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Given his newfound wealth, Owen is naturally concerned about managing it.Christopher Katsarov/The Globe and Mail

Fate has been both cruel and kind to Owen. He came down with a chronic illness, and he inherited more than a million dollars.

He is 61 and self-employed with no dependents.

“I am at a point now that I am in need of a thoughtful and realistic financial plan,” Owen writes in an e-mail. He’s still working part-time, earning about $60,000 a year, and collecting a pension of about $48,000 a year from a previous employer that is not indexed to inflation.

“However, my situation has changed dramatically. I now have to deal with new and ongoing health issues and related costs,” he writes. The recent inheritance – which he describes as modest – “will help with the overall picture,” Owen adds, “but I feel I must be financially prudent going forward.”

Given his newfound wealth, Owen is naturally concerned about managing it.

Short term, he wants to buy a new car. Longer term, he wonders if he can afford to buy a vacation or retirement property. His retirement spending goal is $108,000 a year after tax.

We asked Warren MacKenzie, a fee-only certified financial planner (CFP) in Toronto, to look at Owen’s situation. Mr. MacKenzie also holds the Chartered Professional Accountant designation.

What the Expert Says

Owen lives modestly and would like to know if he can reduce his hours of work, buy a vacation property and increase his lifestyle spending to $9,000 a month, Mr. MacKenzie says. He recently suffered an illness that put him into the hospital for a number of months, the planner says. Owen was off work for about a year.

To make ends meet, Owen opted for an early start to his defined benefit pension.

“During his working years, Owen didn’t make a high income, but he was able to purchase his condo and repay most of the mortgage,” Mr. MacKenzie says. Before receiving his recent inheritance, Owen had saved about $140,000 in his registered retirement savings plan. Most of his net worth has come from an inheritance of $1,150,000, which he received and invested.

Thanks to the inheritance, Owen now has the option to retire sooner, spend more on his lifestyle and buy a recreational property.

If Owen fully retires at age 65, he will get about $6,500 a year in Canada Pension Plan benefits and $8,500 in Old Age Security benefits, lifting his income – with his $48,000 pension – to about $63,000 a year. “If future inflation is similar to what we’ve experienced in the past few decades, in 20 years the purchasing power of Owen’s defined benefit pension will be reduced to about $30,000,” the planner says.

Because he has a disability that could shorten his life, Owen should plan to collect CPP and OAS benefits starting at age 65. He qualifies for the federal and provincial disability tax credits, which will reduce his tax burden by about $4,000 a year.

Owen is now spending about $92,000 a year. “To reduce his cash outflow he should cash in some of his guaranteed investments and pay off his $23,275 mortgage as well as his business loan and credit card debt,” Mr. MacKenzie says. This would reduce his cash outflow to about $60,000 a year plus income tax.

Owen can afford to stop working now if he chooses to, but both he and the planner believe he should continue working part-time to keep his mind sharp and enjoy the social interaction. It would also make the purchase and maintenance of a vacation property more feasible, the planner says.

Because he has no family, Owen would prefer to live a more comfortable lifestyle now, while his health permits, rather than leave a large estate, Mr. MacKenzie says. He recommends Owen draw up a will and powers of attorney for health and finances in case he eventually finds it difficult to make decisions.

Before that happens, Owen may want to consider investing in a life annuity or a fund that offers an annuity alternative. With an annuity, Owen would receive a steady income for the rest of his life without the need to make investment decisions.

To illustrate, if Owen was to buy a $500,000 annuity now, he would get a guaranteed $35,000 a year for life, the planner says. He should choose a prescribed annuity to minimize taxable income, he says. With this type of annuity, the portion of the payment that is taxable income and the portion that is a return of capital are constant over the term of the annuity.

At Owen’s age, with a net worth excluding his home of $1.2-million, “even if he made a zero rate of return he could still dip into his capital to the tune of $40,000 a year and his capital would last 30 years,” the planner says.

Owen is a do-it-yourself investor with positions in 30 different Canadian stocks, Mr. MacKenzie says. He also has investments with an online portfolio manager, or robo-adviser, where he is paying a management expense ratio of a mere 0.15 per cent. His portfolio is more complicated than necessary, the planner says. “He could probably do as well, and have greater diversification, with a few exchange-traded funds, he says.

Owen is holding a significant portion of his interest-bearing investments in his non-registered accounts and growth stocks in his registered accounts. He should do the opposite, the planner notes. “It would be more income tax-efficient to hold his interest-bearing investments in his RRSP and his growth investments in his non-registered account,” he says.

Owen appears focused on trying to find the best investment products, Mr. MacKenzie says. “His long-term financial security would be better if he focused on selecting a goals-based asset mix and following a disciplined rebalancing process when a given asset class moves beyond the prescribed range.”

Owen has more than enough to achieve his financial goals, the planner concludes. His capital may be wasted if it is not used while he is still well enough to enjoy it, he said.

Client Situation

The Person: Owen, age 61.

The Problem: How to organize his life so he can enjoy his financial windfall while he is still relatively healthy. How to arrange for his money to be well managed for the rest of his life.

The Plan: Cash in some GICs to repay his mortgage and other debts, reducing his cash outflow. Continue working part-time until 65, when he begins collecting CPP and OAS. Consider a simpler and more disciplined approach to investing. Draw up a will and powers of attorney for finances and health.

The Payoff: The assurance that he can enjoy his financial windfall now without worrying about running out of money later.

Monthly net income: $6,500 (variable)

Assets: Cash $10,000; GICs $428,000; non-registered stock portfolio $443,000; collectibles $75,000; business assets $50,000; private debt fund $40,000; tax-free savings account $86,000; RRSP $143,000; residence $600,000. Total: $1,875,000.

Monthly outlays: Mortgage $930; property tax $160; home insurance $35; maintenance, condo fees $875; transportation $370; groceries $700; clothing $100; housekeeper $120; line of credit $25; business loan $745; other debt $100; business expenses $1,000; charity $50; vacation, travel $300; dining, drinks, entertainment $1,000; haircuts $30; club memberships $200; sports, hobbies $120; subscriptions $120; other personal $30; doctors, dentists, prescriptions $200; vitamins $40; physiotherapy $160; phones, TV, internet $335. RRSP $200; TFSA $500. Total: $8,445. Shortfall comes from savings.

Liabilities: Mortgage $23,273; credit card $500; business loan $37,700.

Total: $61,473.

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

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