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Matt is 78, a retired professional, and his wife, Marielle, is 80 and worked in the arts. Neither has a company pension.Chloe Ellingson/The Globe and Mail

Matt and Marielle want a second opinion about their investment strategy.

He is 78, a retired professional, she is 80 and worked in the arts. Neither has a company pension. They live in a million-dollar house in an exclusive Toronto-area suburb. Their two grown children are well fixed so leaving a big estate is not a concern.

Marielle and Matt want to stay in their home as long as possible, but they cannot afford to without either cutting their lifestyle expenses – about $76,000 a year after tax – eating into their capital or drawing on the equity in their home. So, at the behest of their investment adviser, they took out a $400,000 mortgage loan and invested the money in stocks and equity mutual funds. This strategy has worked out well so far, Matt writes in an e-mail, with the money generated by the investments more than covering the interest expense.

Their savings and investments throw off an estimated $22,948 a year (net after mortgage expense and assuming a 5 per cent return), while their Canada Pension Plan and Old Age Security benefits add another $34,000 a year, leaving a shortfall of $19,052 excluding income taxes and mortgage payments.

When they eventually sell their house, it will have appreciated in value by the rate of inflation "and the mortgage will have been worn down somewhat, so both are at least headed in the right direction for maximum net-back," Matt writes. Then they can move into more modest accommodation and live on the difference.

We asked Warren MacKenzie, president and CEO of Weigh House Investor Services of Toronto, to look at Matt and Marielle's situation. Weigh House is a fee-only financial advisory firm that sells no investment products.

What the expert says

By borrowing to invest the way they have, Matt and Marielle have taken on too much risk, Mr. MacKenzie says.

"The problem is that their investments are almost 100 per cent in Canadian equities," a substantial portion of which was bought with borrowed money.

A return of 5 per cent a year on a portfolio of $860,000 will generate around $43,000 a year before investment management fees and interest cost on the mortgage, the planner says. (To simplify things, the $100,000 annuity they bought paying $5,000 a year for life has been included in this calculation.)

This, along with $34,000 in government benefits, would bring their income before taxes and mortgage payments to $77,000 a year. Adding in mortgage payments of $18,840 and income taxes of $8,000 lifts their required gross income to $102,840, leaving them with a shortfall of $25,840 a year ($102,840 less $77,000). A steep drop in the stock market could slash their portfolio by half.

"If this was accompanied by a drop in the value of their home, their retirement lifestyle would change dramatically."

Worse, their holdings lack diversification, Mr. MacKenzie says. Their investments are divided among two individual stocks and one deferred sales charge mutual fund with a management expense ratio of 2.75 per cent.

If they had to do it all over again, Matt and Marielle would have been better off taking out a reverse mortgage on their home to boost their income, Mr. MacKenzie says. "With a reverse mortgage, they could tap into the equity in their home to the tune of about $2,000 a month, live the lifestyle they enjoy, and they would be paying interest only on the amount they had borrowed" – without the stock market risk associated with their $400,000 mortgage loan. Despite the high costs of a reverse mortgage, "where the No. 1 objective is to stay in the home and maintain a lifestyle, and when all other non-registered investment assets have been used up, the reverse mortgage is a lower-risk solution than a large, leverage loan."

Given that Marielle and Matt have locked in their conventional mortgage loan for five years at 3 per cent interest, it may make sense to keep it, the planner says. But they should at least lower their portfolio risk by diversifying their holdings more widely.

Canadian equities have been flat over the five years to the end of August, while a diversified portfolio of 50 per cent fixed income, 30 per cent Canadian equities and 20 per cent U.S. equities would have yielded about 3 per cent, Mr. MacKenzie says.

Finally, they may want to sell some of their non-registered investments to pay off their line of credit.

Client Situation

The people

Marielle, 80, and Matt, 78.

The problem

How to maintain their expensive lifestyle without having to sell their home.

The plan

They would have been better off to take out a reverse mortgage, but since the investment loan is locked in, at least diversify their investments to lower their substantial stock market risk.

The payoff

Their goals are achieved with less exposure to stock market swings.

Monthly net income

$5,750 (variable).


His RRIF $240,000; annuity $100,000 (pays $5,000 a year for life); her RRIF $190,000; home $1,000,000; non-registered portfolio $330,000. Total: $1.86-million.

Monthly disbursements

Mortgage $1,570; property taxes $635; utilities $345; insurance, maintenance $185; transportation $575; groceries $720; clothing, $150; line of credit $100; miscellaneous $260; gifts $175; charitable $50; vacation, $1,000; entertainment, dining out, $760; groomin g $150; club memberships, sports, subscriptions $285; doctors, dentists $800; drugs $100; telecom $175. Total: $8,035. Shortfall: $2,285.


Mortgage $400,000; line of credit $28,000. Total: $428,000

Special to The Globe and Mail

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