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Portfolio Makeover

Unexpected death leaves wife to plot course for future Add to ...

After losing her husband, Jim, to cancer a few years ago, Eileen finds herself facing some difficult decisions, as well as many mixed emotions. The two were happily married for more than three decades, but the end came quickly: Once Jim was diagnosed, he lived just another three months.

Eileen, 58, describes Jim as having been gregarious, generous and unafraid of risk. He made some smart money moves, including leaving her with a life-insurance policy worth more than $1-million. But he dabbled in several business ventures, one of which has since gone into receivership.

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Meanwhile, Eileen, who has grown children, is feeling overwhelmed. Should she sell the family home that Jim helped to build or the couple’s beloved vacation property? How can she help her kids with university and housing costs while ensuring a stable financial future for herself? What will she be able to leave her children?

To say Jim’s estate is complicated is an understatement, she notes, which only exacerbates her financial concerns.

“I’m nervous about money and probably have an unhealthy psychology around it; I always worry about it,” Eileen admits. “I also don’t feel confident about my mutual fund investments. I already have capital losses of close to $30,000 and really feel that I haven’t invested my life insurance wisely. I worry that I won’t have enough to fully retire on and that there may not be an inheritance for our children. Had Jim lived, he would have been able to continue to provide a financial safety net that we all very much felt he gave to our family as a whole.”

The toughest question is what she should do about the couple’s real estate.

“I said I wouldn’t make any major decisions for five years, such as sell the family home of 25 years or sell our beautiful vacation home, which we love so much and where as a family we spent our summer holidays,” Eileen says. “We never talked about which house we would keep. It all happened so fast, and he was really sick. All I know is that my time owning both is limited, or I’ll go broke.”

To help Eileen make financial sense of emotionally charged circumstances, we consulted Lynn Williams, owner, chief executive officer and financial architect at the Lifestyle Protector in Vancouver, and Toronto’s John Sanchez, investment adviser with the Horwood Group at Richardson GMP .

The Basics – Eileen’s family home has been paid off and she has a line of credit worth $460,000, $86,000 of which has been used for an investment property – a townhome that is being built.

Assets:

– Family home, valued at $750,000.

– Vacation home, value uncertain, but holding approximately $300,000 in equity.

– $500,000 in mutual funds.

– $200,000 in guaranteed investment certificates.

– $50,000 in a high-interest savings account.

Monthly income:

– $500 CPP pension (survivor).

– $1,500 from part-time employment.

– $1,450 rental income from vacation property; fluctuates.

– $1,000, from kids’ debt repayment.

Monthly expenses:

– $2,300 a month in mortgage payments for vacation property.

– $600 in property taxes (for both homes).

Lynn Williams’s tips

1. Put a plan in place for Eileen’s income. It’s understandable that Eileen wants to help her kids financially, but Ms. Williams says she’s doing so without having a clear sense of her own situation. It’s also not surprising Eileen feels nervous about money, given that the only guaranteed source of money is her CPP survivor pension of $500 (which will be supplemented by her OAS beginning at 65).

“Eileen needs to take care of herself first,” Ms. Williams says. “She has to determine what her income needs are and how she’s going to generate this income from her investable assets. To retire and feel secure that her income will continue, Eileen needs to create a pension-like income from her existing investments that will be sufficient to take care of her day-to-day living expenses, essentially creating a secure income stream from her investable assets.”

This can be done using a variety of income products and structures including a life annuity, guaranteed minimum withdrawal benefit products and traditional mutual or segregated funds.

“This strategy would ensure that her basic income needs are guaranteed for life, regardless of how long she lives or how the market performs,” Ms. Williams says. “She can then decide what money, if any, is available and how she wants to help her children.”

2. Structure her investments for income rather than growth. “Eileen’s current mutual fund portfolio is structured for growth rather than income,” Ms. Williams says. “Being invested in an overly aggressive asset allocation, Eileen is taking on more risk than her needs or nerves suggest she is willing or able to tolerate.”

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