Alone and unsure, widow must organize finances

In Ontario, a woman we’ll call Leona, 61, has suddenly acquired a job managing $1.54million of assets. Recently widowed, she has to shepherd her late husband’s diversified estate through probate, pay down credit card balances and essentially become the matriarch of her family fortune.

She has a part-time job as a researcher that pays $2,500 a month. Added to other sources of income, including her CPP survivor benefit of $530 a month and investment income of $1,767, she has a gross income of $4,797 a month, or $57,564 a year. After tax at an average rate of 20%, she has an income of $3,837 a month.

That’s enough for her immediate needs, but she has to pay off $77,220 of liabilities that carry interest rates of 4.5% to 29%. The fact that she has not paid them off with cash available in her $247,560 of GICs and Canada Savings Bonds reflects her confusion about what to do. She has little idea of what her future living costs will be. She is emotionally attached to assets she and her husband acquired in 40 years of marriage. And she is also helping a grown son, 32, who is unemployed and living with her. A second son works for the government of Canada and has two kids of his own.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Leona.

ORGANIZING ASSETS FOR RETIREMENT

Leona plans to retire within a few years and give up her $2,500 monthly salary. She will need to replace that income, says Mr. Moran. She would have $184,290, the value of her taxable financial investments, including GICs and CSBs, after paying off her liabilities. If she were to invest that sum in dividend-paying stocks with a 4% yield, she would have $7,372 of pre-tax annual income. She could sell her charming $250,000 country cottage. It’s lovely and the source of many memories, but it is not used much anymore. Her children have no wish to keep it. The $200,000 harvested after selling expenses and capital gains tax could yield $8,000 at 4%.

So far, she can have generated $15,372 of pre-tax investment income from her non-registered net worth, including the cottage. Debt service costs and cottage property taxes totalling $4,200 a year will have been eliminated.

If Leona were to work to age 65 and, assuming that her investments produce 3% over the rate of inflation, she could generate total pre-tax income of $66,693 a year, consisting of combined Canada Pension Plan and widow’s benefits of $11,840 a year, $6,481 of Old Age Security benefits, $33,000 of RRIF income and $15,372 of non-registered investment income. After tax at an estimated average rate in retirement of 20%, she would have $53,354 to spend each year, a 16% increase over her present disposable income.

The outline of solutions seems simple. Getting to this point will nevertheless require that Leona reorganize her finances and eventually sell one dwelling. On a tax basis, sale of the house, her principal residence, would be more efficient. But the house and the cottage are priced within $50,000 of each other.

WEALTH MANAGEMENT

Bonds and GICs that produce fully taxable income should be moved into her RRSP while stocks that produce dividends and capital gains taxed at preferential rates should be moved into taxable account. These transactions will require selling, then reacquiring assets, complex transactions that can be handled with the assistance of a professional portfolio manager, Mr. Moran says. These managers charge 1.0% to 1.5% of assets under management for accounts of Leona’s size. Tax savings would cover those fees which would, in any case, be deductible from investment income.

If she chooses to shop for a money manager, Leona should invest a few months in getting to know the field. She could work toward taking an active role in the administration of her not inconsiderable wealth, but that would take a commitment for which she may not be prepared. Even if she lets others manage her affairs, she should study capital markets so that she can judge their performance. In financial terms, there is hardly a better use for her spare time, Mr. Moran suggests.

With nearly $950,000 of financial assets, she will find a wide variety of managers willing to take her on. If she pays an average 1.25% of assets under management, she will save 1.25% of the average 2.50% fee charged by stock mutual funds. That would be about $11,500 that would stay in her pocket each year.

For the future, Leona needs to consider a financial plan for the decades of life ahead. Her present mix of low-yield GICs and CSBs, even after paying off debts, is inappropriate for long-term growth.

She still has her late husband’s classic BMW, a fine ride but a potential money pit if major repairs are needed. There is no need to decide immediately, but Leona needs to think about what role her possessions will play in her new life and the means she will bequeath to her children and grandchildren, Mr. Moran says.