At 72, Barbara has reached a critical point in her financial life. Under tax law, she must begin withdrawing money from her registered retirement income fund even though she has enough income from her non-registered portfolio to cover her expenses, which are quite modest.
"I believe I need to make some adjustments to my portfolio to make it more tax-efficient as well as to provide inflation protection," Barbara writes in an e-mail.
Because she has no company pension, Barbara is dependent mainly on her investments. Her monthly pretax income for 2010 breaks down as follows: $6,070 from investments, $310 from a life income fund, about $580 from the Canada Pension Plan and about $310 from Old Age Security. The latter will be clawed back to some extent this year because of her RRIF withdrawals.
"I am a conservative investor and am concerned that I no longer have time to recover from major errors," she adds.
Short term, Barbara plans to renovate her Toronto condo, then sell it and move back to Calgary early next year. As well, she'd like to visit Australia soon and spend a few months each winter in a warmer climate. Longer term, Barbara is concerned about having enough money for long-term care if she should need it.
She has a son, who is 49, and three grandchildren. She shares ownership of her residence with her common-law partner. Both her son and her spouse are financially independent.
We asked Amanda Knapp, investment adviser and financial planner with RBC Dominion Securities in Waterloo, Ont., to look at Barbara's situation.
What the expert says
Barbara spends less than she takes in each month, which means her net worth should continue to rise over the years so she has no money problems, Ms. Knapp says. Even if she spent $10,000 a month, based on her current assets Barbara would have the equivalent of $1.5-million at age 90, the planner calculates.
"Barbara certainly has flexibility to use her assets up for herself in this lifetime," Ms. Knapp observes. Barbara plans to leave half her estate to her partner and half to charity.
Barbara can make her income more tax efficient by buying a $500,000 insured annuity, which is an annuity that uses part of its payout to purchase a life insurance contract, the planner says. A portion of her monthly income would pay the premium.
Here is how an annuity would compare with her current (mainly fixed) income assuming a 4-per-cent rate of return, a marginal tax bracket of 45 per cent, and $1.75-million in non-registered holdings:
Fixed-income cash flow would be $1,667 a month, minus $750 in income tax, for a net cash flow to Barbara of $917 a month. An insured annuity, in contrast, would pay $3,860 a month, of which only $527 would be taxable. Subtracting income tax of $237 and insurance costs of $1,991 would give Barbara a net income of $1,632 a month.
"When she passes away, her beneficiaries will receive the original $500,000 directly from the insurance company," Ms. Knapp says. The money does not pass through her estate and so is not subjected to estate costs and probate fees, she adds. "The savings in probate fees alone would be about $7,000."
On the philanthropic front, Barbara might want to consider a charitable insured annuity, the planner says. She could make her favourite charity the owner or set up a personal charitable gift fund from which several charities could benefit. Premiums would be tax deductible, and she could elect to receive the charitable donation tax credit throughout her lifetime as opposed to all at once in the year of her death. Her son and/or grandchildren could manage the charity, and its investment earnings "become available to fund worthwhile causes of her choice in perpetuity."
To protect against inflation, Ms. Knapp recommends Barbara invest $350,000 of her non-registered portfolio (about 10 per cent of her total net worth) in dividend-paying, blue-chip stocks.
Barbara might want to consider buying long-term care insurance rather than drawing on her assets to pay for whatever care she might need, Ms. Knapp says. "Costs vary but an estimate of $2,000 to $6,000 a year, depending on the coverage she selected, would be a ballpark range." For a higher premium, coverage could include a rider whereby premiums would be refunded to her estate if she did not use the insurance. Finally, she should continue to contribute to her tax-free savings account, the planner says.
How to arrange her finances in a more tax-efficient way, ensuring there is enough for long-term care, should she need it, and money to leave to her favourite charities.
Consider annuities for tax-efficient cash flow and charitable giving. In the meantime, loosen up a bit and spend more money on herself, travelling and wintering in a warmer climate. After all, she can afford it.
Financial independence and the satisfaction of knowing her legacy will not be eroded by unnecessary fees and taxes.
Monthly net income
Bank account, money market investments $715,000; GICs and term deposits $1,203,000; stocks $12,000; government bonds $1,070,000; half interest in condo $375,000. Total: $3,375,000.
Groceries $250; dining out $100; clothing, grooming $250; medical, drugs, dental $375; tech tools $100; gifts $170; condo fees, taxes $1,400; home insurance $125; heating, hydro $150; telecom, cable, Internet $100; repairs, maintenance $100; vacations $170; reading, music, movies $100; courses, hobbies $100; transportation $140; group insurance $125. Total: $3,755.
Special to The Globe and Mail
Want a free financial facelift?