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(Glenn Lowson For The Globe and Mail)
(Glenn Lowson For The Globe and Mail)

financial facelift

This 63-year-old wants to diversify his portfolio with his life’s savings Add to ...

Keith describes himself as a single guy with $1.2-million to invest thanks to his previous well-paying job, spartan lifestyle and visceral aversion to debt. He owns no real estate and lives in a bachelor apartment in a Toronto-area neighbourhood.

Keith worked in corporate communications for 17 years until the firm went out of business, he writes in an e-mail. “Since then I have found a couple of short-term contract jobs but nothing long term,” he adds. “At the age of 63, I have learned the hard way that age discrimination is alive and well in Canada.”

Last year, he began working full-time as a security guard for $14.40 an hour. “That nets out at $1,830 per month, which, given my conservative lifestyle, is more than enough to live comfortably on,” Keith writes. His sole indulgence is a motorcycle. “I exercise regularly, enjoy good health and have no bad habits.”

Because he has no pension plan, Keith is thinking of buying a prescribed annuity before the tax rules change Jan. 1. “For me, annuities appear to be a credible surrogate for an employer pension,” he writes. “While annuities are not indexed against inflation, the simplicity of regular monthly cash for life holds strong appeal for me.” At age 65, he will get $989 of Canada Pension Plan benefits and $578 of Old Age Security benefits, for a total of $1,567 a month.

“Can you work out a plan that will properly balance my portfolio with a view to retirement?” Keith asks.

We asked Warren MacKenzie, a principal at HighView Financial Group in Toronto, to look at Keith’s situation. HighView is an investment counselling firm.

What the expert says

Keith has substantial savings because of his simple lifestyle, “not because he is managing his investments wisely,” Mr. MacKenzie says. Keith is missing out on even greater financial security because he is too focused on stock market risk, he adds. Keith has about 75 per cent of his money in cash or money-market funds. His stock portfolio is 100 per cent invested in the Canadian market. “His equity portfolio would have lower volatility if it was better diversified internationally.”

The planner looks at how Keith could have done over the past while if he hadn’t been such a Nervous Nellie. “If he was in a simple but well-diversified portfolio, with three exchange-traded funds and a 60-per-cent exposure to the equity market, for the five years ended June, 2016, his investment income each year (including capital gains) would have been about $30,000 higher than what he earned with his cash-laden portfolio,” Mr. MacKenzie says. Given that’s about what Keith makes in a year as a security guard, “this potential increase in return from investments is significant.”

For investors who follow a disciplined investment process, a stock market drop need not be a serious problem, the planner says. In 2008, a well-balanced portfolio would have lost less than 20 per cent and fully recovered in six quarters. “Rather, a market drop is an opportunity to rebalance and buy stocks when they are cheap.”

However, rebalancing is difficult unless the investor has a detailed investment policy statement laying out the investment process. Keith should consider working with an online portfolio manager or robo-advisory firm, he adds.

Keith faces two serious risks. One is the possibility of a health problem that will require an operation or drugs not covered by the provincial health-care plan.

“For a single 63-year-old male, the probability that he will some day need long-term health care is much greater than the probability that the stock market will crash and never recover,” Mr. MacKenzie says. Keith can address this risk through a long-term health-care insurance policy.

The second risk is inflation, which will erode the purchasing power of his savings over time. He can mitigate this risk by being in a well-diversified portfolio.

Keith is considering taking $200,000 of his capital to buy an annuity. The guaranteed income from an annuity often makes sense to offset a high exposure to equity, Mr. MacKenzie says. “A well-diversified investment portfolio would be a better choice, but the annuity would be an improvement over what he is doing currently.” (Keith did buy the $200,000 annuity. It gives him monthly income of $995 for life, of which $100 is taxable.)

While Keith has substantial capital, more than $500,000 is in his registered retirement savings plan, so he will be paying substantial income tax on the withdrawals. “Starting immediately, each year he should withdraw enough funds from his RRSP to lift his taxable income up to about $42,000,” Mr. MacKenzie says, because taxes are lower on the first $42,000 of income. Otherwise, he will pay taxes at a higher rate when he is forced to begin making mandatory minimum withdrawals (at age 72) “from what might become a very large RRIF (registered retirement income fund),” Mr. MacKenzie says. This will also reduce the probability of having his Old Age Security benefits clawed back.

If health care and inflation turn out not to be an issue for Keith, and if he continues to live frugally, he will die with an estate of more than $3-million, Mr. MacKenzie says. “Since that is not his objective, and since he does not have close family to watch out for him in his old age, he should at least consider a gold-plated health-care policy.”

+++++++++++++

The person: Keith, age 63

The problem: How to construct a balanced portfolio for retirement.

The plan: Overcome stock market fears by adopting a disciplined investment process – and balanced portfolio – possibly with the help of an online portfolio manager using ETFs.

The payoff: Greater investment returns than he is enjoying now, inflation protection and the comfort of knowing he can afford to quit his security guard job whenever he wants.

Monthly net income: $1,830

Assets: Non-registered (money market fund) $444,800; RRSP (Canadian index equity fund and cash) $506,300; TFSA (cash) $10,700; bank chequing account $230,000. Total: $1.2-million

Monthly disbursements: Rent $800; food $300; Internet $70, transit $80; motorcycle $100; travel $200; gym $25; miscellaneous $25. Total: $1,600

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

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