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Before Beatrice’s husband died, they sold the family house and invested a substantial sum in a portfolio designed to generate as much income as possible. The rest of the sale proceeds they used to renovate the family cottage and make it their home.

“Here, for the past 20 years, my mum has lived frugally, and only recently has her health required more care,” her son, one of five children, writes in an e-mail. At the age of 91, Beatrice is in the early stages of dementia and depends on a live-in caregiver, a family member.

All was going well financially until the pandemic knocked down the stock market, laying bare the riskiness of Beatrice’s investments, at least one of which has suspended distributions – money Beatrice relies on to pay for her care. While the stock market recovered, Beatrice’s portfolio is still languishing, her son adds.

“We, her children, are looking for direction and options on how to manage these assets,” her son writes. “Her financial adviser has not changed the assets significantly despite our calls to reduce risk and focus on a 10-year plan to unwind her assets to support her financial needs.”

Will their mother be able to stay in her home for the rest of her life? the son asks. Are there changes that should be made to the portfolio?

We asked Keith Copping, a principal, financial planner and portfolio manager at Macdonald, Shymko & Co. Ltd. in Vancouver, to look at Beatrice’s situation. Macdonald Shymko is a fee-only financial planning and portfolio management firm.

What the expert says

Beatrice has financial assets of $868,000, a house valued at $1.25-million and no debts, Mr. Copping notes. Her income consists of $1,708 a month in Canada Pension Plan and Old Age Security benefits (some OAS is clawed back), $3,600 in withdrawals from her non-registered portfolio for her in-home care and $3,810 in registered retirement income fund withdrawals.

“Based on her age, expenses and net worth, it is reasonable to assume that she has the financial means to cover her health care for the rest of her life,” the planner says. “As to whether she can stay in her home indefinitely will really depend on how her health situation and care needs progress,” he adds.

To be conservative, Mr. Copping uses a life expectancy for Beatrice of age 100 to 102 in preparing his forecast. “Based on the current care needs and expenses (home care expenses of $3,600 month), from a financial standpoint she could stay in the home for many years, perhaps to 100 or 102,” the planner says. This assumes an inflation rate of 2 per cent and investment returns of 3 per cent to 4 per cent.

But if Beatrice reaches the point where her care needs expand to require more specialized services, 24 hours day, it may not be affordable or practical for her to stay in her home, Mr. Copping says. “At that point, her home could be sold to provide additional finances to cover care costs if needed.”

Next, Mr. Copping looks at whether some changes should be made to Beatrice’s investment portfolio, put in place by her late husband and managed by the couple’s long-time adviser, who works in the private wealth management group of a major bank-owned investment dealer. The planner starts with Beatrice’s risk profile: “Age 91, widow, limited experience investing, no longer able to make her own financial decisions, family acting as Power of Attorney, high monthly withdrawals for living and care expenses, shorter-term horizon, and potential for large increases in care costs in the near future.”

The current investments seem out of sync, Mr. Copping says.

Beatrice has 8.8 per cent in cash and cash equivalents, which is helping to fund her $3,600 in monthly withdrawals, he notes. She has 53 per cent in fixed income, entirely invested in preferred shares issued by six companies. “Most of these are not individual preferred shares, but structured products that have a complex structure to try and achieve income yields that exceed the yield on the underlying assets,” the planner says. “Does the family understand the risks?” he asks.

Beatrice’s equity component consists of just four individual Canadian stocks and one small global exchange-traded fund, with the two largest stocks representing 70 per cent of the total equity exposure.

As power of attorney for their mother, the family has to ensure her assets are managed in an appropriate manner according to the prudent investor rules (under the provincial Trustee Act), Mr. Copping says. That is, investments should be balanced and diversified, the risk and return objectives “reasonable and suitable” for Beatrice, and the assets invested in a conservative manner. (The attorney must always act diligently and in good faith for the person’s benefit.)

“The family should plan a meeting with the current financial adviser to discuss their concerns and focus on a new asset allocation that better meets Beatrice’s needs based on her risk profile and time horizon,” Mr. Copping says. “If they can’t agree on a strategy, they should look at other options for a portfolio manager.”

A significant portion of Beatrice’s portfolio should be invested in fixed income securities, and not just preferred shares, the planner says. “Wealth preservation is key for Beatrice, and this could include guaranteed investment certificates, an investment-grade bond fund or exchange-traded fund that is low-cost and has a relatively short duration, he adds. “To maintain some opportunity for growth, a portion of the portfolio should be allocated to low-cost Canadian, U.S. and international equity funds and perhaps some Canadian REITs (real estate investment trusts), which may generate higher cash flow.”

A suitably diversified portfolio will almost certainly generate less cash flow, Mr. Copping says. But it can produce an acceptable return while reducing overall risk. “Beatrice does not need to chase high returns at this stage of life and a conservative portfolio can meet her needs.”

At some point, Beatrice may have to sell her home to pay for care in a nursing home. The family believes the sale will escape capital gains tax because the former cottage is now her principal residence. “They may need to review this in more detail,” Mr. Copping says. Beatrice and her late husband owned both a home and a cottage at the same time for many years, the planner says.

“When the previous home was sold, did they use the principal residence exemption for some of the years when the cottage – Beatrice’s current residence – was owned?” If some years of ownership do not qualify for the exemption, some portion of the capital gain on Beatrice’s current home might be subject to taxation when she sells or passes away, the planner says.

Client situation

The person: Beatrice, age 91

The problem: Can she afford to stay in her home indefinitely? Are changes needed to her investments?

The plan: Beatrice can afford to live at home as long as her health care needs don’t become too onerous. Her family should have a serious talk with the investment adviser about the need to preserve their mother’s capital.

The payoff: No more fussing over whether Mom has a suitable financial plan.

Monthly net income: $8,135

Assets: Bank accounts $20,000; GICs $68,970; investment portfolio $445,315; TFSA $53,900; RRIF $279,885; residence $1.25-million. Total: $2.1-million

Monthly outlays: Home maintenance $500; property tax $835; home insurance $125; utilities $370; gardening $65; medical $150; groceries $400; in-home care $3,600; gifting to grandchildren $2,085. Total: $8,130

Liabilities: None

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

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