Assuring income for an aging mom

How to generate the cash flow Gordon’s mother needs.

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by

From the September/October 2013 issue of the magazine.

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Warburton_296The problem

After his mother Elizabeth was diagnosed with dementia, Gordon Warburton became concerned her investment portfolio wouldn’t be able to generate the income she needs to pay for her care. The cost is $24,000 annually, or about 6% of the portfolio’s value. But the $125,000 she has in GICs and Canada Savings Bonds will have to be reinvested at today’s low rates when they mature. And Gordon knows if interest rates rise, the value of her two bond ETFs (currently $260,000) will fall. Only 5% of the portfolio is in equity ETFs, and Gordon wonders whether they’ll need to take a bit more risk to reach their goal.

The Fix

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Heather Holjevac, a senior wealth adviser with TriDelta Financial Partners of Oakville, Ont., says planners frequently face this dilemma. Previously, people in Elizabeth’s generation could get by on GICs, but today’s rates barely keep pace with inflation. The problem is exacerbated by the fact women live longer than men.

Holjevac recommends keeping most of the portfolio in a mix of cash, laddered GICs and bonds. TriDelta is wary of holding bond ETFs in a rising rate environment, so would advise holding the bonds directly. Holjevac suggests increasing the allocation of dividend-paying stocks and preferred shares.

The asset mix is conservative, but it falls in line with the Warburtons’ risk tolerance. The portfolio has an expected annual return of 3.3%, less than the 6% Gordon thought they needed. While Elizabeth will have to draw down some capital to cover expenses, she has more than enough money to last a lifetime.

A third of Elizabeth’s portfolio remains in GICs. The current average GIC payout is 2.8%, but new issues are likely to pay 2%. A further 21% is in cash paying 1.5%, which can be reinvested in GICs if rates rise. And 20% is in bonds with coupons between 3% and 6.5%. (Because they trade at a premium they will suffer a loss when they mature). Holjevac has 5% in preferred shares yielding 5.4%. “Preferreds go in and out of favour but hold their value.” Large-cap North American dividend stocks make up the final 18%, with an average yield of 3.7%.

3 comments on “Assuring income for an aging mom

  1. How about annuities? There was an article in MoneySense about them recently.

    Reply

  2. A person who has dementia does not a have a risk tolerance per se except for perhaps – no risk.

    Therefore, when an aging client has serious health issues, it really comes down to preserving her capital rather than growing her capital.

    As the article noted: “she has more than enough money to last a lifetime”

    Bottom line, I would go 100% GICs – stagger initially and gradually have all 5 yr GIC terms coming due each year..
    (current 5 yr yields are approx. 3%) Maybe have an emergency cash reserve (cashable GIC) or premium savings account.

    Health care costs could be funded by interest payments and drawdowns from matured GICs.

    Reply

  3. Interesting to see a non-ETF, non-mutual fund investment portfolio for a change.
    Preferred shares can be a great investment option, but, unfortunately, it can be difficult for investors to find details of a pfd share’s features and characteristics – Dividend Rate-Reset, Redemption, Retraction, Conversion, etc. Important info!

    For those interested in researching preferred shares, InvestingForMe covers over 95 preferred shares – market data, charting, and full descriptions of features and characteristics.
    For example, this article recommends 4 such preferred shares without much detail. For those interested,below are links to the share descriptions for each;
    BAM.PR.M – http://www.investingforme.com/data-room/quote?s=BAM.PR.M:CA#share-description
    CM.PR.E – http://www.investingforme.com/data-room/quote?s=CM.PR.E:CA#share-description
    FFH.PR.E – http://www.investingforme.com/data-room/quote?s=FFH.PR.E:CA#share-description
    WN.PR.D – http://www.investingforme.com/data-room/quote?s=WN.PR.D:CA#share-description

    Reply

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