This is part of a series of portfolio makeovers that focus on the issues of investors who are in the 50-plus age range.
With every dollar Marge spends, she gets a sinking feeling.
The 69-year-old, single retiree simply cannot shake the sense she is burning through her $400,000 RRSP of stocks, bonds, mutual funds and cash at too quick a pace.
Withdrawing about $30,000 to $35,000 annually from her registered account, Marge worries she is living beyond her means and may outlive her savings.
"I am concerned I won't have enough money to see me through," the downtown Toronto condo-dweller says.
"This, along with CPP and OAS (about $1,300 a month after taxes), has provided a reasonably comfortable life for me and allowed me to be generous with my grandchildren, but I can see that unless I either make more money or curtail my spending, I will be in trouble if I live more than 10 years or so," she says, adding that she has run up a small debt on her line of credit.
Marge says she has been trying to get her financial adviser, a stockbroker, to help her, but this has been a sore point. In particular, she is concerned that her broker has too much of her portfolio invested in cash – more than $160,000 is sitting in savings accounts.
"This seemed a good strategy in 2008, but my broker cannot find reasonably secure investments that would allow me to realize growth in my account," Marge says, adding she is also unhappy that a larger portion of her money is invested in mutual funds.
Marge realizes she simply needs more capital. With much of her wealth tied up in her condo, which is worth $500,000, she thinks about selling her property, investing the proceeds and renting instead.
"Bearing in mind that staying where I am already costs me $830 per month in condo fees and taxes, spending another $1,000 a month on rent doesn't seem excessive if I have the proceeds from the sale of my current residence."
Chartered strategic wealth professional Elizabeth Harding with GMP Richardson in Burlington, Ont., and Robert Broad, a money manager and investment analyst with TE Wealth Counsel in Toronto, analyzed Marge's financial situation and made the following recommendations.
– Condo: $500,000
– CPP and OAS: $1,300 a month
– RRSP portfolio: $399,478 invested in stocks, bonds, cash and mutual funds
– Line of credit: $7,500 owing at 3.5 per cent
Ms. Harding's advice
1. Get the right kind of professional advice.
Marge's current adviser does not have the skill set to meet her needs. A stockbroker can recommend investment opportunities, and buy and sell securities with Marge's consent, but a broker cannot truly tackle the biggest problem facing her money: preserving wealth to support her needs for the long run. "Clients today are demanding a full-service approach – as compared to the traditional broker who will only make isolated investment recommendations," says Ms. Harding, who is also a certified financial planner. To that end, Marge needs a planner to help her develop a cash-flow plan for the rest of retirement, which will in turn determine the right mix of investments for her portfolio.
2. Marge should trust her gut. She will run out of money at her current pace.
If she had hired the services of a financial planner, Marge would know she has a high probability of outliving her money, based on her annual withdrawal rate from her RRSPs. "Withdrawing $35,000 annually – and assuming an average annual rate of return of four per cent – the RRSP would be depleted by age 82," Ms. Harding says.
Increasing the rate of return to six per cent a year would increase her money's longevity by another three to four years. Yet this strategy would involve more market risk. "To obtain a rate of six per cent, the portfolio would have to have a heavy weighting to equities, and this may create an asset mix that is too volatile and aggressive."
3. Strike while the real estate market is hot.
With the downtown Toronto condo market as hot as it is, no better time likely exists for Marge to sell and use the proceeds to help fund her lifestyle. "The risk of waiting until either her health fails or her RRSP has been depleted is that she will then be forced to sell regardless of market conditions and could possibly be looking at a market value less than today." With the sale of her condo, Marge would have a portfolio of more than $850,000, which should be more than enough to pay off her debt and sustain her income needs for the long term while paying a rent of about $1,800 a month.
Mr. Broad's advice
1. Marge's investment portfolio is too conservative even if she sells her home and invests the proceeds.
Marge will likely have to sell her condo in the next decade and invest the proceeds to help fund her lifestyle, but she will also need a more aggressive investment strategy to keep ahead of inflation, Mr. Broad says. She does not need to take on substantial stock market risk because, given her timeline, seeking a higher rate of return will not make a substantial difference to her lifestyle.
Still, she needs a portfolio where the majority of her money isn't invested in low-yielding, conservative savings accounts and GICs.
Mr. Broad says Marge should invest a little more aggressively to provide a return that at least outpaces inflation. "Unless she has enormous trouble sleeping at night, having 55 per cent in cash as a long-term strategy is probably too much," he says. "It might be comforting during occasional downturns but it won't provide much income or growth over time." Although her current portfolio is comprised of about 34 per cent equity, Mr. Broad says Marge could increase her equity component to as much as 50 per cent of her money. It's more likely, however, that an asset mix of 40-per-cent equity, 40-per-cent fixed income and 20-per-cent cash would be the best fit for Marge's portfolio.
2. Mutual funds in her portfolio have served her relatively well.
"Marge could certainly get out of funds, but they aren't really the problem," he says. "I'll admit our firm doesn't use them, but pretty much every mutual fund Marge holds has done better than cash over time." Still, she would likely be better off with a money manager who could build her a balanced portfolio on stocks, bonds and exchange-traded funds to suit her needs at a lower cost. With almost $400,000 in her portfolio, she would likely pay a total fee on her portfolio of about 1.5 per cent instead of paying upward of 2 per cent annually in management fees on mutual funds and a commission every time her broker buys or sells a security.
3. Marge's portfolio needs diversity.
Marge's individual equity investments are highly concentrated. More than $90,000 is invested in six Canadian stocks. Furthermore, most of the assets in the six income-oriented mutual funds she owns are also Canadian equity. Marge should consider diversifying her money beyond Canada's borders into the United States and other markets.
She should also have more exposure to fixed-income investments given her age and need for steady returns. At the moment, she has too much money in cash, and not enough invested in bonds and other income-producing securities. While she has about $60,000 invested in income mutual funds, the majority of the assets in those funds are actually equities. "The fixed-income portion of her portfolio would include long- and short-term bonds, perhaps some high yield and mortgage investments as well," he says.
Although a rising interest rate environment will negatively affect these securities, in reality, the impact of rate hikes will likely not be as profound on her portfolio as she may fear, Mr. Broad says. "While there may be another negative year in the bond market in the future, there won't be 10 of them, and a more diversified bond portfolio will still do better than a money fund over time."