Hands hold on to a model of a house.Getty Images/iStockphoto
Investing Exchange brings couples together with financial advisers in an exchange of opinion over saving and investment strategies.
In this exchange, we meet a couple in their 70s with about $1-million in an RRSP but $650,000 in debt. But Bruce and Jennifer disagree on how to generate the cash flow they need in retirement: fast-rising stocks or safety? Downsize or keep the house Jennifer loves?
With solid six-figure earnings and net worth of well over $1-million, you would think that Bruce and Jennifer would be of one mind about their future. But Bruce and Jennifer (the couple's names have been changed) can't agree on how to invest or plan for retirement.
Bruce, a Toronto lawyer, is 72 and pulls in approximately $300,000 a year. He expects to work another three years. Jennifer, 70, is not working now. She was an art teacher whose earnings topped out at around $40,000 a year. Now she is ailing and sees a number of specialists for treatment.
They have been married for 40 years and have three grown children. By their own admission, the couple's spending pattern for years has been, well, overspending. Jennifer wants to remain in Toronto; Bruce doesn't mind moving out of the city.
"The fact is, with our cash flow, we just can't afford to stay," Jennifer says, which becomes clear when their debt is factored in. They have little savings beyond what they put into registered retirement savings plans.
As luck would have it, that's slightly more than $1-million now. But before 2008 it was $1.5-million. Some high-risk investing resulted in big losses.
The two are more or less relying on what's left to see them through after Bruce retires. (There's a small amount in savings that Bruce had to move to a registered retirement income fund at 71.)
Their Toronto house is worth $750,000, with a $450,000 mortgage. They downsized to this home three years ago. They also owe about $200,000 on a line of credit.
The cost to service their debt is about $42,000 a year, or $3,200 a month, leaving them approximately $35,000 after tax for living expenses.
Perhaps they could downsize again. But Jennifer does not want to "lose" the house. She is emotionally attached to the property and the idea of renting is repellent.
Both Bruce and Jennifer have grown used to a certain lifestyle that a $300,000 income can bring. But this ignores their debts.
Both of them agree, as Bruce says, that "the debt is just too high." But they have trouble agreeing on what to do about it.
For years, Bruce has leaned toward risks – fast-rising speculative stocks that turned out to be fast-sinking later. Jennifer has had enough – they already moved once to save money and she doesn't want to move again.
Bruce, on the other hand, wants to make sure they have enough cash flow to enjoy the things that make them happy – travel and visiting their children. He also wants to be sure that they will have the means to find a nice retirement facility eventually. Why not sell the house and leave Toronto?
The disagreement has been going on for a while. Back in 2007, Jennifer was nervous enough that she persuaded Bruce to move $600,000 of his then-$1.5-million portfolio to a more prudent portfolio manager, Lori Livingstone at BMO Nesbitt Burns Inc. in Toronto. Bruce left the rest of his funds where they were; they had been earning 30-per-cent returns through the decade up to then.
When the crash of 2008 came, that $900,000 was reduced – fast – by 90 per cent. Most of the companies in which Bruce held securities shrunk or went bankrupt.
By 2009 this sad portfolio climbed back to $150,000 and he moved this to Ms. Livingstone's care as well. Together with the $600,000 he transferred to her earlier, which has grown, they have more than $1-million to last the rest of their lives. But they still have huge debt payments every month.
Here's what Ms. Livingstone has advised the disagreeing couple:
"Bruce and Jennifer have had to face up to some harsh realities – and they still need to be more realistic about their future.
"With Jennifer's health, there is little cushion for any extra medical expenses. The debt servicing will cramp their ability to have the quality of life they want in retirement. Interest rates are rock bottom now, but they will move up and this will make things worse. And at Bruce's age, there's no guarantee that he will work for three more years."
Ms. Livingstone is a discretionary adviser – the couple agrees to let her make investment decisions on their behalf. She also has a bit of lifestyle advice.
Despite Jennifer's misgivings, Ms. Livingstone thinks the couple should sell their house and either move to a less expensive nearby city, such as Hamilton or Guelph, or simply find a nice place to rent.
"That would leave them with no debt [they could pay off what they owe] and a still sizable RRSP to fund their goals.
"The key is cash flow. Their RRSP is large enough so that without large debts they have the best chance of living out their remaining years without money stress."