How to shuffle a DIY portfolio to last to age 90
Sarah mulls how to make disability, OAS and registered plans work together
Sarah mulls how to make disability, OAS and registered plans work together
Up until six years ago, Sarah was in full command of her financial health. She contributed regularly to her RRSP and TFSA. She picked stocks. She even cut her advisor loose because he only sold her high-fee funds. But a freak skiing accident changed everything.
The accident forced Sarah to give up her well-paid sales rep position and go on disability. Her recovery has been slow and she has to pay a caregiver $1,000 a month to help her with her housekeeping, personal care and other routine activities. (We’ve changed her name to protect her privacy.) Physically she looks fine, but she struggles to do anything that requires concentration. “I had a head injury and have a hard time managing my money,” she says. Sarah, who is 54, is now on permanent disability and living in a small town on British Columbia’s west coast. She’s had to relearn almost everything about taking care of herself and rely on the help of friends.
While she has improved since the accident, life still isn’t the same. “I have a lot of vertigo,” she says. “And even though I look good on the outside, I have a lot of headaches.”
Despite ignoring her finances for the past five years Sarah’s financial health hasn’t suffered. After selling her large home and purchasing a piece of rural land for $200,000, she still has $550,000 left sitting in cash at the bank. Eventually she plans to build on the property, but for now she’s content with renting. She also has $729,000 sitting in RRSPs and TFSAs, another $100,000 in a LIRA, plus an additional $20,000 in U.S. cash.
Sarah currently collects $3,200 monthly net in disability payments, which she’ll continue to receive until she turns 65. But after that point, she’s on her own. In order to maintain her lifestyle, she figures she’ll need to generate $7,000 a month from her savings, but she isn’t sure if she’s on track to achieve that goal.
That $7,000 goal doesn’t include the money she’ll receive from her CPP and OAS, or the $2,000 monthly from a defined benefit pension plan with her last employer. Why so much? “I really love sailing and do that whenever I can. As I get older, I plan to spend more time on the water. And I still love to ski and do that in the winter. Those are expensive sports to participate in.”
At the moment her RRSPs and TFSAs are invested in 15 blue chip and growth stock, which are split between Canadian and U.S. half in U.S. “I have Microsoft, Apple, and Walmart and they’ve had great returns,” says Sarah. “Encana, Chevron, and DreamOffice not so much. Still, I’ve averaged 15% net in returns for three years so I can’t complain.”
Until she decides to start building her home, she plans to put the $550,000 in a safe investment and is open to suggestions. “I’m paying just $900 a month for rent now so I’m in no hurry to build the house,” she says. Still, she hopes tho have it completed sometime within the next three years, at which point she’ll either rent it out or live there herself.
Sarah plans to remain active well into her senior years and wants to know if her money will last until age 90. “I don’t want to live much past 90,” says Sarah. “But if my portfolio can last until then, and give me a comfortable retirement where I can pursue my passions, I’ll be very happy.”
Janet Gray, a certified financial planner and money coach in Ottawa, has run several scenarios and the good news is that in all cases, Sarah will be fine. Gray assumed that of the $729,000 Sarah has in RRSPs and TFSAs, $52,500 is in the TFSA and the rest in an RRSP. “I did this to track the tax implications,” she explains. “Going forward I’d like to see Sarah continue to max out her TFSA contributions each year—even in retirement. That moves money from taxable to non-taxable which is always a good thing.”
Gray made some other assumptions as well, including the fact that Sarah continues to rent an apartment and keeps the $200,000 lot as an investment. “I also assumed returns of 6% gross annually on her RRSP, as well as a very conservative 2% net return on her non-registered investments—much lower than the 15% average annual rate of return she’s received from her investment portfolio up until now.” Gray also assumed a gross return of 3% on her vacant lot. “I’m not sure it will grow exactly that much in value since it will depend on where it’s located,” says Gray. “But if it’s on or near the water, it will likely garner larger returns.”
Gray then ran the numbers and even assumed that Sarah lived on $7,000 per month, starting now at age 54. ‘So I assumed $3,200 net per month coming in from her disability payments and the other $3,800 per month coming from her unregistered investments,” says Gray.”And I did not include the $20,000 U.S. in her bank account as part of these calculations.”
Instead of waiting until age 72, Gray would like to see Mary set up a RRIF at age 65 instead to see if it would help minimize the tax clawback of her Old Age Security. “She will most likely have a clawback anytime after taking OAS, but the bigger hit tax wise comes at age 72 when most start their RRIF (for first withdrawal),” says Gray.
And of course, Sarah needs to consider a good drawdown strategy, with Gray mentioning that the best strategy is to draw down from tax-free sources first and defer taxable sources like RRSP, RRIF and LIRAs until as late as allowed. “LIRAs can be drawn after age 55 and the latest at age 72, like a RRIF,” says Gray.
As for her investments, Gray believes Sarah is doing fine as a DIY-investor, noting her buy and hold strategy is currently yielding above-average returns. “My projections show she probably doesn’t need to earn much more than 6% gross return on investment to ensure her income goals.” That means she can decrease her risk profile at age 65 to a more balanced portfolio of 60% equities and 40% fixed income—perhaps holding the fixed income an exchange-traded fund that is low-fee, explains Gray. “She will then have the security of the fixed income as she draws out to top up her other retirement income sources, and she has the growth of equities to keep her ahead of inflation and the depletion of her capital.”
Of course, being a self- directed investor, Sarah likely doesn’t likely to receive any advice. But Gray believes Sarah should meet with a fee-for-service planner at least annually to review that she is still on track with her goals. “Only about 20% of any advice will be about her portfolio returns specifically,” says Gray. “The more important advice will be regarding minimizing tax, organizing her estate and working on a viable draw-down strategy of her money throughout a retirement that is comfortable and works for her.”
And one last piece of advice. “I also think Sarah should consider remaining a renter instead of building a home on her own and then paying for the ongoing and inevitable maintenance in her senior years. She doesn’t mention when she might think of selling the house in the future. Has she really thought it out about being a homeowner as a senior or being a landlord as a senior? With the active lifestyle she wants to maintain, perhaps a ‘lock and go’ home might better serve her retirement years.”
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