A plan for this re­tiree to stop wor­ry­ing about every dol­lar she spends

The Globe and Mail (Ottawa/Quebec Edition) - - REPORT ON BUSINESS - DIANNE MALEY What the ex­pert says

Amid some fi­nan­cial re­grets, Linda wants to en­sure she can pro­vide for her fam­ily and still make the most of her re­tire­ment years

‘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.

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. “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.

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.” Want a free fi­nan­cial facelift? E-mail fin­facelift@gmail.com Some de­tails may be changed to pro­tect the pri­vacy of the per­sons pro­filed.

GLENN LOWSON/THE GLOBE AND MAIL

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