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Financial Facelift

Widow had let her husband handle the money Add to ...

Judy, 65, had always let her husband handle their finances. But when he died just months after a cancer diagnosis last year, she was suddenly on her own.

“The transition has been very difficult and stressful,” says Judy, who retired last year. “Not only was his death untimely but he also handled all our financial affairs, including the family budget, paying bills, savings and investments. I very much regret that I was not more involved in our financial affairs.”

She has begun to educate herself by reading investment articles and personal finance books. She also has begun to look for a financial adviser. The two she has seen so far have recommended switching from dividend stocks to mutual funds in her registered retirement savings plans (RRSPs) and tax-free savings account (TFSA).

Taking a look at Judy’s situation is David Shymko, a partner in Macdonald Shymko & Co. Ltd., a fee-only, financial-planning firm based in Vancouver.

What the expert says

Judy is in a fortunate position. A portfolio dedicated to preserving her capital should also provide plenty of income for a comfortable retirement.

One big advantage: Her private pensions are defined-benefit plans, indexed for inflation, that will pay out as long as she lives, so she doesn’t have to worry about outliving her funds or having to deal with a decline in real purchasing power. Add in income from Canada Pension Plan (CPP) and Old Age Security (OAS) and her net income is $5,294 a month, well above her current spending requirement of $3,659.

Still, the investments in her RRSPs and TFSA need to be managed. The good news is that “she doesn’t need to take securities risks – she is financially independent,” Mr. Shymko says. “She may do just fine with a GIC [guaranteed investment certificate]or a bond ladder” consisting of a staggered series of bonds maturing at annual intervals. But she should make sure the bond maturities are not longer than 10 years to avoid being locked into today’s low rates for decades to come.

Such fixed-interest investments are easier to understand than many alternatives and have lower risk. “But we don’t know if they suit her temperament. She should take a risk-tolerance assessment, which could give some direction on how adventurous she might be,” Mr. Shymko says. Dividend stocks could be suitable for her, especially if she has a trusted investment adviser.

She doesn’t need mutual funds. If she wants diversified exposure to the stock market without having to deal with individual stocks, “she can utilize exchange-traded funds [ETFs]” he recommends. They tend to have better returns thanks to their much lower annual management expenses – especially those from the Vanguard family.

“Ideally, the adviser she selects will be a fee-only professional because she needs few, if any investment products [fee-only advisers collect fees directly from the customer instead of through commissions embedded in products] She needs education without learning the hard way.”

Judy is facing rather hefty tax payments in retirement. Already, some of her OAS income is being clawed back.

“She has little room for simple tax planning – no spouse to split pension income with, and her grandchild is living outside of Canada, so is ineligible for a RESP,” he notes.

Whenever she decides to downsize her residence, she may face an additional tax hit. That’s because her house sits on 2.5 acres and Canada Revenue Agency puts a 1.25-acre limit on the tax exemption it provides, subject to some conditions, on money from the sale of a principal residence. As a result, she would be subject to capital gains tax on the property over the limit.

However, when downsizing her home, she might consider buying (depending on local real-estate conditions) “the most expensive new residence,” such as a luxury condo. In this way, she can “store capital, contain income, and eliminate taxation through the principal residence exemption,” Mr. Shymko says.

“There are some more adventurous things that could be considered to reduce taxes,” Mr. Shymko observes. “But I’m not sure the temperament is there and peace of mind may be the better course. The luxury condo is about the most risk I’d propose for her. Real estate can go down too.”

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CLIENT SITUATION



The person



Judy, 65



The problem



Taking control of her finances and preserving, or growing, the investment portfolio left behind by her late husband.



The plan



Continue self-education. Interview a variety of financial advisers before committing to any. Take a risk-tolerance assessment. Decide how investment portfolio is to be invested and managed, keeping in mind tax and estate aspects.



The payoff



Peace of mind.



Monthly net income



$5,294



Assets



Bank accounts $150,000; TFSA $40,000; RRSPs $847,000; non-registered investments $6,000; residence $800,000; private pensions $1,339,000; timeshare $22,000; auto $30,000; tractor $20,000. Total: $3,254,000



Monthly expenditures



Food $500; clothing $100; medical $50; property tax $450; house insurance $220; telecom $275; utilities $631 maintenance $200; furniture, appliances $200; vacations $400; entertainment, hobbies $100; car insurance, repairs, gas $300; group insurance $83; donations $50; gifts $100. Total: $3,659. Surplus: $1,635



Liabilities



2011 taxes owed $3,633 (tax withholding from pension income was insufficient). Total: $3,633





Special to The Globe and Mail



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