Marjorie, 65, confronts unclear financial plan after the unexpected death of her husband

After her husband died unexpectedly, Marjorie struggled to make sense of her new financial circumstances. He had handled the investments.
“Now I’m in the unfortunate situation of having to deal with the finances,” she writes in an e-mail. “I’m paralyzed with fear on how to deal with the portfolio he left.”
For Marjorie, managing her savings and investments would be a steep learning curve. “The information I am getting from family members is all over the place,” she continues.
Yet investing properly is critical to her financial security because her defined benefit (DB) pension, Canada Pension Plan (CPP) and Old Age Security (OAS) benefits fall short of her lifestyle spending. To cover the shortfall, she will have to depend on her savings.
In addition to investing, Marjorie asks about strategies to withdraw from her savings and the tax implications of withdrawals.
“Will I have enough savings to last to age 90?” she asks. Will she have enough to pay for a nursing home later in life if she needs it?
We asked Warren MacKenzie, a certified financial planner based in Toronto, to look at Marjorie’s situation. Mr. MacKenzie also holds the chartered professional accountant designation.
“It’s understandable that Marjorie is concerned about her finances,” Mr. MacKenzie says. “Although she is not poor, neither is she is obviously wealthy.” Until a person understands what they can expect under different circumstances, it’s not uncommon to have concerns, “as if they were in a strange country without a road map.”
But Marjorie needn’t worry, he says. Given her modest spending, she should have enough to achieve her goals and look after herself until at least age 90 and maybe longer.
Potential investment returns will make a difference. Before Marjorie decides how to invest, she must get a firm handle on her tolerance for risk during turbulent financial markets when prices are falling. Can she absorb a setback?
Marjorie just turned 65 and will soon be getting CPP and OAS. Next year – the first full year she will be receiving the government benefits – she will get $15,130 a year from CPP (including the survivor’s pension), $8,740 from OAS and $16,013 from her DB pension, for a total of $39,883 a year. She will also draw an estimated $2,000 in interest income from her savings account and guaranteed investment certificates, for a total of about $42,000.
Her planned spending in 2025 will be $40,840 plus income tax of $2,722, for a total of $43,562. The shortfall of about $1,600 will come from her savings account. The forecast assumes Marjorie converts both her RRSP into a registered retirement income fund and her locked-in retirement account into a life income fund at age 71 and begins drawing money the following year.
“Strictly on a cash flow basis her cash receipts are almost equal to her cash disbursements,” Mr. MacKenzie says. But if her savings grow by 5 per cent a year, and the value of her condo rises in line with inflation, her net worth could actually grow over the next few years even though her cash flow may be slightly negative, he adds.
Mr. MacKenzie assumes that, at age 85, Marjorie will sell her condo and move into an assisted-living home costing $7,000 a month in today’s dollars. “Even with this higher level of spending she’ll not run out of money if she follows a goals-based investment strategy and spends according to her plan.”
“If she can be comfortable with a higher level of volatility, she can expect a slightly higher average rate of return,” he says. For example, if she earns an average return of 4.5 per cent in a moderate to low-volatility portfolio, it is expected that her savings will last until her early 90s. If she earns an average of 6.5 per cent in a higher volatility portfolio, her savings could last until her late 90s. She would still have her pension and government benefits.
With 80 per cent of her investments in stocks, “there is always the possibility of a significant decline in the value of the portfolio,” Mr. MacKenzie says. “If this decline was to occur when she was in her late 70s or 80s, she might not have sufficient time to see a full recovery.”
Marjorie’s investment portfolio was created by her late spouse and she really does not understand why certain choices were made. Over the past five years, her total portfolio has averaged about 5 per cent per annum. She also does not know how that return compares with the appropriate benchmark.
“She has started to read books about investing with the objective of managing her portfolio herself,” Mr. MacKenzie says. However, she is also considering turning everything over to an independent financial adviser. “Given her lack of experience with investing, and knowing that investment decisions get more difficult as one ages, she also wants to consider possibilities that remove the need for her to make decisions in her late 80s or 90s.”
Because she is not concerned about leaving an estate, if Marjorie wants something simple, she could consider using part or all of her registered savings to buy a life annuity where the income is guaranteed for life. To illustrate, based on her age today she could purchase a life annuity for about $293,000 (her RRSP and LIRA) yielding 5 per cent or roughly $14,500 a year. That would not protect her purchasing power from inflation.
She could also consider investing a portion of her registered funds in an income-for-life investment fund where there is longevity risk protection. With this type of fund, payments continue for as long as she is alive and there is also liquidity if she needs to draw on her capital, Mr. MacKenzie says.
Other alternatives, because her portfolio is smaller than many portfolio managers require, would be a couple of broadly based, balanced and diversified exchange-traded funds or low-fee balanced mutual funds. These would also give her some inflation protection.
Most of Marjorie’s income will be taxed at a relatively low rate, so income tax will not be a significant expense for her. “Nevertheless, to the extent that she has surplus unregistered funds on hand, and unused contribution room, it makes sense to continue to contribute to her TFSA,” Mr. MacKenzie says. She is unlikely to ever have her OAS benefits clawed back.
The person: Marjorie, age 65.
The problem: How to manage her savings and investments to last until at least age 90, even if she needs nursing-home care at some point.
The plan: Explore her appetite and ability to absorb investment risk. Keep her spending modest. Sell her condo if she needs nursing care. Consider buying a life annuity for at least part of her savings.
The payoff: The comfort of knowing that she can meet her financial goals.
Monthly net income: $3,500.
Assets: Cash and cash equivalents $90,000; TFSA $87,850; RRSP $27,875 ; LIRA $263,880; residence $190,000. Total: $659,605.
Estimated present value of her DB pension: $300,000. This is what someone with no pension would have to save to generate the same income.
Monthly outlays: Condo fees $495; property tax $150; home insurance $55; electricity $185; transportation $185; groceries $350; gifts, charity $300; vacation, travel $250; house cleaning $125; dining, drinks $50; personal care $10; pet insurance $200; pet food, vet $190; other personal $75; health care, insurance $405; phones, TV, internet $190; TFSA $585. Total: $3,800.
Liabilities: None.
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