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Merle Robillard/The Globe and Mail

Together, Tess and Lee built a successful consulting business. Now, in their mid-60s, they are ready to sell their million-dollar Toronto home and enjoy the fruits of their labour.

Rather than downsizing to a luxury condo, they want to rent a nice apartment but are not sure how much they can afford.

"The shared ownership aspect of a condo has never really appealed to either one of us," Tess writes in an e-mail. Although they have no work pensions, they do have substantial savings and investments. Both still generate some consulting income.

"We could stay in our home and live comfortably on our investments," Tess writes. "But outdoor maintenance is a pain and we're thinking we might be better off to make the move before we get much older." They travel a lot "and love the idea of just being able to lock the door and go," she adds.

The couple has two main questions: Can they afford the lifestyle they want without running out of money? How can they keep to a minimum the claw-back of Old Age Security benefits once they invest the proceeds of their house sale? "We're wondering what strategies we could consider to reduce the potential tax hit," Tess writes.

We asked Warren MacKenzie, founder of Weigh House Investor Services in Toronto, to look at Lee and Tess's situation. Weigh House is a fee-only financial advisory firm that does not sell investments.

What the expert says

Lee and Tess have worked hard to build up a net worth of $2.8-million, Mr. MacKenzie says. Now they want to sell their home, move to a luxury apartment and spend about $20,000 a year travelling. They have a well-diversified portfolio of 55 per cent equities and 45 per cent cash and fixed income.

One of their main concerns is to minimize income tax and the clawback of their Old Age Security benefits, something the planner questions.

"This is a common financial planning objective," Mr. MacKenzie acknowledges. If this really is their most important objective, they might be better off with a higher weighting in equities and a lower weighting in fixed income investments, the planner says. With equities, a greater proportion of their income would be in the form of capital gains, some of which could be accrued and realized periodically. "So they might lose the clawback only once every five years rather than each year.

"However, their main goal should be to protect their capital so they always have enough money to maintain their lifestyle," he says. They have no children to fall back on. To ensure they will not run out of money, Lee and Tess need to address risks such as the possibility of a severe stock market crash.

"They can have a comfortable retirement with a lower return and a lower exposure to common stocks, so why take more risk than necessary?" The stock market is close to a record high.

"If they suffered through a crash just as they started retirement, it would be difficult to maintain the lifestyle they desire," he adds. "Although it may be unlikely that we will experience another 1929-style market crash, if that did happen even their reasonably well-diversified portfolio could fall so much in value they would be unable to maintain their lifestyle."

The probability of one of them living until 95 is about 25 per cent, so their portfolio should be designed to ensure the money will last for at least 30 years. Their financial plan shows that with a slightly lower-risk portfolio, they can spend $3,500 a month on an apartment and still have almost $700,000 at the age of 95.

"If they spend $5,000 per month, they run out of money in their early 90s." Knowing this will help them make the choice that is best for them, Mr. MacKenzie says. He based his calculations on lifestyle spending excluding rent of $87,000 a year (after they sell their home), an average annual return on investment of 3.75 per cent and an inflation rate of 2.5 per cent.

Lee and Tess are using exchange-traded funds, which is better than buying individual stocks through a financial adviser, the planner says. "But it means that they will never beat the benchmark."

Given the size of their portfolio, they should be able to find professional money managers who have a 10-year track record of beating the appropriate benchmark after all fees by one to two percentage points a year, he says.

Another problem is that they are focused on investment products rather than the investment process, Mr. MacKenzie says. They need a rebalancing strategy so they can lock in profits periodically and ensure their portfolio stays within an acceptable level of risk.

Another way they can reduce income tax is for Tess, who owns most of the capital, to pay all expenses so that Lee can save all of his money and eventually build up an investment portfolio that will be the same size as Tess's, thereby moving them both into the same income tax bracket, at which point they could share expenses equally, the planner says.


Client Situation

The people: Lee, 65, and Tess, 64.

The problem: None, really. Just want to know whether they can maintain their current lifestyle, travel and rent a luxury apartment without ever having to worry about running out of money.

The plan: Clarify their goals. Preservation of capital should be paramount. Consider professional money management.

The payoff: Less risk and the information they need to make big decisions.

Monthly net income: $9,030

Assets: Cash $44,385; term deposits $41,040; stocks $26,330; ETFs $542,400; assets in corporation $65,145; his TFSA $35,265; her TFSA $35,240; his RRSP $126,870; her RRSP $444,060; his RRIF $411,130; residence $1-million. Total: $2.77-million

Monthly expenditures: Property tax $600; utilities $350; home insurance $60; cleaning $160; maintenance $500; garden $100; transportation $425; grocery store, clothing $1,050; gifts, charitable $200; vacation, travel $1,700; dining, drinks, entertainment $620; clubs, sports $600; grooming $120; subscriptions $50; pocket money $800; dentists, physio, massage $470; prescriptions $110; health insurance $400; eye care $100; long-term care insurance $300; telecom, TV, Internet $315. Total: $9,030

Liabilities: None

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Some details may be changed to protect the privacy of the persons profiled.