With her 65th birthday approaching, Bobbi would like nothing more than to get out of her basement apartment and into a comfortable condo.
A while back, she plunked $200,000 down for a share in a co-op housing project that fizzled. The land is up for sale again, but Bobbi doesn’t know whether she’ll recoup her full investment when it eventually sells.
Meanwhile, she lives in the basement of her house while her daughter and granddaughter live upstairs. The plan is for the daughter to buy the house when Bobbi moves.
Bobbi’s living expenses are more than covered by $54,000 a year in support payments from her ex-husband that will cease if he dies before she does.
Perhaps sensing that her circumstances could change suddenly, Bobbi wonders whether she should switch her guaranteed investment certificates for annuities to generate more income.
“I have a low risk tolerance and GICs are no longer wise as interest is lower than inflation,” Bobbi writes in an e-mail. “I need sound financial advice I can trust and go to bed with peace of mind.”
We asked Heather Franklin, a fee-only financial planner in Toronto, to look at Bobbi’s situation.
What the expert says
Once Bobbi has sold her house – whether to her daughter or on the open market – she should easily clear enough money to buy the condo she has in mind, Ms. Franklin says. Bobbi’s target for the condo is $300,000. As well, she intends to lend her daughter $30,000 for a down payment.
With luck, Bobbi could recoup her money from the land sale soon, which would greatly improve her situation. But she can’t count on it for the condo purchase, the planner says. So until something sells, Bobbi is stuck in the basement.
She wonders whether she should put off collecting Canada Pension Plan and Old Age Security benefits until she is 70 because she doesn’t need the money yet, the planner notes.
“Postponing these government benefits may not be prudent given the precarious nature of her spousal support,” Ms. Franklin says. The two benefits together would add about $14,000 to her annual income. Still, she could put them off until she needed them.
Postponing these government benefits may not be prudent given the lack of certainty over spousal support, Ms. Franklin says. The two benefits together would add about $14,000 to her annual income. Still, she could put them off until she needed them.
Bobbi’s expenses will rise by at least $500 a month when she buys a condo because she and her daughter are sharing household operating costs now. Bobbi has to take a long, hard look at how she would manage without that monthly support cheque, the planner says.
“The primary concern during retirement is generating a reliable income stream from one’s investments.”
Bobbi says she is risk averse, but she has most of her $46,820 in stock holdings in shares of just one company. She should sell the stock and buy some blue-chip, dividend-paying shares or a low-cost mutual fund or exchange-traded fund that holds them, Ms. Franklin says.
Indeed, if she can accept some more risk, Bobbi may want to add to her stock holdings for the potential growth and tax-advantaged income they offer, she says. Dividends and capital gains are taxed at a lower rate than interest income.
As for annuities, there are pros and cons, the planner says. For a 65-year-old woman, a $100,000 annuity would generate about $500 a month of income at current rates, she says. “The actual amounts vary slightly.” If Bobbi decides to buy annuities, she should consider doing so gradually.
At age 70, the annuity would throw off nearly 12 per cent more income. If she waited till age 70 to buy the annuity, it would throw off nearly 12 per cent more income. By then, interest rates may well have risen, which would make the payout even higher. It would be prudent to keep some ready capital in case of emergencies or a cash flow shortfall, the planner says.
If her support payments stopped, “she would be required to use some of her savings to shore up the possible monthly shortfall.”
If Bobbi recovers her full $200,000, her investment pool will total nearly $750,000, including her tax-free savings account. At 3 per cent a year, for example, this would generate $22,500 of income. That, plus government benefits, would leave her with $36,500 before tax – not enough to cover her expenses. To keep pace with interest rates, she could buy GICs of different maturities to form a GIC “ladder.”
Bobbi could raise her monthly income by annuitizing part of her capital over time – the payout would depend on her age and prevailing interest rates – but the annuities would not form part of her estate when she dies.
The person: Bobbi, 64
The problem: How to generate enough income from her investments to last a lifetime without taking much risk.
The plan: Sell the house before buying a condo, sell the single-stock holdings and buy something that offers more diversification, and consider buying annuities gradually, starting when she is 70 or so.
The payoff: Financial security even after the support payments stop.
Monthly net income: $3,565
Assets: RRSP GICs $470,075; stock $46,820; down payment on land $200,000; TFSA $32,255; residence $370,000. Total: $1.1-million
Monthly disbursements: Housing $510; transportation $365; food, groceries $350; gifts, charitable $70; vacation, travel $50; personal discretionary $105; doctors, dentists $115; drugstore, supplements $110; health and dental insurance $120; telecommunication $65; TFSA $460. Total: $2,320
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