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Liz and Don plan to sell their Toronto-area house and move to their newly built retirement home, a lakeside cottage about 250 kilometres away. How long they stay there depends on how much they miss being close to their children and grandchildren.

"In the future – five or 10 years from now – we will buy a small condo" in the city, Don, a self-employed real estate broker, writes in an e-mail. "We've raised four children and assisted them through postsecondary education with RESPs that we started early in our lives," he writes. "They are all finished school and are working."

Don is 58 with no company pension. Liz, who works in health-care, is 57 and has a defined benefit pension plan that will pay her about $24,800 a year at age 60.

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With retiring on their minds and some cash in their pockets, Liz and Don wonder whether they should add to their four rental properties or invest in fixed-income securities instead. They are even considering selling.

"Should we cash out of real estate investments and invest in the bond market?" Don asks. Most of their registered savings are in blue-chip, dividend-paying stocks, while their cash is in money market funds. "Our strategy is to purchase additional blue-chip, dividend-paying stocks in the next six months."

Don likes to take a "hands on" approach to investing, but with their assets growing, he wonders if he should pass the task on to the professionals.

Their big question is how to leave an inheritance for their children and grandchildren – their new cottage, for example. "Should we pass it on to the children prior to purchasing a condo?" Don asks. "Should we set up a trust?"

In their retirement years, Liz and Don plan to travel and do some volunteer work overseas. "Are we ready for retirement?"

We asked Marc Henein, an investment adviser at ScotiaMcLeod in Mississauga, to look at Don and Liz's situation.

What the expert says

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Liz and Don have lived a comfortable life and are looking to retire in 2016 when Don turns 60, Mr. Henein says. They have $280,000 in available savings and are considering buying another rental property. They already have four, valued at $1.6-million. The properties generate $67,800 a year of rental income before expenses.

Liz and Don have $600,000 in mortgages on the properties costing $33,600 a year. Add to that property taxes in the range of $14,000 a year and an annual maintenance budget of $16,000 a year (1 per cent of the value) and their total expenses add up to $63,600, "leaving them with a meagre $4,200 a year in profit on their portfolio," Mr. Henein says. "When dividing the profit by the total asset value, we get a yield of 0.26 per cent."

Alternatively, investing in a balanced portfolio of 40 per cent bonds and 60 per cent dividend-paying equities "would drive a conservative yield of 3 per cent net of fees," the adviser says. That does not include potential gains. People invest in real estate because it is easier to understand than financial markets, Mr. Henein says. Still, marketable securities have clear advantages – "no maintenance or 3 a.m. calls when the furnace stops working – and higher net income." His calculations assume Liz and Don keep their existing properties.

As to what they should do with their $280,000, Mr. Henein suggests a balanced portfolio of stocks and bonds, which at a 3-per-cent yield would generate $8,400 a year of investment income plus long-term growth.

"This can complement the current real estate holdings," the adviser says.

Don and Liz have owned their properties for many years "and have generated significant gains," so when they die their estate will be liable for substantial capital gains tax, Mr. Henein says. Their $737,000 in registered retirement savings plans will also be subject to tax on the death of the surviving partner.

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"The cheapest way to deal with a tax liability is life insurance," the adviser says. A joint life insurance policy to cover off the approximate tax liability of $500,000 would cost $5,500 a year. "Presuming they live until age 90, this would cost them $165,000 in total," Mr. Henein says. "This avoids incurring any capital gains today by changing title on the properties to include their kids in the ownership."

Given that Don and Liz have more than $1-million in investable assets, they could find a highly qualified portfolio manager for a fee of only 1 per cent a year, the adviser says.

"This fee may be tough to swallow for a do-it-yourself investor, but keep in mind the help they need that goes beyond traditional portfolio management – everything from stock selection to estate preservation," he says. "Creating and following a strategic financial road map is crucial."

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Client Situation

The people

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Liz, 57, and Don, 58, and family.

The problem

How to best invest their cash pile, manage their substantial savings and smooth the transfer of wealth to the next generation.

The plan

Invest money-market funds in a balanced portfolio of quality stocks and bonds. Consider buying life insurance to offset estate tax when passing assets on to children.

The payoff

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Most effective use of hard-earned capital.

Monthly net income

$8,145

Assets

Cash in bank $15,000; money-market funds $280,000; other $58,000; her TFSA $27,000; his TFSA $26,000; her RRSP $218,000; his RRSP $519,000; est. present value of her DB pension plan $450,000; home $265,000; other real estate $1.6-million. Total: $3.5-million

Monthly disbursements

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Property tax $375; utilities $275; insurance $60; maintenance $80; transportation $910; groceries $600; clothing $120; gifts $675; travel $250; entertainment $300; grooming $20; club, golf $150; pets $250; subscriptions $60; life insurance $25; supplements $10; telecom $385; RRSPs $1,000; TFSAs $915. Total: $6,460

Liabilities

Mortgages on rental properties $600,000

Read more from Financial Facelift.

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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