Darren Calabrese/ For The Globe and MailThe Globe and Mail
Patsy and Devon live in a mortgage-free home in the Maritimes. He is 60 and collecting disability benefits. She is 61 and wants to retire from her government job by the end of next year. They have two grown children.
Their big problem seems to be investing. They want to manage their own investments using exchange-traded funds but they have more than $300,000 sitting in the bank.
"We intended to be do-it-yourself investors, but as you can see we are failing miserably at that because there's an embarrassing amount of money sitting in cash and our holdings are a total mishmash," Patsy writes in an e-mail.
"We are paralyzed. We've been badly burned by financial/investment advisers, and the 2008 crash still haunts me," Patsy adds. "Intellectually, I know we should be invested and I have a quasi-investment plan. I just can't seem to pull the trigger on it yet," she says. "It never seems the right time. We've lost about eight or nine years during which time that money could have been invested."
Patsy also wonders about tax-efficient strategies for managing their money once she retires.
"I feel that because we've scrimped and saved our entire lives, we've missed out on things like travel and living in a nicer house," Patsy writes. "I want us to enjoy our retirement." Will they have the money they need?
We asked the team at Kaspardlov and Associates in Windsor, Ont., to look at Patsy and Devon's situation: chief executive Dessa Kaspardlov, certified financial planners Mike Skinner, Josh Lane and Vickey Rowe, and portfolio manager Patrick McHugh, who holds the chartered financial analyst designation (CFA).
What the experts say
The first step is to look at their cash flow once Patsy has retired, the Kaspardlov team say in their report. Until age 65, when other income sources kick in, their income will come from Patsy's pension ($56,256) and government benefits ($24,133).
"Based on the estimated retirement expenses of $2,500 per month, increased travel spending of $10,000 a year and expenses associated with potentially buying a new home ($45,000 for potential renovations, furniture, appliances), Patsy and Devon will be able to live comfortably on Patsy's pension and their combined government benefits," they say. They recommend Patsy begin collecting Canada Pension Plan benefits when she retires at the end of next year.
"This means that their retirement problem isn't how to make retirement work, but how to be more tax-efficient, invest comfortably and reduce portfolio volatility and risk."
Devon and Patsy ask when they should convert their registered retirement savings plans (RRSPs) to registered retirement income funds (RRIFs) and begin withdrawing money. They wonder if this would result in the clawing back of their Old Age Security benefits.
The Kaspardlov team recommend the couple split Patsy's company pension when she retires. RRSP income cannot be split until age 65 when it's converted to an RRIF, but they may want to explore the tax-effectiveness of withdrawing money from RRSPs before age 65 for lump sum expenses. "This will equalize pension and registered income between them, which will minimize overall taxes," the planners say. "Because of that, they won't likely be subject to any OAS clawback" whether they begin drawing the minimum amount from their RRIFs at age 65 or later. Patsy will also receive a lump-sum retirement bonus that can be fully tax-sheltered and deposited into her RRSP.
For their short-term goals, such as possibly buying a new home or travelling more, "they shouldn't take any risk by investing funds to pay for these expenses at this stage," the planners say. Instead, they could set aside some cash in a high-interest savings account so it will be easily accessible.
Patsy and Devon feel they have been burned by advisers in the past but acknowledge they have a problem investing. "One of the biggest problems with do-it-yourself investing is the emotional freight and worry that investment decisions can carry for non-professionals," the Kaspardlov team say. Instead, the couple should explore low-fee investment options through a fee-based investment adviser, who ideally would work alongside their financial planner. They could start by drawing up some criteria that are important to them. What services does the adviser offer and how are they paid? What is the adviser's investment philosophy? Will the adviser help them identify their goals and how to achieve them with the least possible risk?
"Although the fee may be higher than what do-it-yourself exchange-traded funds would cost, it would relieve their investment worry and allow them to focus on enjoying retirement." With investment and financial planning help, "they would no longer need to worry about when to invest and how much, or when to access which account."
The planners recommend the couple continue to diversify asset classes, and also to diversify their portfolio with a balance of cash, balanced mutual funds (stocks, bonds and cash), exchange-traded funds and blue-chip stocks. "A low-risk, income-generating portfolio would help protect against inflation risk in the long term and help take their focus off market fluctuations."
Finally, the planners look at risk management. Patsy and Devon have health care coverage through her group benefit plan. They recommend Patsy carry full coverage into retirement. The couple also asks whether they need long-term care insurance. Such coverage can be costly and Devon may be refused because of his disability, they note. Given the couple's savings and Patsy's pension income, they will likely have sufficient assets to pay for any long-term care they might need without insurance. Patsy has life insurance through her employer for three times her salary. Because they have no debts and no dependants, they don't really need this coverage, the planners say. Patsy could reduce it to one times her salary for as long as she is working and then drop the insurance once she retires. Alternatively, she could convert a portion of her group insurance to an individual permanent plan to cover final expenses and to partly offset income taxes payable on her registered plans after she dies.
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The people: Patsy, 61, and Devon, 60
The problem: Overcoming their fear of investing and putting their savings to work.
The plan: Get professional advice on building a balanced portfolio that suits their needs and risk tolerance.
The payoff: Fears allayed
Monthly net income: $6,000
Assets: Residence $250,000; estimated present value of Patsy's defined benefit pension plan $968,000; cash and short-term investments $307,335; GIC ladder $11,745; his locked-in RRSP $3,300; his RRSP $332,990; his TFSA $50,155; his non-registered $97,075; her RRSP $81,340; her TFSA $38,135; her non-registered $56,755; savings account for child's postsecondary education $58,200. Total: $2.26-million
Monthly disbursements: Property tax $200; home insurance $55; utilities $305; maintenance, garden $120; transportation $215; groceries $500; clothing $20; gifts, charitable $95; vacation, travel $250; dining, drinks, entertainment $170; grooming $55; club memberships $65; pets $50; subscriptions $25; drugstore $50; health, dental insurance $60; life insurance $90; disability insurance $115; telecom, TV, Internet $225. Total lifestyle expenses: $2,665. Savings: $1,870 (TFSAs $915, pension plan contributions $955). Total outlays: $4,535
Liabilities: None
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