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financial facelift

Tim Fraser

Wendy's story shows how much low interest rates are hurting retired people with no company pensions.

An enthusiastic artist, she used to invest her savings with a private mortgage broker, earning 10 per cent a year on average. Three years ago, two mortgages accounting for about $180,000 went into default. Eventually, she recovered her capital but the experience left its mark.

"For two years I lived with almost no income other than my Canada Pension and Old Age Security benefits and a great deal of anxiety," Wendy writes in an e-mail. When the income stream stopped, Wendy qualified for a modest Guaranteed Income Supplement (GIS) but her income is not enough to cover her expenses of $1,805 a month. Wendy, who is 73, co-owns an older home in Vancouver. She values her share at about $500,000. When her mother dies, Wendy expects to inherit about $200,000 from the sale of the family farm. Together, these assets should be enough to take care of her in future if she needs to move into an assisted living or long-term care home, she says.

But she's short of money now. Worse, if she does make some, her GIS will be slashed.

"I need to maximize my income in the present while I am still able to enjoy it," Wendy writes. "Is there a way that I can invest that will allow me to continue to benefit from the GIS, invest some portion of my funds and supplement my income as needed from cash assets?" she wonders. "I have about $220,000 invested without a clear plan."

We asked Ngoc Day, a financial planner at Macdonald, Shymko & Co. Ltd. of Vancouver, to look at Wendy's situation.

What the expert says

Because she collected accrued interest in 2011 on one of the mortgages that had been in default, Wendy will probably not be eligible for GIS benefits in 2012, Ms. Day notes. GIS is cut off when a person's net income (excluding OAS) surpasses $16,368 a year.

Wendy has more than $9,000 of unused contribution room in her tax-free savings account, income from which does not affect the GIS, the planner says. Wendy should contribute the full $9,060 to her TFSA this year in order to shelter the interest income. That, plus the $11,000 already in her TFSA, could serve as her emergency fund.

She could invest the TFSA funds in two guaranteed investment certificates, a one-year and a two-year, of $10,000 each. Next year, she could contribute another $5,000, investing it in a three-year GIC and so on until she has a complete five-year GIC "ladder."

Instead of leaving her $168,000 in cash sitting in a low-interest savings account, Wendy could invest in a five-year GIC ladder with a fifth of the funds invested in each term. This way, she would be in a position to benefit from future interest-rate increases. Wendy should ensure that her GICs are held in two different financial institutions so that they will not exceed the $100,000 limit for Canada Deposit Insurance Corp. coverage.

"With this approach, Wendy's estimated net income excluding OAS would be about $10,150 a year and her GIS benefit would be about $260 a month," Ms. Day says. Wendy would get $395 from CPP, $540 in OAS, $83 from her $20,000 investment in a U.S. real estate fund, and $368 in interest income from her GICs. That, plus the GIS, would give her about $1,646 a month. The monthly shortfall of about $160 would come from her capital.

Ms. Day does not suggest Wendy invest in stocks because she has no experience or knowledge of the equity markets and their risks. Wendy's goal is to get the maximum GIS benefit, the planner notes. As well, a large proportion of Wendy's assets are illiquid, so investing in a fixed-income ladder gives her ready access to at least some of her cash if she needs it.

"Investing in any asset without a full understanding of the associated risks and return could lead to a disastrous experience and a lot of sleepless nights," the planner says. If Wendy invested in dividend-paying stocks, her GIS benefit would be hurt by the dividend gross-up, which artificially inflates net income.

The wild cards for Wendy are the future cost of assisted living or long-term care if she needs it, as well as the possibility that her co-owner might want or need to sell their share of the house. If Wendy is not able to buy out her partner, the house will be listed on the open market and Wendy will have to move to more expensive accommodation, Ms. Day says. Wendy would likely be disqualified for GIS because of the income earned on the house sale proceeds.



The person

Wendy, 73

The problem

How to supplement her government benefits income sufficiently to cover expenses without losing the Guaranteed Income Supplement.

The plan

Build "ladders" of guaranteed investment certificates to take advantage of future increases in interest rates and draw the shortfall from her capital. Use TFSA for emergency fund.

The payoff

Peace of mind knowing that her capital is not at risk and she will have enough money to cover her modest living costs.

Monthly income

$1,400 (variable)


Share of home $500,000; TFSA $11,000; bank accounts $168,000; proceeds of second mortgage under power of sale $20,000; U.S. REIT $20,000. Total: $719,000

Monthly expenditures

Share of taxes, utilities, maintenance, insurance $450; transportation $150; phone, Internet $55; groceries $400; dining out $100; entertainment $100; clothes $50; vacation $200; personal care $100; art supplies $150; miscellaneous $50. Total: $1,805



Special to The Globe and Mail

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