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Tim Fraser/The Globe and Mail

As artists, Lucy and Joseph feel they are "on very volatile grounds" financially because their income is so unstable.

It is also modest. They brought in less than $62,000 between them from their artistic endeavours last year. They also had some income from their basement flat and the occasional rental of their cottage.

So when Joseph learned he was about to inherit a substantial sum of money, he knew he needed a plan.

Joseph is 53, Lucy 51. Their goal is to build a more solid financial base over the next 10 to 15 years for their and their children's security. Their sons, ages 15 and 20, live with their parents in their downtown Vancouver home.

"We grew up where family values were to save and invest in real estate as best we could for our future and our children," Joseph writes in an e-mail. "I have just received my first $100,000 and immediately paid off our mortgage so we are officially DEBT FREE!!!" he writes. Altogether, Joseph will receive about $900,000 over three years.

"How should our money be invested so that we can live off our investments from retirement age onward, yet leave a comfortable amount for our children and grandchildren when we die?"

We asked Matthew Ardrey, manager of financial planning at T.E. Wealth in Toronto, to look at Lucy and Joseph's situation.

What the expert says

Lucy and Joseph's goal is to leave four properties plus $500,000 in investable assets for their two children, Mr. Ardrey notes. They already have two – the family home and the cottage. They plan to buy a second rental property this year for $500,000 with a down payment from Joseph's inheritance of $175,000.

When they retire at Joseph's age 65, they plan to move from their current house, which they would rent out entirely, to a condo priced at about $700,000.

Mr. Ardrey makes a number of assumptions in drawing up Lucy and Joseph's plan, including a return on investments of 5 per cent a year and consumer price inflation of 2 per cent. Future contributions to their registered retirement savings plan and tax-free savings accounts will come from Joseph's inheritance.

The $500,000 rental property they plan to buy this year is assumed to generate $26,200 a year in income with $5,625 in maintenance and property taxes and $21,094 a year in mortgage payments, Mr. Ardrey calculates.

When they retire, they will take out a $600,000 mortgage on the family home plus $100,000 of capital to buy the condominium. The rented family home will generate $57,634 a year in future value rental income against expenses of $10,755 for property tax and maintenance and $51,015 in mortgage payments. Their spending, before inflation, will be roughly the same as it is now – $80,000 a year.

Because Lucy and Joseph want to travel, Mr. Ardrey has added a travel budget of $10,000 a year in current dollars to Joseph's age 80. He assumes they will both live to age 90.

Given all of his assumptions, Joseph and Lucy will run out of investable assets by the time Joseph is 79, Mr. Ardrey says. They are faced with either spending less in retirement or leaving less to their sons.

"To achieve their spending goal, there needs to be some give on their estate goal," the planner says. One alternative might be for Lucy and Joseph to sell their condo just before their investable assets run out, invest the proceeds and rent an apartment. This would stretch their capital to Lucy's age 90 – and they would still have three properties to leave their children.

Putting so many of their eggs in the illiquid real estate basket poses some risks, Mr. Ardrey notes, especially if all four properties are in the same market. While the properties would likely carry themselves, what would happen if they were vacant for a time, or needed extensive repairs? This, combined with a situation where Lucy or Joseph was unable to work for some reason, "could have a devastating impact on their financial plan."

Lucy and Joseph should review their estate plan, Mr. Ardrey says. Planning techniques using testamentary trusts allow tax savings along with other benefits in case Lucy and Joseph died while their children were still too young to manage their own money.

By the time Joseph and Lucy retire, they will have amassed a substantial investment portfolio – more than $1.2-million – "which should provide the backbone of their retirement income," Mr. Ardrey says. At retirement, he recommends an asset mix of 60 per cent stocks and 40 per cent fixed income. The equity component should be diversified geographically, while the income part could include some higher-yielding products such as mortgage investment corporations or corporate bonds.


Client Situation

The people

Joseph, 53, Lucy, 51, and their two sons.

The problem

How to use an inheritance windfall to build assets that will allow them to live comfortably and still leave a substantial estate to their children.

The plan

Scale down their aspirations, realizing they must either spend less or leave less.

The payoff

A solid plan for the future.

Monthly net income



Bank deposits, short term investments $55,000; RRSP $24,000; RESP $30,100; family home $800,000; cottage rental $300,000; this year's instalment of inheritance $500,000. Total: $1.7-million

Monthly disbursements

Housing (property tax, utilities, maintenance) $1,200; transportation $950; groceries, child care, clothing $1,460; gifts, charitable, vacations $485; personal discretionary (grooming dining, entertainment, clubs, pets, sports) $1,040; health care (dentists, drugstore, supplements, life and disability insurance) $1,085; telecom, TV, Internet $365; RRSP, RESP $90; professional association $20. Total: $6,695



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