year was about $270,000 but Penny has suggested $250,000 a year as a target. “That seems like a lot, but when $120,000 is deducted for income taxes, gifts, donations and contributions to their tax-free savings accounts, it leaves $130,000 a year for lifestyle expenses and vacations,” the planner says. This $130,000 can be further broken down between basic living expenses of $85,000 and vacations of $45,000.
“If they spend $130,000 a year on lifestyle and vacations, and they make regular gifts to family members of $40,000 per year, they can expect to leave an estate of more than $2-million in dollars with today’s purchasing power,” the planner says. This assumes a 5-per-cent average rate of return on investments, a 2-per-cent inflation rate and that they live to be 100 years old.
“They would not run out of money even if they lived to be 100, doubled their basic living expenses excluding travel from $85,000 a year to $170,000, spent the same on their vacations and paid their income tax.” They would still leave a small estate for their children but they would eventually have to sell their home or borrow against it, he says.
In 2025, their combined cash inflow is projected to be $223,000, consisting of $21,000 from Canada Pension Plan benefits, $19,000 from Old Age Security, about $70,000 from their registered retirement income funds and $113,000 from their $2.4-million nonregistered portfolio, Mr. MacKenzie says. Their cash outflow would be $133,000 for basic lifestyle and vacations, $41,000 for gifts to family members, $35,000 for income tax and $14,000 for their TFSA contributions.
Penny needn’t worry about the cost of retirement or nursing home care because, if they needed it, some of their other expenses would fall away – travel, housing, food – and they could cut back on their giving if necessary.
Next, the planner looked at the couple’s portfolio. “As DIY investors they’ve been successful up to this point, but with 70 per cent in stocks and 30 per cent in fixed income and other types of investments, they are taking more risk than is necessary to achieve their goals,” Mr. MacKenzie says.
They’d meet their target even if they earned a 4-per-cent return from GICs and a high-interest savings account. So, it makes no sense for them to expose themselves to the risk associated with a 70/30 asset mix. (Since submitting their application to Financial Facelift, Penny has begun rebalancing their investments to add more guaranteed investment certificates.)
The stock markets are at or near their all-time highs and could fall significantly at some point, Mr. MacKenzie notes. “If markets were to fall dramatically over the next few years, Morris and Penny might not be able to hold on long enough to see a full recovery of their portfolio.”
Their RRIFs hold both dividend-paying and growth investments. To minimize income tax on the eventual sale and withdrawal of RRIF investments, Morris and Penny should hold their growth stocks in their TSFAs instead, the planner says. They should continue to maximize their contributions to their TFSAs.
Penny’s RRIF is more than double the value of Morris’s so to minimize income tax they should split all their income, he notes.
The couple’s grandchildren are all over the age of 18. Morris and Penny should consider giving them $8,000 a year each over the next five years to open First Home Savings Accounts. The FHSA maximum is $40,000. “By helping them in this way, Morris and Penny get to enjoy seeing the good they can do, they can shelter additional funds from income tax and the grandkids might learn something about investing,” Mr. MacKenzie says.
Morris and Penny have named each other as the executor of their estates. To minimize the possibility of the children quarrelling over the estate when there is only the surviving spouse, it would be best to either appoint both children joint executors or to appoint a corporate executor, Mr. MacKenzie says.
Client situation
The people: Morris, 81, Penny, 80, and their children, grandchildren and great-grandchildren.
The problem: How much can they afford to spend – for lifestyle, travel, family gifts and eventually expensive health care – without running out of assets and becoming dependent on their children?
The plan: Continue with what they are doing. No need to worry about money. Split RRIF income and take steps to lower stock-market risk. Consider First Home Savings Accounts for grandkids.
The payoff: The comfort of knowing they have more than enough.
Monthly net income: $15,585.
Assets: Her RRIF $715,885; his RRIF $259,490; her TFSA $132,190; his TFSA $115,690; joint nonregistered Canadian securities $1,318,600; joint nonregistered U.S. securities (in Cdn. $) $853,000; residence $1,500,000. Total: $4.89-million.
Monthly outlays: Property tax $760; cleaning $600; home insurance $420; maintenance, appliances, garden, security $850; auto $315; grocery store $980; clothing, personal care $540; charity $500; gifts to family $2,730; travel $3,685; dining, drinks, entertainment $1,085; sports, hobbies, theatre $735; subscriptions $95; phones, TV, internet $420; drugstore $230; life, health insurance $555; TFSAs $1,085. Total: $15,585.
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