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financial facelift

CHAD HIPOLITO/The Globe and Mail

At the age of 70, Yvonne feels she is at a fork in the road and in need of "a professional, disinterested perspective."

She is single again with three grown children and a clutch of grandchildren, none of whom is looking to her for an inheritance. At the same time, she does not want to be a burden on them.

"That really is my overriding concern," Yvonne writes in an e-mail, "how best to look after myself financially so I reduce the chances of needing to turn to family for financial help in the future." She has some savings and a waterfront lot back home. She collects Canada Pension Plan and Old Age Security benefits. But her main income comes from the rental of billboard signs along a highway in New York State.

Last year "was a good year," Yvonne writes. "I had all seven signs rented." Gross rental income translated into $65,510 (Canadian). "After taxes and billboard-related expenses, I live well on what's left," she adds.

Then one morning "out of the blue" a former advertiser called and asked if she would sell just one of the signs. She suggested the company buy all seven because she didn't want to sell piece by piece. "They are thinking and I am thinking," Yvonne writes. However it turns out, she wants to understand what the income stream from the billboard business is worth. "What is the least I can reasonably take for this business?" she asks.

"I would like to sell but I do not know if I can afford to. What level of frugality would I be embracing over the next 20 years if I sold now?" If she sells, Yvonne wonders whether it would be a good idea to use part of the sale proceeds to top up her registered retirement savings plan.

We asked Ian Black, a registered financial planner (RFP) at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Yvonne's situation. Macdonald Shymko is a fee-only financial planning and portfolio management firm.

What the expert says

Because of Yvonne's age, it may make sense to sell her billboards and simplify – as well as stabilize – her income, Mr. Black says. Holding on poses some risks, including changes in the Canadian-U.S. dollar exchange rate, empty boards (hence lower rental income) and maintenance costs over time.

If she is serious about selling, Yvonne should seek the advice of a knowledgeable agent in the area where the billboards are located, the planner says.

In drawing up his plan, Mr. Black assumes Yvonne lives to be 100, makes an average annual rate of return on her investments of 5 per cent and that the inflation rate is 2 per cent.

As to how much income Yvonne needs, she lives frugally, spending about $30,000 a year, the planner notes. Her CPP and OAS combined bring in $12,300 a year and all her dividends are reinvested.

To generate the $17,700 shortfall from sale proceeds, Yvonne would have to get an "absolute minimum" of $350,000 from the sale, net of all taxes and fees, Mr. Black says. The taxes are estimated to be about 20 per cent of the proceeds, although this might be a bit low. Such a low price wouldn't allow any margin of error. There'd be no extra money for an emergency fund or health and/or long-term care costs in future, he adds. As well, the $17,700 a year includes some consumption of her principal investment.

In 2019, she will begin withdrawing $5,500 a year from her RRSP/registered retirement income fund (RRIF), and she also has some money in her tax-free savings account (TFSA).

Now, if Yvonne were to value the billboards based on current net income, they'd be worth a lot more, Mr. Black says – anywhere from $500,000 to $750,000, depending on the assumptions.

If she sells and takes a large lump-sum into income, "maximizing the RRSP contribution is an easy decision," the planner says. The contribution would save her 47 per cent of each dollar contributed. Her RRIF would not be so large as to cause her Old Age Security to be clawed back, except in the year she sells, which will also affect her cash flow for the following year.

"The RRIF can then be slowly withdrawn over time throughout her retirement." As for investing the proceeds, Mr. Black recommends a balanced portfolio of exchange-traded funds to gain exposure to all asset classes. "She should maintain at least one year's expenses in cash in a high-interest savings account to reduce income fluctuations during market downturns," the planner says.


The person: Yvonne, age 70

The problem: Should she sell her billboard rental business, and what is the lowest price she can accept?

The plan: Get a professional evaluation of the billboards, bearing in mind that too low a price will leave her with little in the way of emergency funds.

The payoff: The tools needed to make a prudent decision.

Monthly net income: $4,535

Assets: Cash $2,375; investments $71,590; TFSA $66,235; waterfront lot $150,000; RRSP $103,315; estimate of billboard business $500,000. Total: $893,515

Monthly outlays: Rent $775; hydro $20; maintenance, garden $65; transit $25; groceries $500; clothing $50; line of credit $1,000; gifts, charitable $50; vacations, travel $200; dining, drinks, entertainment $170; grooming $85; clubs $60; subscriptions, other $110; doctors, dentists $70; health, life insurance $150; telephone $45; TFSA $460. Total: $3,835

Liabilities: Line of credit $8,300

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

Larry Moser of BMO InvestorLine says retirees who are 'house rich and cash poor' may seek a loan for travel and other expenses. Moser looks at the safest ways to borrow money in retirement.

The Canadian Press